Credit Canada

I went to my bank the other day for one thing and was offered something else: a line of credit.

Assorted personal banking advisers have, over the years, told me that I should get a line of credit. Never, I must say, when I was short of cash. That's the point, they've told me, so get it when your finances are in good shape. Later, it will be there when you need a short-term loan for an emergency or unexpected opportunity.

Hmm. It's free as long as I don't use it, and I don't have to use it. If I do use it, the interest rate would be low. Why would I say no?

Well, one reason is that line of credit will sit there tempting me like the box of double chocolate chip cookies in the kitchen cupboard. The cookies are there in case we get unexpected company, but often they're gone long before the guests show up.

"The problem is once you're getting a statement showing how much you actually have available on your line of credit, it can be very tempting to use, just like other forms of credit," warns Laurie Campbell, executive director of Credit Canada.

She recommends anyone considering a line of credit answer these questions:
• Why am I getting it?
• In what situations would I use it?
• Do I really need it or is there a better way?

Also, when you do dip into the line of credit, have a plan and date by which you will pay the money back.

Using a line of credit to consolidate credit card debt can be a smart move if you stop using the credit cards and start paying down the debt, Campbell says. The interest rate will be lower and there's one payment a month versus several if you have more than one credit card.

Unfortunately, credit counselling agencies too often see folks who just use a line of credit to rack up more debt on their cards, she says. After maxing out their line of credit, they max out the cards for the second time. Then they are really stuck.

Another dangerous way of using a line of credit is to pretend that it is an emergency fund.

"I think it's a crutch for people to believe this is their emergency fund. How can your emergency fund be a debt?" says Campbell. "However, if it is going to be the difference between using a line of credit and using your credit card, then, yes, using a line of credit would make much more sense."

Finally, don't use it just to help build up a good credit rating, she says. Keep in mind that it doesn't take a lot of credit history to get a good rating. If a line of credit is just going to lead to temptations that could mar your rating, reconsider.

*Material reprinted with the express permission of Canwest News Service.