This & That: Don't be a Sucker Edition

I am so sick of people being given bad advice for the sake of profit. Shame on our lenders and bankers for telling people to do things that work against their financial interests just so their companies can make more money.

R wrote:  Our life insurance broker has informed us of a software program that will help to decrease your mortgage in a short amount of time. It is called "Smart Equity Mortgage reduction software" from what I can gather from the website it states that using your line of credit to pay off your mortgage is the way to go.  Have you heard of this software?  Is it legit?  Is this the best way to pay off your mortgage?  I so want to be mortgage free and do not seem to be getting there any time fast.  Please let me know your thoughts.

Gail says:  In your desperation to be "mortgage free" you can't see the forest for the trees.  If you pay off your mortgage with your line of credit, then you'll still owe your line of credit.  You haven't paid off anything… simply moved the debt around.  And since your line of credit has a variable interest rate, when rates go up, as they will, you'll end up paying more in interest than you are now.  As well, your line is "callable" at any time.  So the lender can demand that you pay it off in full and you'll have to come up with the money.  A software program can't get your mortgage paid off faster.  The only way to get to debt-free faster is to put more towards your principle each year.  That means making more payments or reducing your interest rate so more of your payment goes to pay off the debt.  You can use an accelerated monthly or weekly payment.  You can increase your payment amount.  You can double up or take advantage of the annual principle prepayment option.  Moving the debt around isn't paying it off.  It's just playing a game.

Rita wrote:  Gail, do you think it is wise and/or necessary to keep our secured home owners' line of credit open, even after our mortgage is paid off and we have no debt?  We are 57 and 58, debt free and have emergency funds set aside.  We don't really like having this (0 balance) secured LOC "against" our property so to speak… (Home worth $500,000)…would closing/discharging it not simplify our lives say for eventual estate purposes? …I guess we think of it as a little bit of "financial house-cleaning!"…we cannot think of when or why we would want to access this $185,000 line of credit again….many thanks for your thoughts on this…

Gail says:  If you don't anticipate ever needing to use the line then by all means get rid of the sucker. Very often we get talked into having lines of credit "just in case" and then we use them only to find that the "just in case" is the debt we've racked up because we had easy access to the line.  Hmm.  Do what you think is best for YOU.

S wrote:  Hi Gail, I have a question regarding mortgages. Along with my girlfriend I have just placed an offer on a strata townhouse.  I expect the offer will be accepted, or even if we receive a counteroffer I don't expect it will be much over our initial offer. I intend to take a variable rate, but pay additional funds on my payment (accelerated bi-weekly) which will make it equal to what the payment would be if I was using a fixed rate.  We're putting down 20 percent and going with a 25-year amortization. When I come upon extra money (tax refunds, etc.) that will be applied to the mortgage as well.

While I think I've got my bases covered regarding the mortgage, a co-worker of mine doesn't agree with me on one thing.  I have some additional money in a savings account which I intend to use as an emergency fund, and to build up and use for maintenance of the home (taxes, utilities, furniture, etc.). My co-worker thinks I should take this money and add that to the down payment to lower my mortgage payments and if issues arise with the home, use credit to take care of it. I don't agree with my co-worker. What's your opinion?

Gail says:  You are correct.  Your friend has bought the poop that credit is an "emergency fund".  That's a line of caca being sold by lenders who want people to consider their lines of credit to be as good as cash.  They are not.  Lines of credit are debt waiting to happen.  You have a sensible and well-thought out plan.  Stick to it.

E wrote:  Dear Gail, I paid off the mortgage on my townhouse back in the 90's.  Shortly after, I got a $50,000. line of credit from MBNA.  I used that line for kitchen and bathroom renovations but have since paid that off completely as well.  When I transferred all my accounts to CIBC, I was still paying that LOC off, so it's now remained as one of my CIBC accounts, only dormant.

My financial advisor from CIBC says it's better to keep that dormant line of credit as a disincentive to anyone who would want to claim title to my place.  She said thieves specifically look for properties without a mortgage to place one on it, the owner remaining completely ignorant of the transaction until she finds herself in trouble, saddled with a new mortgage. But I am uncomfortable with the bank still holding that LOC on my townhouse.  I would like to eliminate that secured line of credit but don't know what to do.  Should I allow it to stay on the books or should I tell the bank to eliminate it?  Thank you, Gail.  Your show I watch every chance I get, and I admire your warmth, common sense and passion in helping people.  You're terrific!

Gail says:  This is a scare tactic being used to keep the line open.  Tell your banker that if (s)he's so concerned about your safety, (s)he'll be willing to reduce the line to just $1,000 so that you're not overexposed on credit, but still have the "security" of the title protection.

For your information, there have been several rulings against banks that have mortgaged property without doing an appropriate appraisal and confirming ownership with the body in residence prior to accepting the title change as valid.  Courts uphold the original owner's rights in Canada.  Don't let this dope scare you into doing something you don't want to do.

Courtney wrote:  Hi Gail, I am nineteen years old and I have just started University this fall towards my Bachelors of Nursing. I am trying to look ahead and plan for the future and I realize that establishing credit is very important. I am lucky enough to have my tuition, books and all related costs paid for as well as rent, food, etc. as I am living with my Dad and some extended family that my Dad provides for as well. I am responsible for taking care of everyone's personal needs (laundry, shopping, cleaning, cooking, etc.) in return for this. Therefore, I have no bills or expenses I am responsible for at this time.

I recently applied for a credit card and I was wondering if that was the smart way to go. I'd appreciate if you could answer the following questions and perhaps provide any other awesome advice I know you have! How should I pay it off? Should I pay the full balance or just the minimum? (I was told from the bank that making just the minimum was the way to go about getting the best credit history.) Should I have more than one type of credit? I have researched personal finance and have found that the majority of resources suggested having 2 credit cards or types of credit.

Gail says:  Very often the things you have to do to have the best credit score are not the things you have to do to be financially sound. So when your banker tells you to pay only the minimum to get the best credit history, that banker isn't trying to help you, he or she is trying to make sure you pay lotsnlotsa interest. Banks put profits before people and the credit scoring system is designed to ensure borrowers jump through hoops to keep their scores high. But doing the wrong things to have a higher credit score is just plain stupid. While paying your minimum will give you a higher credit score, it's a dumb thing to do since it costs you in interest. Paying your balance in full means you'll not be wasting your hard-earned money on interest charges, making the banks richer and yourself poorer.

By all means get yourself a credit card but make sure you only charge as much as you can afford to repay in full every month. Make your payments in full and on time. Actually, you should make your payment about three or four days before the due date to ensure you aren't hit with interest or fees because your payment didn't go through on time. Don't use more than 30% of your available credit limit if you want to boost your score. So if you think you'll need to get closer to the top of your credit limit, make an early payment against your credit card balance to reduce your "utilization."

Having two cards is also a good idea. Allocate one to your day-to-day spending, and keep the other for your online shopping. That online card should have a very low credit limit so that if it is compromised, you're not over-exposed.

Share this on Facebook


Share this on del.icio.us


Digg this!


Share this on LinkedIn


Stumble upon something good? Share it on StumbleUpon


Tweet This!


Subscribe to the comments for this post?


Email this to a friend?