Today in the mail I received a letter from my old bank. In it the bank claims that they are offering ‘to help me fulfill my financial obligations’.
For context, I banked with them for just about 10 years. At the beginning of this year I decided I had enough of paying banking fees. I bit the bullet and opened an account with an online bank and closed my chequing account with my physical longterm bank. You can read more about that in my last post.
I only maintained a savings account with them- which currently holds less than $10. I also have a TSFA and an RRSP account that I contributed to over the ten years I banked there.
Since closing my checking account, I have not used my old bank for anything. My reasoning for maintaining a savings account was to have a separate account from my online bank just in case I am unable to access their services at a critical time. I also did not close my TFSA or RRSP as I want my savings to stay put and grow.
I Don’t Even Need to Apply For It.
Other than my TSFA and RRSP (retirement savings) with this bank and the ten dollars in my savings account, I have no other money with them. Which makes me wonder what gives them confidence that I would be able to pay back the line of credit should I choose to accept their offer? They are informing me that I ‘have been pre-approved for a personal line of credit’. On what grounds exactly?
They are offering me a personal line of credit of $5,000 at a 10.48% interest rate. Apparently if I accept their offer by November 30, 2019 I will not even need to apply for the line of credit!
They go on to explain why I need to accept this line of credit. It’s ‘an emergency fund’ I can use towards home repairs, ‘other unexpected expenses,’ or to ‘pay off higher-cost debt with one-low interest account’.
I laugh because this is not a solution for someone who is struggling. There was a time when I would have opened this letter and been happy to be offered a line of credit without even applying for it. It would have made me feel special -I mean, a personalized letter from a big financial institution offering ME a service I did not ask for. I would probably have accepted it not planning on using it but just to have it ‘just in case’. Then of course I would have proceeded to use it.
But I know better now.
When we are down and someone (a bank in this case) offers ‘a lifeline’, it is easy to jump on it.
But here is the thing.
A personal line of credit (or any other loan/credit) is not an emergency fund. An emergency fund is actual money put aside. The point of having an emergency fund is so that in the event of a flat tire like I had over this past long weekend, or other unexpected expenses, there is money to take care of it without creating/increasing debt.
My emergency fund protects me from debt. A line of credit would get me into debt.
Defining Emergency Fund
I am kind of surprised that the bank is actually selling this product as an emergency fund. And because this surprised me, I looked up the definition of an emergency fund.
Vanguard defines an emergency fund as, ‘a stash of money set aside to cover the financial surprises life throws’. (https://investor.vanguard.com/emergency-fund/)
The government of Canada website says an emergency fund is, ‘money you set aside to pay for unexpected expenses’. (https://www.canada.ca/en/financial-consumer-agency/services/savings-investments/setting-up-emergency-funds.html)
The first step out of debt according to Dave Ramsey in his book, Dave Ramsey’s Complete Guide to Money, is to quit borrowing more money. You cannot get yourself out of a hole by digging deeper into it.
Do Not Be Fooled
None of these people say that an emergency fund can be a line of credit. It should be actual cash. Money saved and set aside for unexpected life events.
If you are on the journey to living debt free, which I am, be weary of bank correspondences that offer you more debt. Start putting money aside and gradually it will grow enough to help cover the next unexpected expense. Do not be fooled, a personal line of credit is not an emergency fund.