We are constantly bombarded with messages about the dangers of credit card debt, but no one is talking about Lines of Credit (LOC). The reality is that Lines of Credit and credit cards are just financial products. They are not in and of themselves problematic; how we use or abuse them is the issue. A Line of Credit can be just as dangerous to your financial well-being as a credit card.
What is a Line of Credit? A Line of Credit is a type of loan that lets you borrow money up to a preset limit.
How does a Line of Credit work? You can withdraw or transfer funds from your Line of Credit at any time by:
- Making a withdrawal at your financial institution or at a banking machine
- Writing a cheque
- Telephone or online banking
Once you pay off or pay down your Line of Credit, you can access the funds up to the limit you are allowed. You pay interest on the amount that you borrow from the day you take the money out of your Line of Credit and you must make a minimum payment on the balance every month.
How do you get a Line of Credit? You can apply for a Line of Credit at a financial institution. They will determine your credit worthiness and your credit limit (how much you will be allowed to borrow on your Line of Credit).
Financial institutions have been promoting the use of Lines of Credit and it’s not a big surprise; they make money when you borrow money. And although Lines of Credit do come with lower interest rates than most credit cards, they can be just as dangerous to your financial future. The lower interest rates have lulled many people into making purchases that they may not have otherwise made. Then the reality of paying off the Line of Credit becomes a reality and where is the money going to come from?
According to Equifax, “More and more Canadians, it seems, are turning to their credit line, with balances increasing across the country”.
David Chilton, author of The Wealthy Barber and The Wealthy Barber Returns has very strong, negative opinions about Lines of Credit. “LOCs are the “worst thing” that’s happened to Canadians in the last 20 years. If I was prime minister, I’d shut them down.” Chilton said at a 2011 conference of the Canadian Pension & Benefits Institute as reported in the National Post newspaper. “It’s unbelievable how people are abusing these things.”
Borrowing without a solid repayment plan will get you into financial trouble every time. Are you experiencing serious debt issues as a result of your Line of Credit or credit cards? Contact Ira Smith Trustee & Receiver Inc. today. Starting Over, Starting Now we can help you live a debt free life.