Tag Archives: line of credit rate

Spend $45 to Save $36,000

Two weeks ago, I received an email from a listener in Kelowna asking for some financial feedback. The email had enough in it to fill an hour or more, but here are the highlights:

This middle-aged couple has done really well in their investments. They have significant RRSPs and contribute 5% to their pension plan. They do have an RRSP loan at a good rate – and I won’t fuss about that.

They live within their means, no extravagant spending, small mortgage at a great rate, and an income of over $100,000.

On the debt side, it’s a different story. When they bought the Money Tools book at Mosaic, they immediately found $12,000 savings! Pretty good for a $20 investment! I keep saying: You go to almost any page and you’ll find a way to save money in whatever area! In their case, they have a line of credit that’s insured with life and disability. That’s one of THE biggest ripoffs in the financial field. The bank’s profits are 50 to 60%. Never get your insurance from the bank – ever. He immediately called to cancel it, but was on hold for 1 1/2 hours and never did talk to someone. Well, don’t bother calling. Write a three sentence letter that you want it cancelled as of today and deliver it to your branch. Banks can have a way of ignoring a call, claiming they never received it, etc. in order to protect their profit. In writing and delivered gets it done.

Their line of credit has been around since finances weren’t so good in the 1980s. It’s around $40,000 at a rate of over six percent! The rate is always prime plus something. That rate may have been OK when things weren’t so good, today it’s a massive overcharge. His credit score is over 780! He’s in the top 10% most credit worthy people in the country and ought to pay prime! 3% over for the last 10 years and on-track to only pay it off in another decade is over $25,000 in extra interest! All he did was go to equifax and pull up his credit score! When rates go up, lenders move up your rate. When your credit improves, they’re not voluntarily passing on a lower rate! You have to know your score and go ask – or demand it or fire your bank.

In the case of this couple, I wouldn’t move the credit line, but just get from the 10-year plan to one that pays it off pretty easily by Christmas this year. They have $20,000 in savings. Read the step up debt repayment section: First pay off your debts, then start saving. In their case, they should keep $5,000 for emergencies, dump $15,000 onto the credit line and pay $2,000 a month to get it done. It will take another six months to pay off the RRSP loan, and by June next year, they’d be debt free – instead of the 10-year payment plan they are on.

With a great income and getting really mad and motivated, they would be

$25,000 insurance cancellations for the 10 years the line of credit would take to pay off on their current plan

or: $25,000 (roughly) to pay off the line of credit 10 years sooner

$11,000 paying off the RRSP loan (the interest isn’t tax deductible) nine years sooner (by next summer)

That’s $36,000 of savings by spending $20 on the book and $25 on pulling their credit score. That’s a pretty good return!!

Then, next June to December, they can save the $500 they were paying on the RRSP, the $2,000 they were paying on the line of credit for six months or a total of $15,000 by just re-directing what they had been paying on their debts!

An Easy Way to Save $8.400

There’s a very happy lady in Vernon now. A couple of months ago she applied for a $20,000 line of credit. She was approved, but at a rate of prime plus three percent. She was smart enough to take a time-out and tell them she’d think about it. She was right not to sign up. The rate should have been prime, or prime plus one at worst. When she emailed me, it was really easy to see why her rate was this high.

She has a credit card with a limit of $8,000 and a balance of $5,000. When the balance is more than 50% of the limit, it plummets a credit score. Since the rate on her credit line is only based on that score, she was told prime plus three.

The fix was easy, too. To get a little better rate, she just had to pay down her credit card below 50% of the limit, so a payment of $1,100 to get there. To get a boost on her credit score, the balance versus limit has to be below 30%.

There were two ways to accomplish that: I had her call her card issuer to increase her limit. She did that, and had it raised to $10,000. A higher limit meant her balance versus limit dropped automatically. Now it was $5,000 owing versus $10,000 limit less her $1,100 payment. Now she just had to make another $600 payment to get her card balance to less than 30% of her limit.

She waited 45 days to get it through her credit report and went back to her financial institution. Presto! They re-did her credit report and just like that, she was re-approved at a rate of prime. Since the average person owes on their line of credit for 14 plus years, that was a saving of $600 a year times 14 years, or $8,400. Not bad for one little detour!

Don’t just roll your eyes, complain, and think there’s nothing you can do. Just don’t sign up on the spot. You don’t walk into Walmart and pay double for something, do you? Why would your borrowing rate be any different?

And if you already have a line of credit that’s over prime, the same thing applies. Some lenders check your credit score once a year and adjust your rate – others just do it once. If you’re line of credit rate went up, don’t just shrug your shoulders. Go ask how many points your credit score has to move up! Then get your credit card balances below 50% if they’re not – below 30% if you can and ask them to re-calculate your rate or get another lender!