Glossary of Terms

Hear financial jargon that you want translated into plain and simple English? Find your financial terms here, or ask our in-app financial coach for help.

Collections

If any of your debt or bills go unpaid for more than 90 days, your credit card or loan company can send it to “collections” to help them recover the funds. Often, a creditor will hire a collection agency after they’ve made several failed attemps to collect their money from you. Usually this happens after 3 to 6 months.

What happens to your credit score when you have debt in collections? As soon as you fail to make any scheduled payments on your debt or bills, your creditor will report this to the credit bureau and it will (unfortunately) tarnish your credit score. Once it goes to collections (gulp), the penalty is even more severe. It will stay on your credit file for 6 years.

What if you pay it? Even if you pay it, the collector doesn’t have to remove it from your credit report. You can certainly try and convince them to remove it, but they’re not legally obligated to.

What should you do if your debt is in collections? First, don’t avoid their phone calls. Speak to them and explain your situation. Negotiate a reasonable payment situation with them (you might be able to pay less than 100%). Then follow through on this by getting confirmation in writing, paying it off, and making sure it’s reflected in your credit score.

Common budget account

An account that you and your partner or roommate can use for your shared expenses. You can create a budget to determine how much money your shared expense will cost, and then each of you can put in your proportion of money to fund the expenses.

It’s easy to stay organized financially if you have both a personal account for your non-shared expenses (shopping for clothes, personal cell phone bill, personal car insurance or gas costs), and a common budget account for costs you share with someone else.

Consumer proposal

It’s a maximum 5-year plan that combines and repays all (or the majority of) your debt owed, which is administered by a bankruptcy trustee. It’s generally done when you’re not able to pay off or consolidate your debts on your own.

Your bankruptcy trustee will assess your situation and then create a repayment plan that is approved by both the court and creditors. Then, instead of paying your creditors, you will now make one payment, to this trustee, who will deal with (and protect your from) your creditors.

A consumer proposal will decrease your credit score and remain on your credit report for 3 years after it’s completed.

Credit report

A credit report contains the building blocks of your credit score.

It’s a list created by the credit bureaus, with all your past and present debts, and their status. If you’ve paid your debt in full, have a balance, are always paying on time, or have missed a few payments – it will be recorded here.

Why do I need it? Credit lenders, such as banks, look at credit reports (along with other information) to see how much credit they are able to give you.

Where can I find it? You get it alongside your credit score (with Equifax, Borrowell, or Transunion).

Your credit report has the following sections:

  • Personal information – name, DOB, address

  • Accounts – the balance of any open or closed accounts such as credit cards, installment loans, mortgages and phone accounts

  • Credit inquiries – any hard inquiries, meaning you actually applied for credit

  • Collections – any accounts that have been sent to collections, whether the balances have been paid or unpaid

  • Legal items – any public records you may have

  • Bankruptcies – any bankruptcy or consumer proposals you have filed

Your credit report is essential to your financial health. Check it at least once a year to make sure everything is correct and that you’re not forgetting about any debts you still have outstanding.

Credit score

A credit score is basically a measure of how good you are at handling debt. It’s creditors’ way of seeing whether or not you have a track record of paying your bills, credit cards, and other loan payments on time.

In Canada, a decent credit score is usually around 650-720. According to Borrowell, the average credit score is around 750. The full range of scores is 300 (the lowest) to 900 (the highest). If you keep your score above 650, you should be able to apply for a standard loan at a reasonable rate. If you take a peek at your credit score and it’s not quite where you want it to be, don’t stress – improving it is actually easier than you think.

A credit score is basically a measure of how good you are at handling debt. It’s creditors’ way of seeing whether or not you have a track record of paying your bills, credit cards, and other loan payments on time.

In Canada, a decent credit score is usually around 650-720. According to Borrowell, the average credit score is around 750. The full range of scores is 300 (the lowest) to 900 (the highest). If you keep your score above 650, you should be able to apply for a standard loan at a reasonable rate. If you take a peek at your credit score and it’s not quite where you want it to be, don’t stress – improving it is actually easier than you think.

Credit utilization

When you apply for a credit card or loan, you’re given a credit limit. Your credit utilization ratio shows how much of this limit you’re actually using. (I.e. how much of your available credit are you using up?) 

Let’s say the limit on your credit card is $1500, and your balance for the month is $384. That would mean that you’ve used around 25% of your credit limit, and that’s your credit utilization ratio. It’s usually calculated at the end of the month, so it’s all about whether you can pay down your balance on time.

Credit bureaus want to see this lower than 30% because it shows that you’re not relying on credit to fund your lift.

Debt-free

That blissful moment when all of your pesky, unwanted debt is gone! Think: credit card debt, student loan, card, loan, personal loans, or lines of credit.

For most purposes, you can still have a mortgage and be considered debt-free. Why? Because the value of your house (hopefully) goes up over time, meaning that it’s not the same as the debt that simply incurs interest without giving you future value, or in other words, doesn’t have an appreciating asset underneath it!

Expense tracker

A place to record your expenses so that you can get a handle on your money, or for accounting purposes. You can track them however often you like, such as weekly, bi-weekly, or monthly. Whatever time-frame floats your boat!

You can track each expense separately, or create categories such as groceries, restaurants, or shopping where you’ll tally up all the expenses in that group.

Why use an expense tracker? It helps you understand where your money is actually going, and how you’re tracking towards your personal goals or budget!

Fixed expenses

Those super-predictable bills or expenses that don’t change every month. Think: rent, utilities, car insurance, health insurance, and anything else that stays the same month after month.

And because you’re a financial guru, this also includes automatic transfers into your TFSA, RRSP, emergency fund, or big ticket-savings.

Fixed interest rate

An interest rate which you either pay or earn that doesn’t change for a period of time (the “term”).

For example, a 5-year GIC of 3% means that you’ll earn 3% interest on your money each year for the next 5 years. At the end of the 5 years you’ll have the option to renew it at whatever rates they are offering.

Going into the red

A way of saying that you’ve spent more than you can technically afford. Usually it means you’ve spent more money than you have in your bank account, so you had to use your credit card. Or, you spent more than you got from your paycheck, so you’ve dipping into your hard-earned savings.

High-interest debt

Any debt with an interest rate over 5%. Usually this means a payday loan, credit card, student loan, car loan, personal loans, or lines of credit. This is the debt you want to prioritize getting rid of ASAP because the interest costs are high.

Interest cost

The amount of money you pay as “interest” in exchange for borrowing money.

You can get a very rough back-of-the-envelope calculation of your annual interest cost by multiplying the amount of debt you owe, by the interest rate on that debt. Each year, you’ll owe the same amount again.

For example, if you have $10,000 in credit card debt and your credit card (like most) has an interest rate of 20%, the calculation is $10,000 x 20% = $2,000. If you never pay off this balance, each year you’ll owe $2,000 a year in interest. Ugh.

This is why it’s best to tackle your debts that have a high interest rate ASAP!

Investment account

An account for your savings that holds investments which are designed to make your money grow over time. The main types are a TFSA, RRSP, RESP, or a non-registered account. Once you open an account at a financial institution and put money into it, you can either use the money to buy investments yourself (stocks, bonds, mutual funds, hedge funds), have a financial advisor invest the money for you, or use an online platform like Wealthsimple that invests the money for you.

The first step is to choose the financial institution where you’ll open the account. This decision is based on how involved you want to be in the day-to-day investing and whether you need other financial help, like tax or estate planning. If you want to invest by yourself, pick a discount broker and check out Canadian Couch Potato. If you want to use an online investment platform that does the hard work of investing for you, Wealthsimple and Questrade (via Questwealth) are great places to open an account. Lastly, if you want to use a financial advisor that helps you with complex things like estate planning, you’ll open an account at whichever bank they work for.

Irrational Financial Avoiders

The view that neglecting your finances will prevent money woes from being real. You know the saying ‘ignorance is bliss’? Well, sadly, this does not apply to your finances. If you forever avoid that outstanding credit card balance and pretend it’s not there, it doesn’t just go away. It goes into collections and puts a permanent scar on your credit report for up to 7 years! If you don’t pay your bills, the same thing eventually happens.

Yes, finances are scary, but it’s never to early (or too late!!) to start being responsible with them. The best thing to do is start – even if you’re starting small. Get some help from an awesome friend or financial coach (like ours here at KOHO) who knows what they’re doing with their money. You don’t have to face it alone!

Line of credit

A no-commitment, on-demand option to borrow a certain amount of money (up to the credit limit). If you open a line of credit, that money is available for you to borrow at any time, but you don’t have to use it if you don’t need to. You only start paying interest on that money when you actually borrow it.

For example, you get approved for a $10,000 line of credit with a 5% interest rate which you might use for an upcoming kitchen renovation. You don’t need the money until the contractors are done the work, so you don’t take it and nothing happens. To pay their first invoice, you use $7,000 of the available $10,000. From that date on, you start to owe about $30 a month in interest until you pay it back.

This line of credit allows you to spend the money, repay it, and spend it again in a never-ending cycle. While a credit line’s main advantage is flexibility, the downsides include high interest rates, severe penalties for late payments, and the potential to overspend.

Loan consolidation

Basically, loan consolidation (also called debt consolidation) is when you combine several smaller debts or loans into a single loan with one monthly payment. It’s usually done via a mortgage or a personal loan.

Any unsecured debt that you have – bills, credit cards, lines of credit and personal loans – can usually be included as part of loan consolidation.

Since each debt has its own interest rate, you take out a larger loan to pay off all the different debts you owe at once. Then you’re only dealing with one payment, and one interest rate. That’s what’s referred to as “consolidating” your debts.

Medium-term goals

The easiest way to think about medium-term goals are by what they don’t include. They don’t include any life goals you’ll need money for within 1 year or retirement. What they do include is anything that you may need money for in 2 to 10 years, such as buying a house in 2-3 years, travelling around the world in 4 years, or saving for your future children’s education.

Want to buy a house within one year? That’s a short-term goal. Want to save money for your children to inherit once you pass away? That’s a long-term goal.

RESP

Short for a “registered education savings account”.

So you’ve decide that you’d like your children to have a solid education. The best vehicle, hands-down, to fund the children’s education is an RESP, due to contribution matching from the government & tax benefits.

No matter your family income, the government will pay a Canada Education Savings Grant (CESG) that matches 20% of any contributions up to $500 per year for each child. There is a lifetime maximum of $7,200 in CESGs per beneficiary and maximum of non-government contributions of $50,000 per child. Unused grant room carries forward, and the government will pay an annual maximum of $1,000 in annual CESG including grants carried forward (“CESG Catch-Up”). A beneficiary is eligible for the CESG up to the end of the calendar year in which they reach age 17. If a child is between the ages of 15 and 17, special rules will apply.

The tax benefit is that investment earnings are taxed at the child’s tax rate upon withdrawal (which should be ~0%).

RRSP

Short for “registered retirement savings account”.

What is it? An RRSP is a government-approved savings plan where the money you contribute can be deducted from your taxes each year and the investment earnings grow tax-free.

What can you use it for and when? You guessed it – this account is really only for use once you’re retired. When you actually retire is up to you (and how much money you need to save to get there). Once you actually kick back and begin enjoying retirement, the money that comes out of your RRSP will be taxed as income.

If retirement is far away, there’s also one other time you can withdraw money from your RRSP— through the First Time Home Buyers Incentive program, you can use up to $25,000 of your retirement savings for a down payment, or if you choose to go back to school full-time, you can use $10,000 per year.

Are there any rules? The contribution limit for RRSPs is usually 18% of the income that you reported on your taxes the previous year and can be found on your previous years Notice of Assessment from the CRA.

TFSA

A tax-free-savings account (TFSA) is a tax-advantaged account that every Canadian should get once they start saving. Why? Because you can take out your money any time without penalty or taxes, and because you never have to pay tax on the investment earnings that grow inside the account. It holds things like cash (your actual savings), or investments like stocks, bonds, mutual funds or GICs, where your earnings aren’t taxed.

What can you use it for and when? TFSAs work best for medium-term goals—think more like a car than a vacation. Depending on how the money in the account is invested (i.e., do not learn the hard way about GIC withdrawal penalties), you can usually withdraw the money at any time, tax-free.

Are there any rules? There are contribution rules each year that limit how much money you can put into your TFSA. But! It’s cumulative, so if you don’t contribute the maximum amount one year, the remaining “room” is carried over to the next year. On the other hand, if you go over the limit for a given year, you could be subject to tax.

The TFSA became available to all Canadians over the age of 18 as of 2009. To see how much you can contribute, check out the TFSA guide on the CRA website, and refer to the “annual TFSA dollar limits” for all the years you were older than 18

Variable spending

This is your unpredictable spending that aren’t fixed amounts each month. (Basically includes anything besides fixed bills). Think: groceries, restaurants, clothes, Ubers, and hair cuts.

It’s the type of spending perfect for KOHO, because you have more control with a prepaid card than a regular credit card!

Withdrawal penalties

A fee you have to pay for taking money out of an account before the allowed date. For example, you buy a 3-year GIC, but then you decide that you need that money in 2 years. You’ll have to pay a penalty for “early withdrawal”.

Sometimes mutual funds have withdrawal penalties as well. Be sure to check before you use these investments!

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