Money123 Article: Using a Credit Line as Your Emergency Fund

Do you have a credit line? It may be a great way to provide for emergencies, instead of having cash lying around.

As a financial planner for Global News’ Money123 online email newsletter, I answer reader questions about investing, managing your finances, and planning for your future.

In the latest email that went out to subscribers, I answered a question about whether a credit union would decrease equity access as retirement nears.

By the way, my answer is at the bottom of the email newsletter.

Here’s a link to the Global News Money 123 email newsletter with what I recommend: globalnews.ca/newsletter/10281163/

The Question:

“I’ve got a 240k equity access attached to my checking account, (better rate and no service fees than my previous line of credit) that I originally qualified for thinking I was going to purchase a vacation property with, but have since changed my mind.

Each month I might access a total of $100 of these funds solely for the purpose of keeping this account active.

My question is, would my credit union ever decrease my equity access as I near retirement, or would I have to do any re-qualifying as I’m clearly not using anywhere near what I’m capable of?

I don’t have any other debt including a traditional mortgage. I consider these funds as an extremely accessible emergency account that I don’t want to part with, especially after financially helping my aging parents, who never thought to get an equity access and no longer qualify.”

— A Money123 reader 

Ed’s Answer:

“A credit line can be a great choice to cover cash emergencies. You need an emergency plan, not an emergency fund.

Instead of having a large amount of cash sitting around in case of an emergency for which you don’t have time to save, a credit line can provide those emergency funds.

You are handling your emergency credit line responsibly. They can be tempting to spend. Used responsibly like you are doing, an emergency credit line can give you peace of mind.

Banks don’t normally reduce or take away a secured credit line because your income declines, as long as you make any required payments.

We have had clients lose both their jobs just before their mortgage came due and their secured credit line was not affected.

In the early 1990s when Toronto real estate plunged 30 per cent, many homes were worth less than the secured credit line limit, but the banks didn’t reduce the limits. With low retirement income, you may not be able to refinance or increase it, but the credit union will likely allow you to keep your credit line forever.

You might be doing the right thing with transactions to keep it active, but probably it’s not necessary. If you leave an unsecured credit line unused for a long time, financial institutions will change them to inactive and eventually close them.

However, credit lines secured by your home, like yours, are not usually closed for inactivity. Even if they did, moving $5 once per year would probably be as effective as $100 every month. To give yourself confidence, you could ask your credit union to confirm that their policy is not to have secured credit lines go inactive.

Since you may retire soon, it is a good idea to ask the credit union to increase your credit line limit to the maximum possible a little while before you retire — while you qualify. Once you retire, you probably won’t be able to increase it. Then you have it for decades through your retirement.”

Ed