How I abused my line of credit

When I was a 20-year-old student, my mom co-signed a $7,000 line of credit for me because the bank wouldn’t approve one without her signature. My intention was to only use $2,000 of the amount and buy a used car. But by my 21st birthday, I had used the entire $7,000 and lived with a maxed-out line of credit for the next three years.

I did spend $1,600 on a used car, but I couldn’t figure out what I spent the rest on. So when I finally graduated from college where, not only did I end up owing $14,000 in student loans and $2,100 on a maxed out credit card, but I had dug the hole $7,000 deeper by maxing out my line of credit. And for what? I didn’t have a single thing to show for it, except for a car that was almost as old as I was.

It wasn’t until the moment where I had to bum bus money off of my boyfriend, did I realize I had a problem.

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Here are four mistakes I made when using my line of credit and four lessons learned:

1. I used it like a chequing account

For years, 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 paycheque into the account to satisfy my monthly payment obligations. Then, I would spend to the limit of my line of credit, just like a chequing account. And when my paycheque 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. My credit limit was too high

When I first inquired about a line of credit from TD Canada Trust, I only asked for a $2,000 loan. When my mom co-signed my loan, I was approved for up to $7,000. The financial advisor 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 mom to co-sign

If the bank had turned me down it would 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 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.

Conclusion

A line of credit is a great tool to have because it can provide you with a low-interest way to borrow money in times of need. But because it is also so accessible, it is easy to see why so many people fall into the trap of abusing their line of credit. I found out the hard way how difficult it was to break the cycle of debt, and I will never forget the lessons I learned from that experience.

Krystal Yee is a marketing and graphic design professional living in Vancouver. She also blogs at Give Me Back My Five Bucks.