Line Of Credit, should I open one?

[danam314]

Bad idea!!! Before having a family I used to be in finances and a line of credit is the WORST and most dangerous credit. It's very hard to pay back and it's hard to get out of. It's revolving credit.

If you use credit during an emergency, how are you going to pay the credit bill? With more credit?

Also, unused credit is nearly as damaging as maxed credit. You are as big as a risk in the lenders eyes because if a true emergency did happen you can max out your credit quickly and go from 0 owing to thousands owing with no way to pay it back. To keep your credit score good, only get credit that you plan on using and paying back BUT make sure you keep a balance of approx 10-15%. Don't get credit just because you can.

All in all, Credit for an emergency is BAD!!! It can backfire. A better plan is to save up money and keep it in a money market account. You will earn interest but it's easily accessible if you need it suddenly.

[ashedfc]

I completely disagree with the above statement.
1. Why have a difference of Emergency & True Emergency (for me if its a milder emergency, than its not an emergency at all).
2. If there is money in a Savings account (or money market account), you will be receiving a T5 slip & pay tax on the interest. rather pay down the line of credit & save on the interest. This way you make much more than the money market or savings account, & there is no T5 slip. (Not paying interest on a line of credit is as good as saving).
In reality a Line of Credit is emergency money. It should not be maxed out as normal money & wait for emergency to happen (with no preparation).
Ash Financial Advisor
www.edfc.ca

[nadiabreckon]

Bad idea!!! Before having a family I used to be in finances and a line of credit is the WORST and most dangerous credit. It's very hard to pay back and it's hard to get out of. It's revolving credit.

If you use credit during an emergency, how are you going to pay the credit bill? With more credit?

Also, unused credit is nearly as damaging as maxed credit. You are as big as a risk in the lenders eyes because if a true emergency did happen you can max out your credit quickly and go from 0 owing to thousands owing with no way to pay it back. To keep your credit score good, only get credit that you plan on using and paying back BUT make sure you keep a balance of approx 10-15%. Don't get credit just because you can.

All in all, Credit for an emergency is BAD!!! It can backfire. A better plan is to save up money and keep it in a money market account. You will earn interest but it's easily accessible if you need it suddenly.

I 2nd this statement!

[nadiabreckon]

I completely disagree with the above statement.
1. Why have a difference of Emergency & True Emergency (for me if its a milder emergency, than its not an emergency at all).
2. If there is money in a Savings account (or money market account), you will be receiving a T5 slip & pay tax on the interest. rather pay down the line of credit & save on the interest. This way you make much more than the money market or savings account, & there is no T5 slip. (Not paying interest on a line of credit is as good as saving).
In reality a Line of Credit is emergency money. It should not be maxed out as normal money & wait for emergency to happen (with no preparation).
Ash Financial Advisor
www.edfc.ca

How is having savings in case of an emergency a bad thing? I don't understand... So, if we have money saved up, than we shouldn't use it for an emergency, and use our credit cards instead, is that what you're trying to explain?
Correct me if I'm wrong, but I'd rather not have to use my credit card should something go wrong with our car for example, and have to pay 2 bills for the vehicle in question...I'd rather dip into our savings account, and rebuild it afterward, then pay 20% interest on a credit card... Just sayin'...

[ashedfc]

How is having savings in case of an emergency a bad thing? I don't understand... So, if we have money saved up, than we shouldn't use it for an emergency, and use our credit cards instead, is that what you're trying to explain?
Correct me if I'm wrong, but I'd rather not have to use my credit card should something go wrong with our car for example, and have to pay 2 bills for the vehicle in question...I'd rather dip into our savings account, and rebuild it afterward, then pay 20% interest on a credit card... Just sayin'...

If you have any kind of debt (mortgage, credit card, car loan, line of credit, student loan, business loan, personal loan, etc.) then having a saving has no significance. First all savings should be applied towards existing debt (or restructure your debts in a re-advancable way - means, as you pay your debt you available credit increases proportionately). Only after having all the debt paid, than having money in the savings account or money market funds makes sense.
For example, If you have too much savings, than pay down the mortgage & save more interest than what you make on the savings. & keep an unused available line of credit for emergency. Money in savings give you a T5 (you pay tax on 100% interest income), By paying debt you save more interest & don't pay any tax on the saving as there is no T5 slip.
This is precisely the reason, why majority of Canadians have not managed their assets & debts properly.
Ash

[Insane]

If you have any kind of debt (mortgage, credit card, car loan, line of credit, student loan, business loan, personal loan, etc.) then having a saving has no significance. First all savings should be applied towards existing debt (or restructure your debts in a re-advancable way - means, as you pay your debt you available credit increases proportionately). Only after having all the debt paid, than having money in the savings account or money market funds makes sense.
For example, If you have too much savings, than pay down the mortgage & save more interest than what you make on the savings. & keep an unused available line of credit for emergency. Money in savings give you a T5 (you pay tax on 100% interest income), By paying debt you save more interest & don't pay any tax on the saving as there is no T5 slip.
This is precisely the reason, why majority of Canadians have not managed their assets & debts properly.
Ash

I whole heartedly disagree. This is the last I am going to say on the topic as clearly we have different views on it.

Say the roof springs a leak and is going to cost $5000 to fix. Now over the last year I have worked my tail off paying down my debt. How demoralizing and frustrating is it going to be to now have to go $5000 into debt AGAIN! It would be an endless, vicious circle. If you had an emergency fund, you'd use it to pay to fix the roof and move forward with paying down debts. If that $5000 is sunk into the morgage, you can't just pull it out to pay to fix the roof. You would have to go into debt to fix your roof. Why would anyone in their right mind want to go into debt everytime something goes wrong-and it will. Cars need repairs, houses need fixing, deductibles have to be paid when using your insurance, appliances break, ect.. ect... ect.... Emergency funds are sound financial planning to get yourself out of debt and keep yourself there. Your fall back plan should never be debt. THAT IS why people have problems managing their assets and their debt. If you don't have a safety net, you are screwed.

[nadiabreckon]

If you have any kind of debt (mortgage, credit card, car loan, line of credit, student loan, business loan, personal loan, etc.) then having a saving has no significance. First all savings should be applied towards existing debt (or restructure your debts in a re-advancable way - means, as you pay your debt you available credit increases proportionately). Only after having all the debt paid, than having money in the savings account or money market funds makes sense.
For example, If you have too much savings, than pay down the mortgage & save more interest than what you make on the savings. & keep an unused available line of credit for emergency. Money in savings give you a T5 (you pay tax on 100% interest income), By paying debt you save more interest & don't pay any tax on the saving as there is no T5 slip.
This is precisely the reason, why majority of Canadians have not managed their assets & debts properly.
Ash

I'm not trying to be rude when I say this, but since you have said that, what if tonight (through an act of God...) your roof blows off your house and will be costing you ten thousand dollars... I hope you have enough funds on your credit card in order to be able to pay for the repairs (and you're not allowed to touch your savings, that's only made to pay off said credit card once you pay for your roof, don't forget... )

[ashedfc]

I'm not trying to be rude when I say this, but since you have said that, what if tonight (through an act of God...) your roof blows off your house and will be costing you ten thousand dollars... I hope you have enough funds on your credit card in order to be able to pay for the repairs (and you're not allowed to touch your savings, that's only made to pay off said credit card once you pay for your roof, don't forget... )

You have totally misunderstood me -
The first principal of economics is to exhaust all you savings, then go on debt. That too on a priority basis - always use the lowest cost debt, then probably go to higher cost debt. Its a no brainer.
Why would you keep your savings & use a credit card at 19.99 or whatever %. You are lucky - you have some saving (very few Canadians like you). My statement was not directed to those who are having savings.
Lets take your case - once your savings are exhausted (wahtever they are, its all down to zero) & your emergency is still not solved - And you also dont have a line a credit (because you dont believe in it). Now what you do you do. Do you have a plan for such a situation. Its very difficult or impossible to get any credit approval when things are bad.

(Most of the mortgage foreclosures in Canada are because of medical emergencies)

People who go to payday loan, or who maintain credit card balance, or high interest line of credit balance - most of the cases is because of lack of proper planning. Not preparing for the worst & a catastrophy hits & its all over.

Having a line of credit approved - does not mean you use it.
Having a credit card does not mean you maintain a balance on it.

[nadiabreckon]

You have totally misunderstood me -
The first principal of economics is to exhaust all you savings, then go on debt. That too on a priority basis - always use the lowest cost debt, then probably go to higher cost debt. Its a no brainer.
Why would you keep your savings & use a credit card at 19.99 or whatever %. You are lucky - you have some saving (very few Canadians like you). My statement was not directed to those who are having savings.
Lets take your case - once your savings are exhausted (wahtever they are, its all down to zero) & your emergency is still not solved - And you also dont have a line a credit (because you dont believe in it). Now what you do you do. Do you have a plan for such a situation. Its very difficult or impossible to get any credit approval when things are bad.

(Most of the mortgage foreclosures in Canada are because of medical emergencies)

People who go to payday loan, or who maintain credit card balance, or high interest line of credit balance - most of the cases is because of lack of proper planning. Not preparing for the worst & a catastrophy hits & its all over.

Having a line of credit approved - does not mean you use it.
Having a credit card does not mean you maintain a balance on it.

I agree that some emergencies might cost more than what one might have saved, and that's exactly why we have credit cards...but why on earth would we want to charge everything at once to such a thing and have to pay even more of a monthly payment, and then have less in our budget to put towards our savings?

Personally, I'd rather my bills be lower and have more money to put towards savings (ie: son's education, RRSP's, etc... and don't even get me started on those).

[ashedfc]

I agree that some emergencies might cost more than what one might have saved, and that's exactly why we have credit cards...but why on earth would we want to charge everything at once to such a thing and have to pay even more of a monthly payment, and then have less in our budget to put towards our savings?

Personally, I'd rather my bills be lower and have more money to put towards savings (ie: son's education, RRSP's, etc... and don't even get me started on those).

CRedit card is not a emergency financial planning tool. Its just a convenient way of paying bills/purchases (couple of weeks free money), that's it. Those who maintain a balance on credit card are actually doing damage to their financial well being. Cost of carrying a debt: 100000 dollars on a Line of credit, & a 8333 on a Credit Card, both cost the same ($250 a month payment).
What you you have a Line of credit at 2.75% (interest only), or a Credit card at 19% (with 3% monthly payment, & your credit record gets ruined because of the outstanding balance).
Above all :- If your savings can take care of your emergency - then its not an emergency at all. For example, stress test your financial situation for catastrophies like,
1. Severe accident leading to disability
2. Medical emergency like stroke, cancer, etc.
3. Natural disaster like roof blowing off (as you mentioned)
4. Complete write-off of your automobile (& your credit score is bad, that, you cant get a 0% Toyota financing)
5. Loosing a job & not getting another job till all the savings are over.
6. Economy going into another severe recession (like the one in 1929 where the recession lasted for 7 years, & people had to line up with coupons for food)
7. List is endless.
Those who depend on credit card, have a tough time getting out of it.
Al corporates, high net worth individuals, manage debt by using line of credit. Its a standard practice.

On more example: Ford Motor Co. survived because they had a unused line of credit & now they are doing very well, & General Motors Co. went bankrupt last year because they had no access, & Citibank (which itself was was going bankrupt) was not willing to extend their credit.

[nadiabreckon]

You may think of an emergency as something totally different, and as Insane has said, I'm not going to get into it further with you because personally, I think you give iffy financial advice...I'm sorry but everything I learned money-wise is from my father (who has no mortgage, only bills are for his utilities, and pays cash for his vehicles because he has SAVINGS)...so I'd rather take his bit of advice rather than somebody on the internet... *shrug*

[brunt]

No way, no how, don't.

As others have mentioned, you should have ready access to your own cash for emergencies. If you run into a genuine money emergency, better to replace your own savings than have to replace the loan plus all of the accrued interest.

There is also a temptation by many to elevate the importance of really minor emergencies to tap a loan. Not saying that you are one of these, but it is definitely harder to spend your own money than it is to spend somebody else's. If you don't believe me, just look at the government.

[nadiabreckon]

No way, no how, don't.

As others have mentioned, you should have ready access to your own cash for emergencies. If you run into a genuine money emergency, better to replace your own savings than have to replace the loan plus all of the accrued interest.

There is also a temptation by many to elevate the importance of really minor emergencies to tap a loan. Not saying that you are one of these, but it is definitely harder to spend your own money than it is to spend somebody else's. If you don't believe me, just look at the government.

Booya! Well said!

[poppleton]

I agree with the others, that a line of credit is not necessary with careful financial planning. Building up your own emergency fund (which really is only to be used in case of emergency brings peace and takes away reliance on other means to provide in a bad situation. If you're looking for a way to do this in an easy, logical manner, check out Dave Ramsey's Baby Steps at daveramsey.com. DH and I are 29, and we've been checking out his plan for a year or so now. We carry no debt except our mortgage (which we are currently paying off as fast as we can!), invest 15% of our income for retirement, are saving for our kids' schooling and have a 6-month emergency fund in the bank. There honestly is so much freedom in knowing that we have our bases covered, and we won't have to take on debt to complete our goals!

[bug]

I have a comfortable savings cushion (at least for me), and I have a line of credit open. You never know when s**t really hits the fan and you end up burning through your savings. Since no bank wants to deal with you at the time you need it the most, the likely sources of loans then will be of high interest, ie. credit cards.

You can always request to have your LOC unlinked from your bank card and lock the LOC checks in a drawer somewhere if you're tempted to use it for non-emergency purposes.

I say yes, it's literally money in the bank if you need it, and if you don't need it, you (typically) don't pay for it.

We got one when we needed an emergency down payment to secure an offer on our house. Was paid back 2 days later when the sale of our condo went through. You never know what may come up.

I agree with the above. Many people have ample savings and have LOCs for flexibility (i.e., need cash in the short term, unexpected expenditures like a child going to an American university). In such situations, the LOC is not used regularly. You should have savings that cover your routine expenses and routine/anticipated emergencies like your car breaking down.

However, if you cannot control yourself and think you might use your LOC inappropriately, DONT'T GET IT.

Some people have their LOC linked to their bank card...so whenever they use debit or credit, it goes on to their LOC. I personally do NOT have this set up and think it can lead to trouble as it gives the allusion that the LOC is readily available and should be used for daily expenses.