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10 things your kids should know about debt
July 14, 2014 | By:

Even basic financial skills can be confusing, but passing money knowhow on to your kids could help keep them out of debt. By Julian Knight, the Independent on Sunday’s personal finance editor

Money_Debt_620_StocksyOne of the most useful things we can do for our children is to give them a grounding in how to deal with debt, banks and personal budgets. Here are High50’s 10 key tips.

Pay off your most expensive debt first

Not all debt is the same. Some debt is cheap, some debt expensive and some, like payday loans, is a complete rip-off in terms of how much interest you have to pay. For example the best-buy fixed-rate mortgage can be had for around 2.5 per cent at the moment, a credit card or personal loan starts at 7-10 per cent but a payday loan can set you back a whopping 2-3,000 per cent a year. So when you do acquire debt it’s best to try to pay off the most expensive debt first. This will mean that you pay the least possible amount in interest over the long term.

Prioritise your debts

Debts can be cheap or expensive. They can also be important or less so. Take your mortgage, for instance. If you don’t pay that you will have your property repossessed within a matter of weeks or months and that could mean homelessness. Likewise, failing to pay council tax debt is serious as you can be sent to prison for non-payment. Failing to pay a credit card or loan is bad and best avoided but the worst that is likely to happen is that you damage your credit rating severely and find it nearly impossible to get another loan for a long time. So if you find yourself in debt difficulty, prioritise your loans and focus on those that if you don’t pay can cause you the most damage.

Aim to be debt free… eventually

Debt is a fact of life for most of us but it doesn’t have to be a fact for your whole life. In fact, it is a good idea to try to ensure you pay off your debts – such as mortgage and car – at least a few years before retirement. This way you will have at least some time to supercharge your retirement savings, as you won’t be encumbered by debt repayment. Financial planners call this debt-free period before retirement the ‘golden period’ and the longer this lasts the more comfortable a retirement you will be able to have.

Debt is necessary

Not all debt is bad. In fact, it can at times be necessary and a good idea to take on a bit of debt. Taking a college course to make yourself more employable and therefore hopefully secure a bigger wage often involves taking on debt, but this can also be seen as an investment in yourself. As for home ownership, very few people can afford to buy property and hopefully enjoy capital growth without taking on a mortgage. But again this could be seen as borrowing to invest in your financial future as over time the property you have bought should rise in value and of course it gives you somewhere to live.

Avoid store cards

We all love a bit of retail therapy but beware of offers of discounts from sharp-suited salespeople if you take out their store card. These cards are much more expensive than credit cards, typically charging more than 30 per cent in interest per year and about two or three times more expensive than a credit card. Any discount you are given for agreeing to the store card can soon be eaten up by high interest charges. Best avoid them, and either pay on a credit card or, better still, if you can’t afford it out of your income or savings then don’t buy the item.

Draw up a budget and stick to it

Budgets may seem boring but they are necessary if you are going to keep on top of your finances and avoid expensive debt. First list all your incomings and outgoings – remember to be honest about all your expenditure – see what you have spare each month and try to put some of that aside in order to build up an emergency float to help pay for one-off events that happen to us all, such as car repairs or a higher-than-expected heating bill. Be realistic about your budget and if you are spending more than you earn, then choices are to cut back on spending or try to earn more; don’t fill the gap with borrowing.

Look for 0 per cent credit card deals

Taking on debt can make you money. Yes, that’s right, save money! Credit card firms want your business so many of them offer 0 per cent deals where either new purchases or debt moved from other cards is charged at 0 per cent. This is below both inflation and probably how much your wage is growing by, so the debt is in effect eroded over time. Now, the credit card firms hope that once the 0 per cent period is over – anything from six to 18 months – you will continue with them and pay their much higher standard rate. But what you must do is remember to switch to another deal just before the 0 per cent deal expires (set a reminder in your phone or calendar). Then shift your debt to another 0 per cent credit card deal and start the process again.

Always read the small print

You may need an electron microscope to see it but credit agreements are riddled with nasties in the small print. For example, many car loans have an early settlement payment so if you do as an estimated two-thirds of people do, and settle the car loan early, you may be hit with a substantial one-off charge. And be wary of payday loans: as part of the agreement you often agree to allow the company to raid your current account direct if you get behind with your repayments. Not a a good power to give any lender.

Never make just the minimum payment

The polar opposite of someone who plays the system and uses 0 per cent credit card deals is someone who makes just the minimum monthly repayment on a credit card. Now, it can be tempting to make a minimum monthly repayment, as it is generally very low. But the majority of this monthly repayment is taken up in interest and this means it can take years and years to clear the debt. As a result you pay a lot more in interest. Always try to pay off your credit card in full each month or at least try to make more than the minimum.

Steer clear of interest-only mortgage debt

Millions of Brits who have taken out interest-only mortgages now regret it. Don’t join the club! These mortgages were popular in the 2000s and are still offered today, and basically they mean that you just pay the interest on the home loan and at the end of the term – normally 25 years – you still have a huge capital sum to pay off. Monthly payments are lower, of course but it is a false economy. Many Britons face getting near or to retirement age having to find a huge amount of money to pay down their mortgage debt, all because they chose to go down the interest-only route. Though 25 years may seem a long way off to someone in their twenties, thought now can save pain when your kids reach our age.

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