Hidden dangers of using a line of credit instead of a loan to consolidate debt

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Q: I have two credit cards with outstanding balances of approximately $ 5,000 and $ 8,000. I also owe around $ 15,000 on my car loan. I know it’s crazy to have a balance on your credit cards which is why I spoke to a loan officer at my credit union where I have my mortgage consolidating my debt at a rate of lower interest. Because I have a good credit rating and equity in my condo, they approved a line of credit for me with a limit of $ 50,000. They would have given me $ 100,000 but they should have put a lien on my condo title and I didn’t want it. The line of credit will allow me to consolidate my debt at a much lower interest rate and with a minimum payment less than half of my current payments. Before going ahead and consolidating debt on a line of credit, I wanted to know if there were any hidden dangers I should be aware of. Thank you! ~ Geoff


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A: First of all, it’s good that you take the time to find out the potential downsides of using a line of credit for debt consolidation before you go ahead and ask questions by. the following. I wish more people would carefully consider the pros and cons of taking out credit and the long-term implications for their financial well-being.

There are risks and rewards with all credit products, and one of the best ways to protect yourself is to understand the terms and responsibilities associated with the type of credit you’re looking for. Additionally, you should understand that even if your financial institution has approved a credit limit of $ 50,000, it does not mean that full use of that limit is in your best interest.


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Here are four things to consider and carefully assess before using your line of credit to consolidate debt:

1.Look into the future before going into debt today

Financial institutions will usually look at your repayment history, your financial ability to repay the requested credit, as well as any collateral they may need to support the credit application. In your situation, because of your good credit rating and your home equity, your financial institution (FI) is comfortable lending you up to $ 50,000 unsecured. However, while creditors are very good at managing the amount of credit they will extend to their customers, they do not consider the impact this extended credit can have on their customers. It is up to the consumer looking to take on debt to weigh the pros and cons of taking on debt to ensure that he can manage it.


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Why save when borrowing is cheap?

For example, what if your situation changes, how will you handle it? Would you use your line of credit when facing a financial crisis? What if you lose your job, does it make financial sense to go into debt when you have no income or reduced income? You could find yourself in a worse situation if you don’t resolve your situation on time. Your credit rating could take a lot of damage and take years to repair if you’re not careful. It’s easy to get a false sense of financial security with a line of credit.

How To Get Out Of Debt And Stay Out Of Debt

2.A line of credit can make it hard to say no to impulse spending

Many consumers take out a line of credit (LOC) in order to consolidate and pay off their debt. Unfortunately, having access to additional credit that costs them nothing until they use it can be a difficult temptation to resist, especially when interest charges on lines of credit are still low. It becomes easy to justify that the good prices you got on your purchases will more or less offset the interest charges. While this may be true if you’ve paid the fees in a short period of time, many people have active balances on a letter of credit, and the ongoing monthly interest charges can wipe out and wipe out savings on items. that they bought.


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Tips for reducing or changing impulse spending habits

3. Budgeting is a four letter word

Alright, I’m a little cheeky, but budgeting is really a four letter word from my point of view and that word is “plan”. I will not go into the details of developing a spending plan, as I have written several times on this subject. The point I want to address here is that if you don’t fully understand your actual monthly expenses and are not living within your means, a line of credit can become your worst financial enemy. When you have a line of credit, if you find yourself short of pay between paydays, it’s a relatively easy and painless process to operate and borrow against your line of credit; shortfall resolved like this. If you haven’t been able to save funds to cover annual / seasonal expenses, it’s okay if you can tap into your LDC again.


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By living beyond your means with the help of an LOC, your dream of getting out of debt may turn out to be nothing more than a dream, or in this case a nightmare. Even with low interest rates, the amount of interest you will pay each year will run into the thousands of dollars once your balance begins to approach your credit limit. It’s hard to go ahead and save for retirement if you stay in debt. It’s a big problem in Canada right now; Canadians are in debt at record levels and find it nearly impossible to save enough for retirement.

Before consolidating, tips for managing

4.The impact of rising interest rates

We have had two interest rate hikes in the past year and the Governor of the Bank of Canada promises more in the future. With an increase in interest rates, two things will happen; your interest rate on your letter of credit will be increased and your monthly payment will increase to offset the higher interest charges. Depending on your financial situation at the time, your financial institution may lower your credit limit to reduce the potential increase in the number of customers who may be struggling with higher interest charges. This is not likely in the short term, but it is something to be aware of.


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3 Steps To Paying Off Debt Before Interest Rates Rise Too Much

The net result on lines of credit and debt consolidation

Credit can help you move towards a strong financial future; use it carelessly and you could be heading for a financial crash that can take years to resolve. A line of credit is just one tool to help you manage your finances; it can be good or bad depending on how you use it. However, due to its revolving nature, it can keep you in debt longer than a repayable loan. So play smart; Use a line of credit wisely and responsibly, and never let it get in the way of your long-term financial goals.

Associated reading:

What to do if you’ve been turned down for a consolidation loan

What is debt consolidation and how does it work?

7 Steps to Achieving a Great Credit Score in Canada

Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott byE-mail, Checkwww.nomoredebts.orgor dial 1-888-527-8999.



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