I Pay Down My Line Of Credit, Then Watch It Go Right Up Again. How Can I Break The Cycle?

Q: I keep paying off my line of credit , then watch the balance climb right back up over the next few months. It happens every time, and I never seem to get ahead. How do I break this cycle instead of just repeating it? –Naomi

FP Answers: It can certainly feel frustrating to work hard at paying down a line of credit, only to see the balance creep back up again a few months later. The reason this happens so easily is that a line of credit has no fixed payment schedule that moves the balance toward zero and keeps it there.

Once you pay a line of credit down, the available credit is ready to be used again. While paying it off is still progress, it may not solve the reason the balance built up in the first place. Unless that underlying reason changes, the credit line will keep revolving, which is what it was designed to do.

To start figuring out how to break free from the cycle , look at what the line of credit has been covering for you. Review your last two or three statements, along with any statements from accounts you paid using the credit line.

Some expenses may be true one-offs, such as a car repair or dental bill. Others may show up more regularly, such as groceries near the end of a pay period, a credit card payment or a bill that arrives before the next paycheque. These types of expenses can point to a recurring shortfall.

If you often use your line of credit to pay down a credit card , look at that pattern closely. The credit card may be doing the same job as the line of credit: covering the gap between what you are earning and what you are spending.

Paying one revolving balance with another usually does not close the gap. It just moves the pressure from one place to another. If that is the case, the line of credit is not necessarily the main problem. It may simply be showing you that your spending needs to fall in line with your income.

Once you can see the gap, the next step is to adjust your budget so your regular income can cover your regular spending without needing credit to get you by. Adjusting your budget does not have to mean a drastic overhaul. In fact, smaller changes are often easier to stick with.

Pick one or two variable costs that you are not clear about, such as subscriptions, dining out, takeout or groceries, and give them a realistic limit based on your average spending over the past few months. That works better than simply telling yourself you will spend less and hoping it happens.

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As that gap gets smaller, budget at the same time to start building a cushion account. Even setting aside a modest amount from each paycheque in a separate savings account can make a real difference.

The goal is to create a buffer for the unanticipated costs that used to land on your line of credit or credit card. This way, when something comes up, you can pay using your own money interest free, instead of borrowed money plus interest.

Building a realistic budget and a cushion account takes longer than making one large payment, which is part of why the cycle is so hard to break. Paying off a balance feels quick and satisfying. Changing the habits behind the balance takes several months of steady attention and effort.

But that diligence is what turns a line of credit from a regular fallback into a true emergency backup, and that is a far more secure way to manage your money.

Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.

Do you have a debt question for FP Answers? Email wealth@postmedia.com.