When your bank contacts you with an offer for a pre-approved credit line, should you take it? Many people automatically say no to solicited offers. Maybe you feel like you don’t need a credit line right now, or you already have a Line of Credit, or you feel that you have enough debt.
When you get a pre-approved line of credit offer, you may want to stop and think about it for a few minutes before you say no. The worst time to apply for credit is when you actually really need it!
How Does A Credit Line Work?
First, a brief note on how a line of credit works. A line of credit (LOC) is a loan that has a credit limit that you can draw on at any time. It is referred to as revolving credit. This is different from a personal loan which is a lump sum amount that has to be repaid over a specified period of time. With a LOC, you are required to make a minimum monthly payment. The payment can be set up to be taken automatically from your bank account, or you can manage your payments online. To access the funds you can simply transfer from your LOC into your bank account or you can write a cheque on your LOC account. There are no set up or monthly fees; you pay interest daily on the amount you borrow. The LOC will stay in place as long as you operate it within the terms of agreement.
Why you Want to Take the Pre-Approved Line of Credit Offer
It’s easy! Whereas applying for a loan can be painful and time consuming. When you need it the most it is often difficult to qualify, such as if you are between jobs, on leave, or starting a business.
The process to get a Pre-approved Line of Credit looks like this:
You agree to the offer, go to the bank and present your identification to your banker, sign a few forms. Thank your banker for this great offer. This all takes about 20 minutes. Done!
The process to get a full Line of Credit approval looks like this:
Let’s say you pass on the offer and decide to apply for a LOC 6 months later. Here’s how the process looks:
You complete a full credit application, which means supplying a statement of all of your assets & liabilities, along with providing statements of any investments you have that are not held at your bank. Banks take into consideration what your Net Worth is when approving LOCs and if you have low net worth you usually will not be approved.
You will also need to provide proof of income. This may be done easily by giving the bank a couple of paystubs and your last year‘s T4. However, this can also prove more difficult.
• Less than six months on the job? You will need to prove that you’re not on probation.
• If you are on a leave of absence then you will need a letter from your employer confirming when you are returning to work.
• Self-employed or have seasonal income? Then you’ll need to dig up 2 to 3 years tax returns and if your job/business is newer and you can’t provide this information you’re not likely to get approved.
• Do you own a limited company? If so, you’re going to have to provide financial statements from the company as well.
• If you have any form of additional income like overtime or bonuses, the bank will not include this in your application unless you can prove that it’s consistent over the past 2-3 years.
In other words, unless you have been on the job for a while and your salary is straight forward, you will have to dig up quite a bit of documentation to prove your income and even then you may not qualify.
Once you supply all this information and documentation your banker will process your application. It could be approved instantly, or it could take a week, or possibly be declined.
The difference is this – the Pre-Approved Offer is based solely on your credit score, whereas a loan request requires all of the above.
SO even if you don’t need the money now, it’s usually a good idea to have a LOC in place. And if you are self-employed, definitely take it because it’s difficult to get credit when you have a small business.
More Good Reasons to Take a Pre-Approved Offer
Convenience – once the limit is in place you don’t have to go to the bank if you need to borrow money. It’s great to have access to funds for a vehicle purchase, home renovations, investment purchase or as a cushion during uncertain times – like a pandemic. If you don’t use it for a few years you can keep it active by drawing $10 and paying it right back. There are no fees or charges to keep your LOC in place, you only pay interest when you use it.
Preferred interest rates compared to a personal loan or credit card. If you have a high interest credit card you can pay it off using your LOC and reduce your interest costs. What if you already have a LOC with another bank? Then compare the interest rate with the new offer and get the best rate!
Lower monthly payments than a loan or credit card. Typically the payment is 2% of the balance and in some cases you can qualify for interest only payments. You have full flexibility with your payments. You can pay extra anytime and you can increase or decrease your payments at any time. The only requirement is that you make the minimum payment required.
Payment on a $10,000 loan at 6% over a 5year term = $194/month
Payment on a $10,000 LOC at 6% = $50/month
Of course, credit isn’t right for everyone.
Some good reasons to Decline a Line of Credit offer
If you are an impulse spender then it might be best to limit your access to quick credit.
Too many credit cards or LOC’s can hurt your credit bureau score, even if you don’t use them. There is a measure on your credit bureau for the amount of revolving credit you have access to so you want to limit your revolving credit to a few credit cards and LOC’s.
Similar to a credit card, making minimum payments only reduces your balance owing slowly and you will end up paying a lot more interest. Your intention should always be to pay the LOC within a reasonable time period.
A Final note regarding scams and security. You may receive an email offer for the pre-approval. Banks email their customers all the time with offers. As long as the email is just to notify you of the offer, it is legitimate. The email should provide contact information for a bank representative and not request any personal information. You will never be asked to provide any confidential information by email. If you have any concerns about the email, call the banks contact center and they can verify that it is legitimate.
I welcome your comments and questions, and please share this if you have found the information helpful.