Debt Relief Experts
Your bank has just sent you a pre-approval credit limit offer. Should you accept credit limit increases? When should you think twice about accepting a credit offer from your bank or credit card company?
While receiving a pre-approved credit card limit increase or line of credit offer can be flattering, you should be mindful of how much credit you carry at one time. Having more credit available than you need can lead to debt problems. While there are a few instances in which a credit limit increase makes sense, you need to weigh the benefits and risks before accepting any new credit offer from your bank, credit union or other financing company.
Table of Contents
What does it mean to be pre-approved for more credit?
When you receive a pre-approval offer for more credit, it simply means that you have passed the lender’s initial screening process. This process involves running a soft check into your credit history, looking at your borrowing habits, confirming that you make payments on time and reviewing your current credit balances.
A credit pre-approval is only an invitation and does not guarantee that you will receive the increase as offered. To increase your credit limit, you will need to formally apply. Your bank or lender will then do a hard pull into your credit report to verify whether you are still eligible.
Should you accept a pre-approved credit limit increase or line of credit?
Whether or not you should accept more credit depends on your current financial situation and debt repayment habits. Be honest with yourself: Are you making full debt payments each month or are you only making partial or minimum payments? If you are not paying off your debts in full each month, then you likely do not need access to more credit.
To further help you make an informed decision, consider the following risks to accepting an increased credit limit or line of credit offer:
- A pre-approval is not a guarantee you will receive the offer.
As mentioned, getting a pre-approved offer is only an invitation to apply. If you apply and are not approved, the bank will still have run a hard check into your credit report which will lower your credit score.
- There is a high chance you will use more credit than you can repay.
Lenders offer credit limit increases because they know people will eventually take advantage of the extra credit available to them. It takes willpower to avoid running up your credit card balances. I’ve had clients in my office tell me that their debt problems stemmed from when they were given access to more credit and they borrowed more money than they could repay.
- You may not qualify for more loans in the future.
More credit now limits your access to credit in the future. It may be wise to forego accepting a line of credit offer today so that when you need a loan, for example to purchase a car, your lender won’t deny your application because you already have too much credit.
- The interest rate on lines of credit can increase unexpectedly.
Lines of credit are ‘callable’ debts, meaning the bank can change borrowing terms without warning and at any time. Your lender can raise the interest rate unexpectedly which means, if you have outstanding borrowing on your line of credit, your monthly payment will increase and you will pay more in interest.
- Credit is not a substitute for cash.
You may be tempted to accept more credit as a substitute for an emergency fund. However, using credit to pay for emergency expenses can lead to money problems down the road. Borrowed money must be repaid and carries an added interest cost. We never recommend using credit as a safeguard against unexpected costs. Instead, build your own emergency fund for events like job loss, illness, or divorce.
Should you accept more credit to improve your credit score?
One of the most popular reasons for accepting a credit limit increase is to improve your credit score.
Generally, the more credit you have available the higher your credit score, if you maintain a healthy credit utilization rate. Your credit utilization ratio is a calculation of the total debt you’ve borrowed divided by the total amount of credit you have available. For example, if you have $10,000 in credit available and are borrowing $8,000 you have an 80% utilization rate. This is too high so you may be tempted to increase your credit limit to $15,000 which would lower your utilization to 53%.
Take on only the amount of credit you can comfortably repay. You are not obligated to use the credit available to you, and you can cancel or lower your limits in the future, however people rarely do this. Debt creep, the slow build-up of your actual balances, is a real risk. A better way to manage your credit utilization is to pay your balances in full each month. If you currently carry a balance, build a debt repayment plan to reduce your existing balances.
The diversity of your loans is another factor that affects your credit score. Taking on more credit card debt or revolving debt, can reduce your score. However taking on loan for those with bad credit, can harm your credit score.
My advice: if you already have a good credit score (say in the 700 to 750 range) , you don’t need to chase a better credit score. If you are applying for more credit just to improve your utilization rate there is a better way to improve your credit score.
When accepting an offer for more credit makes sense
There are situations when the benefits of accepting a credit increase offer outweigh the risks. You may consider increasing your credit limit if:
- You are someone who repays their monthly debt obligations in full;
- You bump up against your credit limits periodically and want to avoid over-the-limit fees;
- You want to use your credit card to earn more rewards points;
- You’re using it to finance renovations or something that will add to your net worth and have a plan to pay off that debt;
- You have cash on hand invested elsewhere you can access if you need to pay off the balance quickly;
- You are using it as an alternative to withdrawing money from investments like your retirement funds.
When to say no to higher credit card credit limits
There are financial circumstances when you should turn down any pre-approved credit offer:
- You’re using credit for everyday living expenses;
- Your budget isn’t balanced and you can’t pay down existing loans;
- You lack willpower not to spend money;
- When a personal loan is a better choice. Term loans offer a fixed repayment period reducing the risk of carrying balances forever.
Before accepting a pre-approval for a credit limit increase, which is potentially an increase in debt, you need to think critically about your personal financial situation. You should only take on as much credit as you can comfortably repay in full. If you are using new debt to keep up with old debt, consider contacting a Licensed Insolvency Trustee for a better plan to deal with your balances.
Tune in to the podcast episode below.
Transcript
Doug Hoyes: When I asked my clients what happened, how did you get in so much debt, they tell me the credit card company offered them a credit limit increase on their credit card so they took it or they called me and offered a line of credit so I took it. Makes sense, if someone offers you something you take it, right? But is it always a good idea, what should you watch out for? So today on Debt Free n 30 I’ve invited back Diane Cunha, did I pronounce your name correctly there?
Diane Cunha: You did.
Doug Hoyes: Oh, I nailed it, who was with us back on show 235 when we talked about credit cards. Today we’ll have a discussion about the pros and cons of preapproved credit limit increases and lines of credit. I’m going to explain why conventional wisdom says they’re a good idea and Diane will explain why the conventional wisdom is often wrong, Diane, ready to go?
Diane Cunha: Let’s go.
Doug Hoyes: Okay, let’s do it. So reason number one, this is pretty obvious actually, why you should accept a credit increase on your credit card or credit or line of credit is there’s no downside, why would you say not to someone offering to give you a higher credit limit?
Diane Cunha: Well, usually when you are preapproved for a product you might – it doesn’t necessarily mean that you’ll get it. So preapproval is based on your habits essentially to see okay, have you been paying off your debts on time, minimum payments, do you have a lot available, a lot of credit available?
So yeah they’ll offer you, they’ll say you know what, you’re preapproved for this. The issue is is that they might do a hard credit check. So it doesn’t necessary mean that you’re automatically approved. They’ll say come in, we’ll see the application, alright we did the application and you’re doing a hard credit check, which does hurt your credit in the end.
Doug Hoyes: So, saying you’re preapproved doesn’t mean you’re preapproved.
Diane Cunha: Correct.
Doug Hoyes: So are you saying that a bank would actually lie to someone? I’m stunned that you would say that on the show here.
Diane Cunha: It happens. The thing is that they don’t take a loss out of that, right? The get you in, it’s all about money. So yeah you’re reapproved for $14,000, $15,000 they get you in and let’s say you do qualify for it and you say yes, well it’s no loss for them, it’s a win/win for them because they do end up making money off of you once you start using it.
Doug Hoyes: So I get this form in the mail that says I’m preapproved, I actually fill out the form, I send it in and it turns out oh guess what, actually no, we’ve now done a full credit check on you instead of just the soft hit to generate this form and you don’t qualify. Oh too bad, now you’ve got a hard hit showing up. Okay so I’m stunned that banks would do something like that, that’s just amazing, I hope you’re lying to me and that’s not actually true. So, now I mean frankly if they are offering this preapproved deal I think there’s a pretty good chance you will actually be preapproved.
Diane Cunha: Right.
Doug Hoyes: So, I agree okay, maybe they haven’t done a complete, you know, work up on you but they’ve done a soft hit, they know that you’re good enough to qualify. There’s probably a whole lot, not a whole lot more they’re going to find out about you when you actually fill out the form and apply for it. So, again it’s not costing me anything to say yes to the higher credit limit so why not just take it?
Diane Cunha: So the banks know that on average people will end up using that higher credit limit. On average people will say you know what, I’ll take it just because it’s there. It’s based on – a lot of things are based on willpower. So when I see clients and I say okay, this is how you rebuild your credit and they say well, I don’t want a large credit limit. Great, you know yourself better. Maybe some people who have a larger credit limit yes, they understand that if I use it all then I’m going to be paying more there’s no temptation there. But on average people are more likely to use it, which in the end makes the bank money.
Doug Hoyes: But I don’t have to use it.
Diane Cunha: Right, you don’t have to.
Doug Hoyes: So again, I mean just take it and what you’re saying is you’ve got to be disciplined.
Diane Cunha: Correct.
Doug Hoyes: So if I’m disciplined okay, I’ll just take it and run with it and everything will be fine.
Diane Cunha: Well, not necessarily. I mean again when you’re offered large amounts of lines of credits you have a good credit score. When people come in they say either oh, the majority of people say I don’t have bad credit, I don’t have a bad credit score, honestly everything is great. It’s like well yeah, of course it is because you don’t get credit with bad credit score. So for you to get more credit doesn’t make sense, if your credit score is great why get more credit?
Doug Hoyes: Well, so let’s talk about credit scores then. You and I have had this discussion many times. Your job here at Hoyes Michalos, and we’re in the Kitchener office, which is our head office, where our fancy studio is here and you meet with clients just on the other side of the wall there all the time, right?
Diane Cunha: That’s right.
Doug Hoyes: And so people come in and it’s a very common thing to say to you what you just said. Okay, I know I’ve got debt and I’d like rebuild, you know, I don’t want my credit score to be hurt, I want to improve my credit score so I can borrow more money. So would it not therefore be logical if the bank is offering me an increase in my credit limit or a new line of credit, I should take that because that will lead to a new higher credit score, isn’t that exactly what people want and need and should do?
Diane Cunha: I think that people forget that you know what, your credit card is great. Offering you more, wow this is great, this is flattering, I can get more, I can use more. But remember whatever you use you have to pay back. So, I mean when I see people come in and, you know, they say I have lines of credit here, here and here and they’re all maxed out, well yeah, the bank is offering you more because one, you’re paying on time, you’re paying the minimum, which is interest, which is a lot of money that you’re making them. So why not offer you more because maybe you can afford more, let’s try to get more money out of you.
So I mean to get it to increase your credit, if your credit’s good why have it any higher? People come in here 750, 800, great, why do you want it any higher than that, what’s the point of having that? I mean would you rather have a high credit limit or no debt?
Doug Hoyes: And so your big worry is I focus on the credit score and that leads to higher debt, which ultimately leads to a lower credit score because I get myself into trouble.
Diane Cunha: Yeah because if you think about it a credit score, a credit report basically tells creditors how well do you manage your debt? How much debt do you have, do you pay your debt on time, have you accumulated more debt down the road? So, and that score, it gets generated, the FICO score and most people know the higher the better. Is it worth it to you, though, to have such a high score and have debt?
Doug Hoyes: Yeah but, and again I’m giving the counterarguments here, my credit score is based on what you just said, debt and everything, but it’s also based on utilization. So the best credit, and you and I don’t know the secret formula because they don’t tell us what it is, but our best guess based on the, you know, tens and thousands of people literally that you and I have met with over the years, is that your credit score is higher if your utilization is at an appropriate level. So utilization is the percentage as you know of the total debt that I’m actually borrowing, so, if I’ve got a 10,000 limit on my credit card and I carry a balance of $2,000 that’s a 20% utilization.
Diane Cunha: Right.
Doug Hoyes: So 20% that’s pretty good, that’s what the banks like to see, that makes your credit score higher. If you’re utilizing 100% they figure you’re pushing to the limit and therefore are at high risk of default so that’s not good. But if you have a 0% utilization well, you’re not much of a customer then because we can’t make any money off you.
So the convention wisdom is you want to try for 20, 30% utilization so that’s just enough. Well, if I get a credit limit increase to $20,000, then the $6,000 I’m borrowing on my formerly $10,000 credit card is no longer, you know, 60% utilization, well now it’s 30% utilization or whatever. So is it not better then to get as much credit capacity as you can, which will then lower your utilization and therefore make your credit score better? See, I’ve got it all figured out, there’s no way you can respond to that, I think I’ve won this argument then.
Diane Cunha: But the thing is is that it still reports the credit that you use. So when you see high credit limit and, you know, how much you’ve used there in regards to say the $6,000 into 20, are you 100% sure you’re not going to use more of than that $6,000? Again, it’s based on the banks know on average if we offer this to you and we put aside the whole – even if we say yeah, use it for emergencies what if you lose your job, what if this happens, well, you still have to pay that money back. It’s always better to rely on your own money on cash rather than having this huge limit, especially as I said, willpower is the biggest key here and banks know that people will resort to credit to avoid losing their house, to avoid losing their home, like renting, to help their kids, Christmas, anything like that, they will resort to that.
Doug Hoyes: Okay, so you’ve hit on a couple of issues here. So we are recording this it’s May, 2019 and so for people who are watching this in the future, I can tell you today the economy’s still doing pretty good. The unemployment rate is pretty low, interest rates, well they ticked up a bit over the last year and a half, two years but they’re still very close to historical lows. You know, times are good. And we know that when times are good banks want to lends lots of money and then when times are bad they cramp it all back and start, you know, reducing your lines of credit and cancelling lines of credit and calling back credit cards and things like that.
So does it not make sense when times are good, as they are now, to get as much credit as you can, you don’t have to use it, but are you not better off getting it now while times are good because when times are tough the banks aren’t going to give you any new credit so at least if you’ve got it locked in now then you’ve got it if you need it if times get tough in the future. So get it now while the getting is good.
Diane Cunha: That is a very dangerous statement. So I’ll use an example of a client that I saw recently that she went off sick 10 years ago, was on long-term disability, which doesn’t pay very much. It pays something but not enough to maintain a household of five, her husband’s working and she has lines of credit. So banks offer this to you. Perfect, she got the line of credit, she was utilizing it, she waited until she got an insurance paid out, perfect, paid off that line of credit with that insurance pay out, four years later has debt again, came to see me and she was like I don’t know what to do, I don’t want to lose my house.
What did that do in the long run? It put a band-aid on the issue. It didn’t help her whatsoever. I mean lines of credit it’s the idea that I have to pay this back or I mean I have debt but I will be able, I’ll deal with it in the future. Well now the banks are coming after her and saying we want $5,000 today, we’re closing this line of credit today we want this money now. How is she going to come up with this money? She doesn’t have it.
So getting a product because you know what, in the future I might need this, well no, use your own money for emergencies because in this situation she’s already tens of thousands of dollars in interest to avoid a problem that was going to happen. So the line of credit didn’t essentially help her in the end.
Doug Hoyes: So you’re saying what the bank giveth, the bank may taketh away.
Diane Cunha: That’s right. And now she has all this debt load, her debt to income ratio is not good meaning that she has more debt than what the household even takes home, that even when she needs a car she’s not going to get one because they’re going to see holy smokes you have all this debt over here, how the heck can you afford a car payment of $500 a month when you need to pay $2,000 a month on all this other debt minimum.
Doug Hoyes: So getting the credit upfront when you didn’t need it ended up meaning she couldn’t get it when she did need it in the example you’re giving.
Diane Cunha: Well and she couldn’t get more help, I mean it just dug a deeper hole for her because she used it, she had it was great, increased the limit, okay I’ll worry about it later. Now it’s in demand so they say no, we want this $5,000 now. Well, how is she going to pay it because she didn’t have enough income? So it did not help her in the end, in hindsight it did not help her. And I think that’s what people mistakenly use lines of credit for, you know what, this is temporary, this is temporary. Well, unfortunately we don’t know how long that’s going to be.
Doug Hoyes: Yeah if you get it how can you pay it back?
Diane Cunha: Exactly.
Doug Hoyes: Okay, I’m willing to buy that I think. You know, I mean again it all comes back to what you were saying before about discipline, if I’m disciplined enough I can borrow it and pay it back, then I’m good. And if something happens once I borrowed it now I’m even more debt than I was before.
Diane Cunha: Right.
Doug Hoyes: Okay, so let me throw another thing at you. Every financial guru out there says that you need to have an emergency fund; this is like the basis for all financial planning. So, set aside 10% of your income and it should be a saving account, a TFSA, something so if something goes wrong, you get laid off, you lose your job, whatever, there’s money sitting there.
Okay you can’t really argue with that. But here’s the counterargument to that, I put my – so let’s say I’ve got a $10,000 – I’ve saved up $10,000 and I’ve put it in a savings account. And you know how much interest I’m earning on that savings account, pretty close to zippo. But even if I’m some really sophisticated investor and know how to get GICs or money market funds or something, I’m like not making any money at all.
So would I not be better off, and I understand if I lose my job or something and I need some money to pay the rent then I need access to money, but I don’t need access to savings, I need access to money. So why not have a line of credit sitting there, a $10,000 line of credit that I haven’t used and then if I do lose my job, no problem I can draw on that money. And so instead of having $10,000 sitting in some savings account earning me nothing, if I actually do have savings, well why don’t I invest it in the stock market, buy some mutual funds, stock market always goes up, right, nothing can go wrong with that. Or maybe I pay down my mortgage on my hose or invest it in real estate.
There is probably something I can find to invest that $10,000 in that will earn me more than the 0% I’m going to earn at the bank but I need an emergency fund, great. I will have a line of credit as my emergency fund, bingo, bungo, there’s a perfect reason to have a line of credit.
Diane Cunha: So you said savings is 0%, is line of credit 0% because line of credit is not.
Doug Hoyes: Well, I’m not actually using the line of credit it’s just sitting there if I need it, which is exactly what’s happening with the savings, it’s just sitting there if I need it.
Diane Cunha: Right, so if you choose to use line of credit, there’s going to be interest. Right off the bat you’re paying the bank interest, you’re worrying about minimum payments. When I sit down with people they say you know what, I can’t save money with all this debt. And I say well you can’t save when you have debt because all of your money is going towards debt.
So why wouldn’t you deplete the savings that’s at 0%? Isn’t it better to deplete that rather than to worry about a line of credit that is costly in the end? It’s going to cost you more money to use line of credit rather than to use your savings because yeah, your savings, the interest rate, the savings rate is like what .2% or something? But at the end of the day it’s your money, it’s not somebody else’s. And I think that’s the biggest key is that illusion that if I use this line of credit I’ll pay it back, don’t worry about it. Well now you’ve got a minimum payment of 200, 300, 400, it’s going to increase. And when you can’t pay it back, well, guess what? They’re not going to help you, you’re too risky. Now what? You lose that 10 grand anyway and now you’re back at square one, you’re in a hole.
Doug Hoyes: So it comes down to risk is what you’re saying.
Diane Cunha: Huge risk, yeah.
Doug Hoyes: And I get it, if I put my 10,000 bucks in the stock market, there is a chance that it will not be $10,000. It might go up but it might also go down. So you’re saying well maybe I’m better off earning 0% on savings account or .2% but it’s actually my money, nothing can go wrong, there’s no risk.
Diane Cunha: Right.
Doug Hoyes: So okay, I’m not done yet, I’ve got more on my cue cards here. Here is an actual comment I saw on Reddit, which is something on the internet where people talk back and forth. I get mentioned every now and then, so does this podcast, so thank you to all you Reddit people. And this was referring to lines of credit, okay and their comment was it’s a super premium payday loan. So okay, instead of getting a payday loan which has a super high interest rate, why not have a line of credit, that has a very much lower interest rate? Makes sense, right, no down side there?
Diane Cunha: Well, debt is debt in the end. So yes, it’s lower interest, what, six, seven, eight percent rather than –
Doug Hoyes: 390%.
Diane Cunha: Yeah, three, 400%, but again, it will slowly grow and you will – you have to pay it back in the end.
Doug Hoyes: So what’s better, a line of credit or, you know, a cash advance on a credit card, a payday loan, an overdraft, like I would think the line of credit is better on all of those because the interest rate is less.
Diane Cunha: It would be but let’s say you have one of each of those products and you put it on your line of credit, can you pay that off? What’s the interest rate? Yes, it’s lower but that’s – I rarely see people that just use a line of credit just for emergencies. I mean they end up I’ll pay later. It’s this mentality of when I have the money I’m going to pay it but something always seems to come up.
Doug Hoyes: So, tell me a story then. So again you are a credit counsellor here so you’re meeting with many, many people every day either before they file their bankruptcy or consumer proposal or afterwards because in every bankruptcy or consumer proposal there are two credit counselling session where they meet with you and you go over things like exactly what we’re talking about here, you know, the use of debt and budgeting and credit repair and all those sorts of things.
So, can you think of a client or two that you have dealt with in the recent past who had, you know, a bunch of credit debt a bunch of line of credit debt who sort of got it thinking I’ll be able to pay it off and it’ll all be good but ended up coming back having to file a proposal because they had no other choice.
Diane Cunha: Yeah, I’ve seen a couple of recently that everything was going great they thought. It took them along time to come in because I tell people when they come in and see me or go into any one of our offices, the hardest process, the hardest thing in this whole process is calling us and showing up for the appointment because a lot of people feel embarrassed, nobody says I want to grow up and file for bankruptcy, that doesn’t happen. So it’s a tough – that’s the only – toughest thing to do is come in.
Once you show up – so I saw this couple and I’m writing down all their debts and they have $200,000 worth of unsecured debt, so that is credit cards, lines of credit attached to nothing. And they have been paying this for 20 years constantly. And the way he was doing it was he was having his paycheque – so the husband was depositing his paycheque into the line of credit. So constantly the line of credit was being made but then he was using the line of credit to pay the other guys, the most common phrase robbing Peter to pay Paul. So he’s paying off this guy, this guy, this guy, this guy and he just – he can’t do it anymore. Now the minimum payment’s going to get too high that his paycheque’s not going to cover it, now what?
Well filing a consumer proposal was the first time that they had money after money. After a month they said wow, we were able to buy winter tires with our money not borrowed money. And that was a situation where the line of credit increased, you know, they had a home then they sold the house but they never took away the line of credit. So they kept offering more and they took more because they needed it to live, they needed it for whatever. And they thought you know what, we’ll worry about this later and it got to the point where they said you know what I wish I did this years ago because it was just so much easier to file a proposal than to constantly pay down this debt. I mean I told them 20 years worth of payments you’ve probably paid your original purchase two times over.
Doug Hoyes: Maybe four times.
Diane Cunha: Maybe, yeah.
Doug Hoyes: The example you give of someone using their line of credit as their bank account, that’s not unusual. $200,00 worth of debt, okay that’s higher than the typical person we’re dealing with, the average person we see it’s sort of like 40, 50, $60,000 and some are smaller, some are larger.
But yeah, using your line of credit as a bank account makes perfect sense, I don’t have to pay banking fees. There’s no fees on a line of credit, I can put deposits in, it lets me write cheques against it so look I figured out a way to save on banking fees. But you’re right, the interest on $200,00 over a 20 year period is easily a half a million bucks or whatever it was they’ve been making in payments. So okay, were running up against the clock here, let’s get to practical advice. And I’m going to start.
Diane Cunha: Alright, go ahead.
Doug Hoyes: I’m going to start. I’m going to tell you a couple of times where it might actually make sense to say yes to a credit limit increase on an existing credit card. So we’re talking credit cards, we’ll talk about lines of credit in a minute. The first one would be if I am constantly bumping up against my limit. So, for example I have a credit card, it’s got a thousand dollar limit on it and I use it for business purposes. I’m a sales guy, I travel a lot, I’m putting hotels on it and I’m always bumping up against my credit limit. And they start whacking me with fees, you know, over limit fees and whatnot.
So, in that case okay, bumping your credit limit up from a thousand to 5,000 or whatever means okay, I don’t get hit with those extra fees. That to me makes perfect sense. The other obvious example would be instead of using a debit card for everything, which is frankly what I recommend because you’re using your own money, but if I use a credit card then I’m earning points, then maybe I can get some advantage by doing that. So there’s a couple obvious reasons where it does make sense to use a credit card.
Diane Cunha: Can I get back to this reward thing?
Doug Hoyes: Sure.
Diane Cunha: So the issue with rewards though so if you’re paying let’s say you have a rewards card or travel card from the bank $5,000 and you did this increase, you’re paying for those rewards and you’re paying more than what the rewards are even worth. So in the end it’s a good thing for that but I think people to remember that huge fact because I tell people all the time you have to make the credit card work for you, not the other way around.
Doug Hoyes: Yeah, if I’m paying it in full at the end of every month then great, the rewards make sense, the over limit fees I’ve eliminated. But I mean the point you’ve continually stressed through, you know, the last 25 minutes has been yeah, but if you don’t end up paying it then you’ve got a problem. So okay, over to you then, give me your list of when you should say no, when it is a bad idea to get a credit limit increase on your credit card?
Diane Cunha: So, a bad idea would be, one would be if you’re starting to use it for living costs, so for example it’s like okay I really need to pay this hydro bill, I really need to pay this utility bill so you’re using the credit in order to pay it because you don’t have your own money, so there’s a red flag right there. People I think, again have this mentality of I’ll worry about it later or it’s not that much of a payment, I will be able to fix this, well once it gets too high, it’s too high.
But living costs are a huge thing, which leads to having an unbalanced budget. When you are paying too much for one thing well what’s going on within your budget? When I sit down with people I say to them, you know, it’s not my job to sit down and tell you, you need to cut this out, this out, it’s like what works for you, because if you want to leave something in your budget you have to either bring or take something out.
Doug Hoyes: It’s math.
Diane Cunha: It’s very simple however it’s not a simple decision of what you want to do. But it’s not my job to tell you, you know, you can’t have, you know, $200 worth of cable, I mean that’s kind of silly. But at the end of the day if that’s your thing, that’s okay it’s just how are you going to make that work? Well, if you’re using your credit card because you really need that, well, that’s not a good idea.
I talked about willpower as well. So everyone I sit down with when we discuss this is how you build credit the first session we talk about, let’s talk about saving money, where’s your budget at? We’ll review the budget again because people – many, many clients are how do I rebuild my credit again? That’s not your concern, your concern is saving your money first and then we’ll talk about rebuilding your credit. When I see them again in four months, we talk about rebuilding credit and a lot of them are just saying you know what, I don’t think I’m ready. Good then don’t get it, you know yourself better I can tell you use this card for gas. You know, if you have an accessible amount and you think you’re going to use it, then don’t get it. You don’t have to do anything you don’t want to do.
Doug Hoyes: You have to know yourself then. So okay, we’ve talked about a credit increase on your credit card. So now let’s talk about getting a line of credit. So again I’ve got a nice list here of why it’s a good idea to get a line of credit or to increase the line of credit that they’ve got. I mean the obvious one is they’ve got lower interest rates. So if I’m carrying a balance on a credit card at 19.9% but the bank is willing to give me a line of credit at 5%, kind of no brainer, transfer one to the other, I’m going to save myself some interest, we already talked about, you know, money in a savings account well, you’re probably better having a line of credit as your emergency savings plan, right? That makes perfect sense.
If I’m going to be spending the money anyways on things like financing renovations or whatever, then again kind of makes sense to have a line of credit to do that. Perhaps you do lower your utilization by having a higher available credit and that maybe makes your credit score better. And so long as you’re responsible there’s no problem and it might be something that you need in the future so why not get it now so you’ve got it. Those are the arguments in favour, tell me why you think there are some problems with jacking up your available credit on a line of credit.
Diane Cunha: So the first most obvious is you have to pay it back. You are obligated to pay that back, you signed a contract, mind you we can help with that if there was an issue. But you’re saying yeah, I’m going to pay whatever back, whatever I use I’m going to pay it back. And like people that we see they want to pay it back, they say it’s morally wrong if I cannot pay this back. But that is a huge – that is the biggest, biggest point.
Second is cash is always better than having debt. So having that $10,000 savings, I’d rather have $10,000 in my savings than $10,000 worth of debt, so you decide what is better, it’s always to have – accessible cash is always better than accumulating debt and having interest when you don’t have to have the interest. I mean like I said to save money you can’t have any debt. So if you have money saved, wonderful then you should not have any debt because that should be used instead of your lines of credits.
Doug Hoyes: And so really what you’re saying is you’ve got know yourself, there is this illusion of security that oh well, I’ve got all this available credit so I’m going to be fine when in fact no, what you really have is access to a whole lot of debt and that’s just a big worry.
Diane Cunha: Right.
Doug Hoyes: So to sum it all up you’re kind of siding on the angle of yeah, the less debt is better.
Diane Cunha: Yeah, so in an emergency, rely on yourself.
Doug Hoyes: Rely on yourself, excellent. Well that’s a great way to end it, Diane thanks very much.
Diane Cunha: Thank you.
Doug Hoyes: So that’s Diane Cunha, who is a credit counsellor here at Hoyes Michalos in Kitchener. So if you would like to sit down and have her explain all this to her you can track her down at hoyes.com and do that.
Now obviously on today’s show I presented arguments in favour of bumping up credit limits and credit cards lines of credit. But, you know, obviously I’m kind of on Diane’s side on this because I see the impacts of having too much debt. Debt is dangerous and unless you’re very disciplined, having access to debt can cause trouble. And I think you made the comment, and of course you were quoting from my book here Straight Talk on your Money, I don’t think we got the commercial in yet so got to refer to it every time we do a show, myth number four give credit where credit is due.
This is my favourite myth. And the reason is the banks call it credit but really what it is is debt. And so even though they’ve increased your credit limit on your credit line or your credit card, really what they’ve done is increased your debt limit on your debt line, on your debt card. And if we think of it that way then that probably makes it a lot easier to say no, you know what I agree with Diane, I don’t really need it, let’s stick to savings and we’re good. So think of it that way and of course you can all take a copy of your book and read myth number four.
That is our show for today. Please subscribe on iTunes or wherever you get your podcasts. And if you’re watching on YouTube, because we do have a Debt Free in 30 YouTube channel, please hit the subscribe button so that you don’t miss an episode. Thanks for listening and watching, until next week I’m Doug Hoyes. That was Debt Free in 30.
