Credit lines are masked as good debt because they offer seductively low rates. But, unless they’re used to purchase assets that are expected to grow (education, investments, and businesses), they’re not.
Because they’re easy to qualify for and access, they encourage ‘incrementalism,’ layering on more, which translates into bad debt, a deal you can’t afford. There’s no pressure from the bank to pay off the principal, you’re simply required to cover the interest. You can even borrow back everything you pay towards it.
You know you’re abusing your credit line if; you can justify busting your budget for unplanned purchases like a new TV because you’ve got a low rate; if your bottom line isn’t growing, but your credit line balance is; if your credit card is racked up each month because of overspending and you pay it off with a credit line rather than cash; if you find yourself unable to stop the $5,000 home renovation in the bathroom, and it creeps into new floors, cupboards and sparkling state-of-the-art appliances for the kitchen; or if you’re expediting the purchase timeframe on major items like a car.
A low rate credit line doesn’t solve a systemic overspending problem, it facilitates it.
Credit lines should only be used for good debt by investing in stable assets. It’s counterproductive to borrow back what you pay.
Tame your credit line. Change your repayment plan so the available credit reduces by the same amount as your payment; in essence turning it into a traditional loan. Also consider collapsing your home equity lines of credit into a fixed-rate mortgage. Rates are historically low and they won’t stay there forever.
Unless you’re drowning in expensive consumer debt (rates upwards of 10 per cent), credit lines don’t make sense, saving in advance does. Get off the credit line carousel, reign in spending and pay off your debt.