My student line of credit disaster

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.

About Krystal Yee

I'm a writer, personal finance blogger, and marketing professional based in Vancouver. I'm a former Toronto Star (Moneyville) columnist, author of The Beginner's Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I'm not working, you can usually find me running, playing field hockey, or plotting my next adventure.

14 comments

  1. Great story. I found my self within your story, and some of the mistakes I made with my LOC debt and CC debt. I never hit rock bottom, but always had revolving debt which became frustrating. Like your self, I had enough, and decided to eliminate my debt for good. Started with CC debt, and within a year I had it paid off.

    Breaking down the payments sure put things more into perspective.

  2. Gees, you were really bad at personal finance!

  3. I have a similar story with a line of credit my dad co-signed for. I was actually just using it to “build credit” when I was 18. So my plan was to take out the loan, put it in savings, and repay it over the course of a year to build up some history. Yeah, well I soon realized – like you did – that I wasn’t ready to handle that kind of financial decision. Plus the bank gave me a higher limit that I should have taken. It was a big mistake, but I’m glad I learned some important lessons.

  4. I can relate to this story, thanks for sharing, I thought I was the only one that did things like this in my past. I lived with a maxed out credit card for about a year and whenever I paid down a little bit I would just use up that credit line again and again. It’s pretty amazing to see all the right things you did to fix your bad spending habits though!

  5. The banks are really good at pushing their services on their clients like extending the loan limit, even if they don’t necessarily need all that much. Glad to see you were able to get it all sorted in the end.

  6. I have a $10,000 line of credit my dad co-signed for me. I haven’t touched it yet and hope to never have to. Plus I am going to re-apply every year of university for $10K more room or credit. But I knew I could handle it. I quickly did the math and realized that I would have to pay $38 every month I have the full credit out. That was not okay with me so
    I just keep it around for the sake of having it.

    What I may do is borrow the full $40,000 close to graduation to make a down payment on a house if the interest rate is lower than that of mortgages out there in the future.

  7. I can relate to this story! I am currently in debt with student loans. I do feel bad for my parents having to co-sign but then again I worked every summer and have worked off big chunks to pay for the next year. Your story seems to be lacking the big picture though you clearly must have mismanaged your money in a big way cause I am looking to pay of my debt in about a year and have a bigger hole(Student loan) than you talk about. Not many high school students can come out and say I am financially ready for university that is why the co-signing. Good luck in the future hopefully you won’t end up on welfare and instead take a cut in your lifestyle perks.

  8. Interesting story – I created a similar problem for myself when I was a student (back in the day). Congratulations for tackling it head on and getting it under control – on the positive side, you started to learn some good lessons about debt management when the debt was still of a size that you could do something about it. Hopefully that will prevent you from encountering a more serious debt issue down the road. I think about the people who are on the show Till Debt Do Us Part – they have $30-$40K of debt (or more), and the host shows how quickly that can turn into hundreds of thousands of dollars in debt.

  9. Hey there,

    I did almost a similar thing during my undergrad, except it was a 25K credit line! Plus 20K in govt loans.

    I managed my finances rather well, ie never once paid interest on my credit card and now, 4 years after graduation I’m down to 8K and 11K.

    About a year after grad I realized how much money I wasted!! I wasn’t bad with my money I just did not live like a student. I don’t regret too much though. I will have them paid off by next year, and considering my education was a lifelong investment, I think I got pretty good value overall. I think of it as a choice I made, my lifestyle has remained relatively constant over these last 8 years. I’d choose it that way again.

    I just have to be prepared to be a little later in life with some of the adult things.. ie buying a house.

  10. Tyler – It’s quite possible the author doesn’t earn as much money as you, and that’s the reason you’re able to pay off a larger debt in the same amount of time.

    Poor Student – maxing out your line of credit to make a down payment on a house? You do realize you’ll have to pay the LOC off, PLUS the mortgage? That’s a terrible idea, and it is highly unlikely that any bank will approve you for the kind of mortgage you’ll be looking when they see that your entire down payment is borrowed. (And they will see this – don’t think you can hide $40 000 debt from them!)

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