Using Your Line of Credit to Pay Down Credit Card Balances? Good or Bad?

Canadians are still chalking up debt, but there is some encouraging news on the credit front. Canadians are starting to pay down their credit cards. This is according to a recent report from Equifax Canada.

The report states that the average Canadian cut back 3.4 percent from their credit card debt this past year (2011).

But here's the downside. Many Canadians are paying down that credit card debt using their line of credit, which is tied directly to the equity they have in their home.

Equifax spokesperson Nadim Abdo had his concerns. Paying off a higher interest rate credit card bill with a lower rate line of credit makes sense, however there can still be bumps in the road.

"We're still at record high levels of debt. If there was to be an interest rate adjustment of 50 basis points … we'd see an increase in delinquencies and bankruptcies," said Abdo.

According to the Equifax report, the average Canadian has $ 6,000 in consumer debt, a 4.5 per cent rise since the end of 2010. In addition, it was noted that the growth rate is slowing – between 2009 and 2010, the average Canadian's consumer debt griev 7.7 per cent.

The drop in credit card debt is a sign that people are finally starting to think about how they're spending, said Lewis Johnson, a finance professor at Queen's University.

"It seems like there's an outbreak of rationality. The more you can shift balances from a credit card where the rate is 24 per cent interest to a line of credit where it's 3 or 4 per cent, the more able you are to pay, said Johnson.

Consumer spending on "durable goods," including everything from household appliances to automobiles, dropped by.4 per cent in the third quarter of 2011, according to Statistics Canada.

The world economy could also affect Canadian debt levels. The ongoing crisis in Europe and the slowdown in the Chines economy could also have an effect on Canadian debt levels.

If the Canadian job market is affected, the interest rates of your line of credit could have been affected too.

Is it worth it? Outside of finding other low risk sources of paying down your credit card debt, yes. For now at least, using your line of credit, which generally is prime plus 1 or a half, depending on the bank, still makes sense. And with this week's announcement of a 2.99 3 or 4 year mortgage rate, it appears interest rates are going to be somewhat low for the foreseeable future.

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