Can debt be a safety net?

Normally, I dismiss the countless unsolicited financial products I get in the mail every month out of hand, but I'm tempted to bite on a particularly persistent one. In the deluge of pitches I receive from my bank, Royal Bank, every month, one of the recurring items is an offer of an unsecured line of credit. They're offering $10,000 at a rate close to prime, if I recall correctly.

I currently have a high-interest savings account that doubles as an emergency fund and condo downpayment fund. If something like a job loss were to happen now, that's what I'd be dipping into to tide me over. But when I eventually come around to buying a place of my own, I'll probably be inclined to empty the entire thing (so as to maximize my downpayment) and knowing myself, I know I'll be tempted to pour every spare cent I have into paying off the mortgage after that -- at least for the first year or so, until I've convinced myself I'm not actually about to get fired on a daily basis.

The long and the short of it is, when I liquidate the fund to buy real estate, I'll find myself in the position of not having an emergency fund, at least in the short term, to pay for those unexpected emergencies. (I'm told having three months' expenses is a good guideline.)

What I'm thinking of doing at the moment is to sign up for this unsecured line of credit as a sort of insurance policy. It doesn't cost anything on a monthly basis unless I take money out of it (which I wouldn't do as long as I had that $10K in savings I currently have) at which point I'd pay interest on the withdrawals. That way, should the need ever arise, I'd dip into the line of credit, as opposed to the emergency cash that's I'd already have wisely invested into minimizing my mortgage.

I suppose this is all moot until I actually need it, but I'm tempted to sign up for it now. I'm sure the rates offered by banks on unsecured loans start to change once you've borrowed six figures to buy a house, so my reasoning was to sign up now while I'm an excellent credit candidate.

Any thoughts on this? You don't have to remind me of all people that, as a general rule, debt = bad, but is it not better for my long-term financial wellness to not have 5K or more sitting around in a savings account when that money could be put toward paying down a future mortgage? I suppose there might be some negatives in terms of credit rating to consider, but the thought of having several grand sitting in a bank account while I have a six-figure debt to pay off doesn't sit right with me -- and I haven't even taken the plunge yet. It just seems a waste to hoard cash for a rainy day that might never come.

Is this not a situation where debt is actually the smart financial decision?

How I got my bank to pay me to fly to California

Alternate title -- Growth in Value's credit card experiment

After being bombarded by all the offers for new credit cards that my bank seems to send me on a quarterly basis (it's amazing what paying off your bill every time in full can do for your reputation) a few months ago I finally caved in and signed up for one of RBC's annual-fee cards.

I know, I know -- I can hear you all saying, "What? I can't believe it -- after the way he blathers about low-fee investing on his blog, he has the audacity to get suckered into paying for a credit card when there are so many free ones available."

I get it. But hear me out. While it's true that I have experienced a small amount of buyer's remorse after seeing the sweet deals that places like PC Financial and CIBC are offering (free groceries and cash back on purchases sound pretty damn tempting to me) I didn't just blindly go into this. I figured out, based on how much I was putting on my card in an average month, added to the bonus points I was being offered for singing up, I could get myself a free flight out of it.

Here's my plan:

I signed up for RBC's Platinum Avion card. It comes with all the usual accoutrements these cards tend to have -- deals on extended warranties, rental car insurance, traveler's cheques and insurance, etc. -- for a pricey (to me anyway) annual fee of $120. They gave me 10,000 points just for signing up, and 5,000 more points when I renew after the first year. So right off the bat, I'm at 15,000 RBC Rewards points even if I don't put a penny on the card for two years.

On my old, no-annual-fee card, I used to rack up a few hundred dollars a month, largely on purchases from retailers and online purchases. I think my most expensive month ever was about $500, and I had months of well under $100. The average was probably between $200 and $300 a month.

For my new plan to work, I need to start putting more money on the card to rack up points -- with the important caveat being that I'm not actually spending any more money than I would otherwise have spent through other means like cash and debit cards, because that would obviously negate any "savings" from points I was accruing.

Keeping in mind that I always pay off 100% of my bill on-time, I figured, if i start putting things like restaurant bills, groceries and gasoline on the card -- stuff I used to pay cash for -- I'd quickly rack up the points to get some sweet rewards. And it wouldn't actually be costing me any more in real dollar terms, since those are all items I'd be paying for anyway.

I've been doing this for six months so far, and my theory appears to be working. I haven't had a bill yet that was under $500, and I'm knocking on $1000 a month more often than not. It's amazing how much groceries you can buy!

So let's make a conservative estimate and say I'm putting an average of $700 a month on my new card. After two years, at 1 point per dollar, this means I will have accrued 18,000 points -- bringing my total to something in the neighbourhood of 33,000 points.

What does that do for me? According to the handy chart they provide, 30,000 points earns me a flight anywhere in continental North America. So essentially, for $240 (two years' worth of annual fees) I get a flight anywhere in North America. And having seen what friends pay to visit family on the West Coast, I know those sort of long-haul round-trip flights can easily cost close to $1000, and certainly over $500, even when you get a deal.

It's not perfect, and I acknowledge there are great credit card deals out there that give you things like cash back and gift cards at retailers that you don't have to wait two years to build up enough points to make it worthwhile to redeem. Which is why I doubt I'll renew the card for year 3, when RBC isn't offering me any free points to stay with the card.

In the meantime, it's a nice little financial experiment I've undertaken for myself. Meet me in California in 2008 if you want to tell me I've made a mistake... :)

My first credit card

A lot gets written about the evils of credit cards, and how one of the best things someone having financial difficulties can do is to just cut up their credit cards. That may be the case for some people, but I've never really thought that applies to me.

I got my first credit card in university. It was a basic, no-fee student card. I think my initial limit was something like $500 to start with.

I remember some friends and I were planning a trip together, and the easiest way to book those sorts of things is to put it on a credit card. A friend of mine didn't have one, so she cut me a cheque, and I put her fees on my card too. The charge for the two of us combined would have put me over my limit, so I nervously called the bank to ask them if they might be kind enough, to, uh, bump up my credit limit to $2000 a month -- just this once, pretty-pretty please.

The lady on the phone was quite nice, and she briefly put me on hold while she reviewed my file. I was sweating it out on the other end, certain she was going to figure out I was only earning about $25,000 a year, eking out a frugal living in Canada's most expensive city, living with 4 roomates in a crappy student house. She was probably in the process of telling the whole office about my audacity, having a good laugh at me before coming back with a "who the hell do you think you are?" speech, I reasoned.

Little did I know.

Imagine my surprise when she came back on the line: "Certainly sir. I've reviewed your file and am pleased to tell you that not only has your credit request been approved, but I'm further authorized to offer you our platinum card with a limit of $10,000 a month."

I was stunned. It was mind-boggling to me that the bank was willing to front me 40% of my annual salary, sight unseen, every month. I'm now a lot more savvy about the way banks operate and the way they make their money, but at the time I was positively shocked at the kind of money they were throwing my way.

I ended up signing up for RBC's no-fee platinum card -- how's that for an oxymoron -- and used it diligently for 2-3 more years, never coming anywhere near that $10,000 limit. I've since upgraded cards once again and my credit limit has been once again bumped up -- still to a level I can't fathom ever approaching in any given month. But I'll never forget my shock at the way that played out. I think that's the moment my eyes were really opened up to how the financial system works.

Banks have a bad reputation with a lot of people. They get accused of trying bankrupt people, but really, having you go bankrupt is the last thing any bank wants. If I was a cynic, I'd say a bank's goal is to keep you in a manageable amount of debt for your entire life. Never deep enough to make you go under, but just enough so that they can rely on your for a constant flow of steady income in the form of debt repayments. Giving people who aren't good with money a credit card is one of the best ways they can achieve this.

I've been lucky to have parents that helped finance my education, and I know they're still behind me today, ready to bail me out if I ever go in any serious finacial problems. Happily enough, and largely thanks to the financial education they've given me, I've never been in a position where I had to use that safety net.

I think VISA has earned a total of less than $100 from me in the past 10 years, all from one month when I couldn't pay my bill off in full and had to resort to only paying the minimum balance. My interest charge was $87 the next month, and it hurt so much to pay it that I swore to myself I'd never let that happen again. I suppose $87 isn't too much to pay for nearly 10 years of convenience, plus special perks like extended warranties and travel insurance. But something inside me found it fundamentally abhorrent, so I've never done it again.

I guess what I'm saying is that for people like me who pay off their balance in full every month, having a credit card is a great, convenient way to learn about money, build up credit, and squeeze a few perks out of your bank.

But if you find yourself in any sort of debt problems, cutting up the credit cards with their 18% interest rates is a great place to start.