When I was a 20-year old student, my mom co-signed a $7,000 line of credit for me because I couldn’t get approved for one on my own. My original intention was to use $2,000 and buy a used car, because I needed (looking back, this was true – I did actually need one) a car to shuttle me back and forth between school and my three part-time jobs. But by my 21st birthday, I had borrowed the entire $7,000 and lived with a maxed out line of credit for the next three years of my life. Yeah. :|
Aside from the $1,600 I ended up spending on a used car, I couldn’t figure out what I spent the rest of my money on. So when I finally graduated college, not only did I end up owing $14,000 in student loans and $2,100 on a maxed out credit card, but I had put myself an additional $7,000 behind by maxing out my line of credit as well. And for what? I didn’t have a single thing to show for it, except for a crappy car that was almost as old as I was.
I finally hit rock bottom when I couldn’t afford to put gas in my car, and I didn’t have enough money to take the bus to get to work. I had a major problem, and it was that moment that made me want to change my life forever. I created a plan, and gave myself 12 months to become completely debt-free.
Once I got around to tackling my line of credit debt (I got to it last, because it had the lowest interest rate), I realized I had made four crucial mistakes which led to my downfall:
1. I used my line of credit like a chequing account
For years, I abused the line of credit because I didn’t think I could pay it off without sacrificing my lifestyle – and I hated the feeling of being broke. So instead of paying the balance down, I would deposit my entire pay cheque into the account to satisfy my monthly payment obligations. Then, I would spend out of my line of credit, just like a chequing account. And when my pay cheque wasn’t enough to cover my monthly expenses, I freely spent more than what I made because I had the credit there to supplement my income.
The Fix: I stopped the cycle by creating a debt-repayment plan, living on a budget, and increasing my income. My goal was to be completely debt-free in 12 months, so I broke down my $7,000 debt into bi-weekly payments of around $270.
2. The limit on my line of credit was too high
When I first inquired about a line of credit from TD Canada Trust, I only asked for a $2,000 loan. I didn’t get approved for it on my own, so when my mom agreed to co-sign my loan, I was approved for up to $7,000. I didn’t need that much, but the financial advisor at the bank and my mom both recommended I take the entire $7,000 loan “just in case of an emergency.” Little did I know that my emergencies would end up being lattes and clothing!
The Fix: Every time I paid off $500 on my line of credit, I would call the bank to have my limit lowered by the same amount. It meant that I remained maxed out as I paid off my debt, but it also meant I wouldn’t be tempted to fall back into old habits and use credit to supplement my income.
3. Asking my mom to co-sign the line of credit
Getting declined for the loan on my own should have been a sign that I was not ready to take on the financial responsibility that came with the line of credit. And putting my mom’s financial reputation on the line like that – while it was one of the nicest things she has ever done for me – was not fair of me to ask her to do.
The Fix: Once I paid off my line of credit, I called the bank and asked to put the loan under my own name.
4. I kept consolidating my credit card debt
Whenever I did end up being successful in paying down my line of credit by a few hundred dollars, I would use the credit room I had created to help pay off my constantly maxed out credit card. Then I would spend until my credit card was maxed out again. This vicious cycle meant that every time I tried to get ahead, I ended up even farther behind.
The Fix: Because the interest rate on my line of credit was so low, I consolidated my credit card debt one last time, and created an aggressive debt-repayment plan. By being able to pay down both my line of credit and remaining credit card balance at the same time, I eliminated the need for another consolidation.
Even though it can be easy to spend more than you can afford to pay back with a line of credit, it is a great tool to have because it can provide you with a low-interest way to borrow money when you need it. But because it is also so accessible, so many people fall into the trap of abusing their line of credit. It took me less than a year to max out my line of credit, and over 4 years living with the weight of that debt hanging over my head.