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Veterans Affairs Debt Management Center

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Veterans Affairs Debt Management Center
Veterans Affairs Debt Management Center

Undoubtedly, your children have seen you use a credit or debit card when you shop and wanted to know about them. Explaining the difference between credit and debit cards and their function will take some time, as well as a few tools to illustrate their use.

Probably the best way to explain what each card is for is to demonstrate by using visual tools. For example, take out a debit card and a credit card. Use a label or scotch tape a piece of paper to each one identifying what they are.

Now you can effectively show your children what they are used for. Make a game of it. Place a few grocery items on the kitchen table. Pretend that you are buying them and paying for them with a debit card. Explain the process to the children in ways they can understand. Repeat the same process with a credit card.

Show the children a credit card bill. If the grocery amount is on the bill, they can easily connect your grocery demonstration and the charge on the bill.

Most likely the children will have many questions for you. Answer as best you can in words they understand.

More importantly, however, is to illustrate to the children what can happen if you use the credit card too often. Use the family budget as a way to teach them that you have set aside so much money to pay for the credit card bill each month. Then show them what would happen if you overcharged; that you wouldn’t have the money in the budget to pay the monthly bill.

You may have to repeat the demonstration a few times before the children truly grasp the significance of what you are trying to relay to them. Eventually, they will come to understand and will probably ask, “Why don’t you just buy things with money?”

That’s a good question and one that will take time and a considerable amount of self-examination to fully explain to their satisfaction.

While experts suggest that you really do not have to explain what credit cards are used for and why, they do recommend that at some point you have to have a discussion about financial responsibility.

This is particularly true when the child becomes a teen and asks for their own credit card. There has been a great deal of discussion as to whether or not teens should be given a credit card at all. Whether you are a proponent of such an idea, early education on the disadvantages of owning a credit card will likely be a topic your family will discuss in the near future.

Veterans Affairs Debt Management Center2

Is a Second Mortgage a Good Idea?

In order to determine the pros and cons of a second mortgage, let’s first explain what it is. A second mortgage on a home is basically the process of taking out a “second” loan. It does not take precedent over the original mortgage, which would have to be paid first.

Under what conditions would a homeowner take out a second mortgage? There are a variety of reasons, including healthcare costs, college, home improvements, consolidating debt, or perhaps to create an equity line of credit.

In today’s market, however, it is going to be quite difficult to obtain a second mortgage. The reason for this is that the value of homes is in decline. On the other hand, in cases where a home has a great deal of equity, there may be the possibility that a second mortgage can be obtained.

Generally, however, a second mortgage may be the only way to pay outstanding debts and/or increase the value of the home by making significant improvements.

Unfortunately, there are disadvantages in taking out a second mortgage. What if you cannot pay back the loan? The consequence is foreclosure, considering that you have the first mortgage pending as well.

Secondly, there are higher rates incurred with second mortgages. In fact, banks view a second mortgage as a higher risk because the homeowner is still paying off the first mortgage. In today’s economy, the chances of defaulting on a second mortgage are much greater.

In addition, there are many fees associated with a second mortgage. This, combined with the initial mortgage, can put a family into dire financial straits if neither mortgage payment can be met.

Given the difficult times we are living in, it is not a good idea to take out a second mortgage on your home unless you can afford to do so. But, even then, the market value of your home can decrease even further; a health crisis may occur, you may be laid off or have other debts that you can no longer pay.

There is no way of knowing how long this current economic crisis is going to last. Are you willing to take the risk of losing your home by taking out a second mortgage? If you are thinking of a second mortgage to consolidate debt, another prudent course of action would be to speak to a financial counselor who can guide you into finding an alternative way to pay down your existing debt.

Think twice about a second mortgage on your home. There are many disadvantages in pursuing this course at this time.

 

Understanding the Rates – Quickly Lower Your Credit Card Debt

I see it time and time again – a general lack of understanding of credit card interest rates or even a lack of knowledge to lower credit card debt. People walk into my office asking for investment advice, which you might find admirable and proactive. However, when we get to the debt status situation, they are carrying thousands of dollars in high rate credit card debt.

The interview/investment discussion ceases immediately and we begin talking about how to get rid of or even simply lower credit card debt in a timely manner. “Why?” they always ask. “I want to invest and save for a comfortable retirement.” That’s when I explain that they are borrowing money on their credit card and paying that company an interest rate for that borrowed money. Most credit cards average more than 13%. The stock market works your money at an average historical rate of approximately 10.5%, which makes understanding credit card interest rates so important.

Interest on Credit Card

Principle

Interest Rate

Annual Interest Paid

$1,000

13%

$130

Investment Return

Invested Amount

Historical Rate of Return

Gain at Historical Rate

$1,000

10.50%

$105

Understanding Credit Card Interest Rates

Assuming you were only to pay the interest on your credit card and that you earned the historical average on the S&P 500 index, you would net a negative $25 loss. Therefore, instead of thinking that it is smart to save while still having debt, it is a better idea to get your high interest credit card debt paid off FASTER before you begin investing and have a full understanding of credit card interest rates.

Remember, you always want to earn a higher rate of return on money that you are borrowing than the rate you borrow at.

If you are stuck in a situation where your credit cards are all at high interest rates, look for another company with an offer to transfer your balance to their card at a lower rate. Many cards offer these balance transfers at a lower rate than what you are paying or even at 0%. Even if the deal is only for one year, you can drastically lower your credit card debt rather quickly. See our article on transferring your card balance to lower your credit card debt for more information.

More: https://www.va.gov/debtman/

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