To LOC or not to LOC, that is the question
Of all of the ditch debt posts, this one was the hardest to write. I really want you to know that I don't believe in using debt, or a Line of Credit, as a way to live the life you want. A Line of Credit is not free cash, and I don't want you to read this and think - if you get a Line of Credit, your problems are solved! Now that my anxieties are out of the way...
First of all, let's define a "Line of Credit". It is loan issued by a bank, usually in the form of an account from which you can draw down and pay back with interest. Once you use the line of credit, and repay the money, you can use it again.
From my perspective, a Line of Credit can be used for good or evil.
The good category includes using a Line of Credit strategically:
Using the cash available to pay less interest on debt - for example, let's say you have a $4000 balance on your credit card, and you're paying 20.99% interest/year (approx $840/year to the bank). Instead of paying this debt off at 20.99%, it could make sense to transfer the balance to your lower interest Line of Credit. If you do the research, know your interest rates, have a plan for paying off your debt and DO NOT use your credit card in this way again, the Line of Credit strategy is very smart.
Accessing cash flow for a short term, knowing you will be able to pay it back very quickly - for example, using the Line of Credit for a small renovation that morphs your basement into a very functional rental space. Ideally you would have savings rather than use your Line of Credit BUT if you know you'll be able to pay back your loan in the first 1 or 2 months of renting the suite, it may be an option to use a Line of Credit rather than affect your cash flow.
The evil category includes using your Line of Credit as cash flow. For example, over spending on your credit card and using your Line of Credit to pay it off. Or using your homeowners Line of Credit to buy all new appliances and furniture for a pleasing aesthetic.
We're in the game of building wealth and getting to a place where we have enough money to live the life we want. Spending money before you earn it is not how to get ahead. Let this be heard! If you do not have the discipline to spend within your means, you should not be using your line of credit to make up the difference. If it's strategic, consider your options.
Comment or email me with your thoughts or if you have any questions. I want to hear from you!