I’ve had a personal credit card with BMO since I graduated from university just slightly after plastic was invented. I almost never use it because I pay cash for most purchases and we usually use another card for our hotel and airline transactions. When Costco switched to Mastercard a year or two ago, though, I dug out my card and used it once or twice for large items for which I wanted a double record of the purchase. Then suddenly I get an offer in the mail from BMO for a pre-approved personal line of credit at a lower interest rate than my Mastercard and I wondered why?
Should I Get a Personal Line of Credit as an Emergency Fund?
I see people asking this question a lot on financial chat lists. They have been offered a personal line of credit and they ask whether they should accept the offer or if the rate is good enough.
Personally, I don’t see why most people should accept a personal line of credit. What’s the advantage of having another potential source of debt?
But then, I don’t believe most people should make purchases using credit unless they are for exceptionally expensive items like a house, or unless it’s just as a convenience and they will pay the cost in full when the credit card bill arrives. I believe you should save up for that home renovation, new-to-you car, electronic wonder, or vacation trip.
When you save up in advance, *you* get the benefit on the interest on the money: it helps pay for your purchase. When you buy on credit, you lose because you have to pay the lender interest as well as the cost of the item.
And no, I don’t think having a loan from an institution is a substitute for having a true emergency fund. The last thing you want in an emergency is to incur more debt AND have to pay interest on that debt. Set money aside ahead of time to cover emergency expenses. Or figure out who among your friends and relatives could be trusted to help you get through an emergency.
Is It a Coincidence That I Got a LOC Letter Just After Using my BMO Mastercard?
I found the timing of this LOC offer interesting. I’ve never had an offer of a LOC from BMO before, despite having a bank account with them since I was attending university. So why did I get this letter now?
My suspicion is it’s because I used my Mastercard several times in the last year after not using it for a decade.
I’m doubly suspicious because the amount of the PLOC is the same as the credit limit on my BMO Mastercard.
Why Would BMO Offer Me a Line of Credit With a Lower Annual Interest Rate?
I’m not interested in having a line of credit, so I will be shredding this letter from BMO. But I wondered to myself why they would even offer me a loan at their “competitive rate” of 7.2% when my Mastercard has a rate of 17.5%. Wouldn’t they make more money if I had to pay them 17.5% on an outstanding balance than 7.2%.
Then I remembered something I read in the Globe and Mail. The writer said that many people think they will get out of credit card debt by getting a loan, usually a home equity line of credit. But as soon as they pay off the credit card with the HELOC, they start using it again. And before they know it, they have used up the credit limit on their HELOC *and* the credit limit on their credit card. And the bank then makes high interest off the HELOC and even higher interest off the credit card. Double your debt: double their profits.
Is that the strategy behind this BMO offer? I’ll never know. But if it is, they’ll be disappointed in me. I’m still paying off my credit card each time the bill arrives. And I’m not getting a line of credit. And I’ve got an emergency fund that could last me over a year, if I needed it to.
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Do you have a personal line of credit? Do you use it as a chequing account and never pay more than a few dollars of interest? Why do you find a LOC useful? Please share your views with a comment.