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Consumer Debts Workbook Section

Consumer Debts Workbook Section

Revolving debts first , then installment debt, then mortgage debt to be paid off, in that order.

Pay this off first.  Biggest Monthly Payment Lowest Balance, then move to the next one, applying the payment of the paid off debts to the next debts and follow this as a snowball effect until you are debt free.  Set a calendar/plan and keep track.

Savings vs. Credit:  A familiar debate held by many is they want to keep some money in savings in case of an emergency, which we endorse highly,  however when we see  credit card balances carried month after month at rates of 6,9,12,18% with savings rates under 1% that isn’t smart.  That is definitely savings going backwards.  We recommend a balance with as minimal consumer debt as possible.

Installment debts:  Usually a fixed rate held by some collateral such as a vehicle, RV or motorcycle.  Right now they are an awesome place to borrow money if needed.  Rates as low as 2-3% fixed .  If there is other debt at higher rates such as credit card debt rolling the debt over to an installment loan might make sense.

Question to ask yourself about consumer debt:  What is the lifespan of my purchase?  If we buy a snowmobile and pay on it for 3-5 years, will the excitement or use of it decrease before it is paid off.  Vehicle loans-can we obtain a vehicle that is acceptable to be paid off in 36 months instead of 72 months?  We have to keep up with depreciation and hope to surpass it.  Your payments on installment loans are principal and interest, but most people don’t factor in depreciation.

Credit cards:  Do you have an exit plan in place already, not assumed or hoped for, for each purchase placed upon a credit card?  Credit cards can be great ways to keep track of expenses and earn points on purchases, but only if paid off monthly by the due date.  If credit cards aren’t paid off monthly interest rates and possible fees are attached and keep adding until paid in full.  Default rates are the ones that can get you, if you are late at all on some cards, they automatically default to enormous rates.  So, great introductory offers are made at low interest rates, but if you are late one day on that account it will change to very high interest rate terms and fees.

One of our mottos:  We describe FINE PRINT in BOLD LETTERS.

 

Question in fine print:   Dates are one of the most important items to be aware of on a credit card statement.   Due Dates, Default Dates, etc.  For example, when signing up with a low introductory rate, if the due date is missed then high default rates automatically start retroactively.  That means if you miss one due date throughout the introductory period the interest charges go back to the beginning of the loan and charge interest on the balance of the loan for all the months you paid on time.   If you miss the due date then a default rate can be charged which is usually 18%+.   Electronic autopays are highly recommended for credit card financing to never miss a due date.  Cash advance is easy but generally a very expensive option.  Multiple rates can be charged on your credit card if you obtain money from different options offered by the card such as cash advance or balance transfers.

Credit Card Points/Rewards:  This is a legitimate option offered.  Most things like this seem to have a “catch,” but this is legitimate.  Every time a credit card is swiped the credit card company received 2-3% on average of the balance from the merchant.  So, they make money off of the merchant and the cardholder.  Credit Card companies offer incentives of points/rewards towards cash back, trips, etc. to get cardholders to use their card.  They give back around 1% and keep around 2%.  So, it is legitimate.  Everyone pays these fees  with higher prices charged by the merchant, this is one way to get some of it back. Balance X Interest Rate X 365(days) / 12 (months= monthly interest charges.

 

APR stands for annual percentage rate.  If you have a fixed rate it will be the same as your APR, if you have an adjustable rate it will be the average over the year of your charges.

 

New car every3- 5 years vs. hanging on to it:  Vehicles can have a great emotional effect upon us probably for the good and the bad.   Our recommendation is if it fits in your budget and you can keep the vehicle debt in line with value it can work.  The problem really comes when the car value, which is effected by mileage, care, and age is not in line or under the loan.  But if we are honest with each other a simple vehicle with less accessories is a better economic decision.

Time Shares:  A time share can work out to your benefit if you vacation multiple times a year.  If it is an annual trip or less it doesn’t normally pay for itself.

Interest rates AND/OR Fees:  Some consumer debts can show a lower interest rate, but charge fees in lieu of a higher rate.  It all equals increased dollars in the end.  So, be aware of late fees, or other fees.

We specialize in reading SMALL PRINT, so give us a call or come see us, we would love to explain it to you.

 

Side note:  I think we ought to offer an update with an email reminder to all who are signed up so they are notified of update changes to the workbook.  It will be good reminders if they haven’t used us, yet.

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