David Chilton, author of The Wealthy Barber, says that “The worst thing that’s happening to Canadians in the last 20 years has been lines of credit.” I think the reason for this is more than just the temptation of available credit.
Chilton popularized the idea of paying yourself first by saving 10% off the top each time you get paid. A big problem with lines of credit is that it undermines your ability to know whether you’re truly saving any money. Moving $500 into your RRSP may not help much if you also borrow another $1000 on your line of credit.
Back when Chilton wrote The Wealthy Barber, the world was a different place. People who saved 10% of their pay and managed to pay their mortgage and any other fixed-payment debts could have some confidence that they were making progress in their personal finances. But today, with a varying debt in a line of credit, it isn’t obvious whether we’re making progress. Over time we can see if we’re falling behind, but we don’t have the immediacy of running out of money before the next pay day to help us curb our spending.
It’s true that many people simply can’t resist the temptation of dipping into lines of credit, but even for those of us who try to do the right thing financially, lines of credit undermine our ability to determine in a given month whether we’ve made progress or have fallen further behind.