# My Line of Credit Debt



## buick1957 (Jan 13, 2010)

I owe 6,000 on my line of credit is this a big debt or being in debt I still rent so I don,t have a mortgage can I get some advice


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## HaroldCrump (Jun 10, 2009)

Pay it off as soon as you can.


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## ssimps (Dec 8, 2009)

Second that; pay any debt off as fast as you can, interest == money lost that you could use for other purposes, like saving.


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## FrugalTrader (Oct 13, 2008)

Draft a budget, find ways to create excess cash flow by either saving more money or earning more income. Put excess cash flow towards highest interest debt. Repeat to next highest interest rate debt until all is eliminated.


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## mogul777 (Jun 2, 2009)

All things being relative how are we to know if $6,000 is a big debt or not. I'll take a guess and say for you it is since you appear to be a total novice and you are likely quite young. As mentioned pay it off.


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## Dr_V (Oct 27, 2009)

Pfft. Don't pay it off. The trick is to keep adding more debt! Live the high life, buy a BMW, big screen TV, and play PS3 all day. Call in sick for work every second Friday so that you can practice your Modern Warfare skillz. Take a few trips to warm locations -- Hawai'i is nice at this time of year.

Once you've racked up a good $60k in credit card debts, and are hopelessly behind on the interest payments, you can declare bankruptcy. Sell your stuff. Quit work; go on social assistance. And find yourself unable to buy a house or get financing on a car loan for years to come. 


Or ... joking aside, you can stay on top of your debt and Do Not Buy What You Cannot Afford.


K.


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## Dana (Nov 17, 2009)

Any amount of consumer debt is bad debt. The only good debt is debt that helps you to meet your financial goals - i.e. mortgage debt, student loans, leveraged investing...


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## buick1957 (Jan 13, 2010)

Dana said:


> Any amount of consumer debt is bad debt. The only good debt is debt that helps you to meet your financial goals - i.e. mortgage debt, student loans, leveraged investing...


I borrowed the money for a GIC but a student loan is a lot more than 6,000!


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## ssimps (Dec 8, 2009)

buick1957 said:


> I borrowed the money for a GIC but a student loan is a lot more than 6,000!


What is your LOC interest rate? What is the GIC duration rate you received?


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## buick1957 (Jan 13, 2010)

ssimps said:


> What is your LOC interest rate? What is the GIC duration rate you received?


prime+2 and I don,t have a interest rate on my GIC its a progressive GIC from BMO Dividend Link GIC locked up for 5 years in a RRSP(registered)


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## HaroldCrump (Jun 10, 2009)

buick1957 said:


> prime+2 and I don,t have a interest rate on my GIC its a progressive GIC from BMO Dividend Link GIC locked up for 5 years in a RRSP(registered)


Even progressive rate GICs have interest rates - they are usually escalating rates i.e. different ones for each year.

That aside, you borrowed from an LoC to invest in RRSP?
And in a GIC?
Your loan interest rate sounds rather high....it's probably 4.25% now.


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## ssimps (Dec 8, 2009)

HaroldCrump said:


> Even progressive rate GICs have interest rates - they are usually escalating rates i.e. different ones for each year.
> 
> That aside, you borrowed from an LoC to invest in RRSP?
> And in a GIC?
> Your loan interest rate sounds rather high....it's probably 4.25% now.


No offense buick1957, but it seems you may have been the latest guy to be sold by a bank salesman. I've been there so this is no dis. Get rid of that LoC as fast as you can; and don't listen to whoever got you into this ever again. If you ever see them in a bar, buy them a drink, but spit in it first. 

My 2 cents atleast.


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## mogul777 (Jun 2, 2009)

This is even worse than speculated. So you borrowed money to invest in a GIC in your RRSP in which case you can't even make a claim? So all in all this should pretty much be a wash for five years. The bank might send you a holiday greetings email though... And we won't even get into the pointlessness of a market linked GIC.


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## ssimps (Dec 8, 2009)

I used to like index based GICs 5 - 7 years ago, when at least the bank I used had a very simple formula for determining the GIC potentiol, basically it was the % difference between the given index at GIC purchase time and the index value at GIC maturity, capped at 7.5% per year.

We bought several 3 year GICs like this then, and did very well from them. 

Those days are long gone.

Many people must have as well, because now any index based GICs that are left I look at(and there are many less being offered now too) has a formula you would need to have a math degree to understand, and it is usually on a fraction of the % growth that you get. So they make no sense at all anymore. Even my local banker comer out and said they were a waste of a product, so if the seller does not want to sell them then you know they must be bad!


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## the-royal-mail (Dec 11, 2009)

Going into debt to invest is a bad idea IMO. IMO the source of investment money needs to be from money you have saved. You'll pay a lot more than the interest rate they gave you in LOC interest. Please tell me the GIC is cashable so you can cash it out and pay back the LOC. With all due respect, this was a very bad idea.

Doesn't anyone save money before spending it anymore?


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## buick1957 (Jan 13, 2010)

what I did was a great idea I will make more than 4 or 5 per cent a year I bought a Dividend Link GIC which the principle is guaranteed but these progressive GIC once again have no interest rates you make your money at the end of 5 years on your Participation rate which is 60% but remember Dividend Fund is one of the top performers


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## HaroldCrump (Jun 10, 2009)

buick1957 said:


> what I did was a great idea I will make more than 4 or 5 per cent a year I bought a Dividend Link GIC which the principle is guaranteed


How do you plan to make 4 - 5% on this deal?
Your loan interest rate is 4.25% - correct (P+2) ?
A dividend ETF like XDV barely returns about 4%.
Your participation rate is not 100%


> but these progressive GIC once again have no interest rates you make your money at the end of 5 years on your Participation rate which is 60% but remember Dividend Fund is one of the top performers


You may be confusing two separate products here - progressive rate GICs and market-linked GICs.
Progressive rate products have clearly defined interest rates (different for each year and escalating rates).
Market linked GICs have a base rate defined (very low).
Only the principal and the base rate is guaranteed (by CDIC).
The rest is all based on your participation rate and the index upon which the GIC is based.
Note that the big banks usually have some custom variant of a popular index.
Seldom are these products based on a popular ETF like XIU or XDV.
Often they'll have a custom variant called something like "TD TSX Equity Index" or "Scotia Canadian Dividend Index".
The holdings may or may not match those of XDV.
The holdings and % in that index may have been doctored to limit your upside.


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## ssimps (Dec 8, 2009)

buick1957 said:


> what I did was a great idea I will make more than 4 or 5 per cent a year I bought a Dividend Link GIC which the principle is guaranteed but these progressive GIC once again have no interest rates you make your money at the end of 5 years on your Participation rate which is 60% but remember Dividend Fund is one of the top performers


Can you tell the exact GIC you purchased? This could help give more real input onto how good of a choice it was given you purchased using a LOC prime+2.

At least please take the tax refund you get since you put the LOC $ into an RRSP and use the cash to pay down the LOC instead of buying something.

The likelihood of you making $ on a GIC linked to a dividend index fund given 60% participation is very low to nil given your interest rate, as has been suggested earlier. 

And what if interest rates raise (they sure can't go down anymore), then you could end up loosing $ in the deal unless you pay the LOC off FAST, even with the tax break you get from the RRSP contrib.

Recognize a mistake and learn from it; that is the most value you may get from this deal.


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## buick1957 (Jan 13, 2010)

ssimps said:


> Can you tell the exact GIC you purchased? This could help give more real input onto how good of a choice it was given you purchased using a LOC prime+2.
> 
> At least please take the tax refund you get since you put the LOC $ into an RRSP and use the cash to pay down the LOC instead of buying something.
> 
> ...


I'm sorry people I can,t explain it any better I'm not confused with nothing go to bmo.com and look under progressive GIC!!!!!!!!!!!!!!!!!!


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## HaroldCrump (Jun 10, 2009)

buick1957 said:


> I'm sorry people I can,t explain it any better I'm not confused with nothing go to bmo.com and look under progressive GIC!!!!!!!!!!!!!!!!!!


I took a quick look.
The maximum participation rate is 50% for a 5 year term.
It is linked to the BMO Dividend fund and its 5 year return is hovering around 4%.
I'm probably missing something since you appear so confident, but I don't see how you can make money on this deal.
If you have such a high degree of confidence in this mutual fund, why didn't you invest directly in this fund and get the full upside?
Why give up 50% upside?
Missing 50% returns seems like a big price to pay for principal guarantee.


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## buick1957 (Jan 13, 2010)

HaroldCrump said:


> I took a quick look.
> The maximum participation rate is 50% for a 5 year term.
> It is linked to the BMO Dividend fund and its 5 year return is hovering around 4%.
> I'm probably missing something since you appear so confident, but I don't see how you can make money on this deal.
> ...


well your not understanding, you lock it up for 5 years hoping the dividend fund and the market will improve no one knows!


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## mogul777 (Jun 2, 2009)

Buick the person that doesn't understand these products is none other than you. I'd strongly suggest you follow the old advice of "don't buy what you don't understand". 

Ssimps pretty much explained it a few posts up. 

If we stick to simplified calculations, if said fund returns 6% (typical market return) you would get 3% in addition to a return of your principal amount. You are paying, apparently, 4.25% on your principal amount. That is a return of minus 1.25%. As I said purely sticking to the basics and using assumptions such as no change in interest rate and the fund returning a decent performance. The fund would have to return 8.5% annualized over that five year term just for you to breakeven on this "deal". 

Good luck...


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## ssimps (Dec 8, 2009)

mogul777 said:


> Buick the person that doesn't understand these products is none other than you. I'd strongly suggest you follow the old advice of "don't buy what you don't understand".
> 
> Ssimps pretty much explained it a few posts up.
> 
> ...


And the above is assuming the best you can get: best return from the index and that your LOC interest rate does not go up. Both of these assumptions are very unlikely to actually happen, so it could end up being even worse.

As was also suggested, if you believe you will get the return you will from the index so strongly, when why limit it via the participation rate GIC.

Never invest assuming the best outcome is another thing that I think most would agree with.

Again, maybe there is some part of the equation that you have not revealed, but based on the facts you have listed, it is very hard to see any upside to this situation, unless you can pay that LoC off within this year I guess.

No one is trying to just crap on you here; I think the replies have all been from people genuinely trying to help you.

If you are not willing to take fair advice and adjust your view based on it, why post the question in the first place?

All the best.

S


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## Berubeland (Sep 6, 2009)

Buick I think you are doing a great job. You are trying to save and a lot of people can't even be bothered. So good on you 

I am happy you have come to this forum so you can learn more about investing. 

I have bought some awful dogs when it came to investing most notably Fannie Mae and Freddie Mac when I thought the whole of US real Estate couldn't go down the tubes and stay there. Through my investing skills I turned $3300 into $1100. See how well you are doing? 

So pay off the line of credit and then start saving ! And whoever gave you the advice to buy this investment give them a kick in the pants  They really could have done a better job. 

Also seeing the is an RRSP loan you also got some dough back from your taxes so that is good.


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## montyloree (Jan 16, 2010)

It's best to save money while you pay down debt.
You say you have $6000 in debt.

My question is: how much cash reserve do you have ...
Do you have enough cash reserved to pay bills for six months?


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## buick1957 (Jan 13, 2010)

as long as you understand that some progressive GIC can make anywhere from 10% to 15% a year and thats a fact so if I'm paying 4 % in LOC interest I'm doing well but its all a gamble of course there isn,t a investment around that isn,t a gamble and also my principle is guaranteed but Mutal Funds isn,t!


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## ssimps (Dec 8, 2009)

buick1957 said:


> as long as you understand that some progressive GIC can make anywhere from 10% to 15% a year and thats a fact


Can yo point us to the source of this 'fact' please? If your fact is true; I'll buy some too.

It sounds like non-fact to me. Never seen an index based GIC that did not have a single digit yearly cap.

Maybe you are mixing the total possible return over 3 or 5 years vs a yearly return?


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## buick1957 (Jan 13, 2010)

I can,t say for sure what I will make but does have big potential of making if the Dividend Link does well in Canadian Banks but yes I could lose money because of interest of the LOC but all depends what the market does next 5 years
something also to think about since this is RRSP I get a return back from the government I have 7 different kinds of Progressive GIC that I have invested in the last 2 years better than making low interest in a regular GIC its all a gamble! 

I have a question where do you all think is the best way to invest in a bank!


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## Berubeland (Sep 6, 2009)

Canadian Western bank has a warrant trading at around 7-8$ right now. 

It expires in 2014 but you would get three times the exposure to the stock if you buy the warrant rather than the stock. 

You do get dividends with warrants thought.


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## buick1957 (Jan 13, 2010)

Berubeland said:


> Canadian Western bank has a warrant trading at around 7-8$ right now.
> 
> It expires in 2014 but you would get three times the exposure to the stock if you buy the warrant rather than the stock.
> 
> You do get dividends with warrants thought.


can someone please tell me what my exact interest rate is at prime+2 prime rate is 2.250


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## Dana (Nov 17, 2009)

buick1957 said:


> can someone please tell me what my exact interest rate is at prime+2 prime rate is 2.250


If your interest rate is prime +2 and prime = 2.25%, then your interest rate is 4.25%. Your interest rate will be 2 points above prime regardless of what prime is. So, if prime goes up to 3%, your interest rate would also go up - to 5%. 

Hope this helps.


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## ssimps (Dec 8, 2009)

buick1957 said:


> can someone please tell me what my exact interest rate is at prime+2 prime rate is 2.250


Prime is generally at about 2.25% now at most (all ?) banks, so your interest rate would be 2.25+2=4.25%

Edit: Sorry, missed previous post by Dana before posting my redundant reply.


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## buick1957 (Jan 13, 2010)

ssimps said:


> Prime is generally at about 2.25% now at most (all ?) banks, so your interest rate would be 2.25+2=4.25%
> 
> Edit: Sorry, missed previous post by Dana before posting my redundant reply.


has anyone heard about interest rates going up? 1 % is retarded for a regular GIC!


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## HaroldCrump (Jun 10, 2009)

buick1957 said:


> has anyone heard about interest rates going up? 1 % is retarded for a regular GIC!


I cannot believe that you don't know the interest rate on your LOC, yet you are able to say confidently that you'll make money with your dividend linked GIC.
Anyhow, regarding interest rates for regular GIC - 5 year GICs are at 3.50%
The 1% is probably for 1 year term.
Don't hold your breath waiting for 1 year GICs to pay 10% or whatever you are expecting.
Unless we hit significant stagflation like the 80s that is not likely to happen.


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## buick1957 (Jan 13, 2010)

HaroldCrump said:


> I cannot believe that you don't know the interest rate on your LOC, yet you are able to say confidently that you'll make money with your dividend linked GIC.
> Anyhow, regarding interest rates for regular GIC - 5 year GICs are at 3.50%
> The 1% is probably for 1 year term.
> Don't hold your breath waiting for 1 year GICs to pay 10% or whatever you are expecting.
> Unless we hit significant stagflation like the 80s that is not likely to happen.


LISTEN MR. GRUMP OR WHAT EVER YOUR NAME IS I just didn,t know the exact interest rate I knew it was between 4% and 5 % thanks for your input!!!!!!!!!!!!!!!!!!!


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## HaroldCrump (Jun 10, 2009)

buick1957 said:


> thanks for your input!!!!!!!!!!!!!!!!!!!


You are always welcome.


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## ssimps (Dec 8, 2009)

buick, again you seem to take constructive criticism way to negatively.

You have also not given us the name of the exact fund you purchased (I can not find it at least) with your LOC $, which would really help us stop some of the guessing and instead help you understand what you have gotten yourself into.

But perhaps you don't care about the reality of the situation, and only wish to be told that your decision was correct since you have already made it.

just trying to help here........


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## HaroldCrump (Jun 10, 2009)

It is probably this one:
http://www4.bmo.com/termproducts/navigator/0,,35649_26030845,00.html


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## ssimps (Dec 8, 2009)

HaroldCrump said:


> It is probably this one:
> http://www4.bmo.com/termproducts/navigator/0,,35649_26030845,00.html


Do we now if 3 or 5 year was purchased?

It is interesting that there is no cap. on the max yield, other banks cap. maybe there is a reason why BMO is not capping it for this though.


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## HaroldCrump (Jun 10, 2009)

ssimps said:


> Do we now if 3 or 5 year was purchased?


Doesn't make a diff. - the terms and conditions seem to be the same.


> It is interesting that there is no cap. on the max yield, other banks cap. maybe there is a reason why BMO is not capping it for this though.


What do you mean cap?
The participation rate is only 50% for a 5 year term.
The Rates tab shows how your yield is calculated.
The way these products are structured you will seldom make more money this way than buying a dividend ETF directly.
Once you add in a loan to invest, that makes it even more difficult to make money.
Up until a few years ago, banks used to have a minimum guaranteed interest rate of such market linked GICs.
I have one such product from back in 2005 (maturing this year) that has 2.25% guaranteed, regardless of the performance of the linked index.
This BMO one doesn't seem to have any guaranteed interest - so everything depends on the performance of the linked index and your participation rate.

Also, since most dividend indexes primarily hold bank stocks, these products are a nice way for the banks to kill several birds with one stone - sell you a loan and make interest off of you, sell you a mutual fund and charge fees, and get you to buy their common shares (via their own mutual fund) and yet cap your upside to 50% or less.


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## ssimps (Dec 8, 2009)

HaroldCrump said:


> Doesn't make a diff. - the terms and conditions seem to be the same.
> What do you mean cap?


There is a diff, participation rate:

30% for 3 year term
50% for 5 year term

By cap I meant the max % return you could get per year. When I used to have these type of GICs (when it was 100% participation), they would often cap the maximum yearly return to say 7 or 8%, even if the index formula did better than that.

Thanks,

Sol


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## mogul777 (Jun 2, 2009)

As you'll see there is no cap on the return. It's simply 50% of the fund return plus a return of principal. No gain or a loss for the fund you get zero return, simply your money back. Fund makes 50% you get 25%, fund makes minus 50% you get zero. There is no guaranteed return beyond return of capital. 

Buy a regular GIC get 3.5%, buy the fund get 6%, buy the market linked GIC get 3%. Hmm, wonder which is the better buy? Now keep in mind option two has downside risk, option one has no upside potential so those numbers for 2 and 3 can change drastically.


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## sprocket1200 (Aug 21, 2009)

buick, you are screwed. try to get your money back and pay off that debt!


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