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The slippery slope of credit card debt: A veteran's guide
The slippery slope of credit card debt: A veteran’s guide
Whether your family’s bills piled up while you were overseas, or you’re tempted to swipe to fund your transition to civilian living, credit card debt can pile up quickly. That debt can then spill over into the rest of your financial life, affecting your ability to save, borrow and buy.
Let’s say you have $5,000 in credit card debt, with an APR of 13%, and you’re paying $200 each month. How will your financial life be affected?
Your credit score may go down
The amount of debt you carry is the second most important factor in determining your credit score, behind only your payment history. If your debt exceeds 30% of your credit limit, your credit score may go down. So if you have a credit card with a $10,000 limit, carrying a balance higher than $3,000 could potentially hurt your score.
If your limit is $10,000
Try to keep debt under $3,000
Home and car loans may cost more
Generally, the higher your credit score, the lower your rates on auto loans and home mortgages. If your credit card debt begins to impact your credit score, you may pay more for these things. A lower score could prevent you from securing a home loan backed by the Veterans Administration, too. While the VA does not have a credit score minimum, many lenders issuing VA home loans require a score above 620.
Emergencies may be more expensive
It’s harder to build an emergency fund when extra cash goes to credit card payments. If you’re forced to finance an emergency on your credit card, the situation could get worse:
If you charge a $1,000 car repair → Payment $50 monthly → Total interest $133 → Payoff time Nearly 2 years
Everyday spending may feel like a stretch
The money you pay in interest could instead be going toward everyday items. If you’re paying $55 in interest a month, that could have gone toward a tank of gas, your cell phone bill or your utilities.
You may have less money for retirement
You’ll spend $900 in interest over two-and-a-half years to pay off the credit card. If you invested just the interest in an IRA, and earned annual returns of 7%, in 20 years you could turn $900 into $3,500 toward your retirement.* Note that investments can lose money.
IRA investment $900
20 years later $3,500
*This is a hypothetical example created for illustrative purposes. It is not indicative of any specific investment. Market conditions will affect investment returns.
You may be giving up the fun stuff
What could you have bought with the $900 you spent on credit card interest? A big-screen TV, a nice couch or mattress, a vacation, a cooking or woodworking class or a musical instrument.
For more information, visit BetterMoneyHabits.com
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