Saturday, July 03, 2010

Man the Life Boats II (credit card, mortgage debt)

Surviving a falling dollar...

First, let me re-cap from last week before I start talking about credit card debt and mortgages. Last week I talked a bit about something you can do to help protect yourself from inflation and the coming erosion of the U.S. dollar. Inflation in prices means that the dollar is a poor store of value. Of course, you need a small amount of dollars on hand to take care of emergencies, maybe $500-$1,000 of reserves. Beyond that, I advised using some dollars that you can afford to save away for a couple of years to buy some silver or gold.

There are places around where you can get an ounce of silver for around $20. So one advantage saving this way has over a CD is that it does not take a huge amount of money up front.

We live in a time though, where a lot of people have credit card debt, and they have more mortgage debt than perhaps their homes would sell for. What should people do in those situations?

Generally, paying off credit card debt ought to be the highest fiscal priority. There are exceptions. If your credit card debt has an interest rate that is both low and fixed, it may be best to keep a little liquidity by not paying off that debt as fast. This does not apply to new credit card debt. The rules were recently changed so that almost all credit cards can increase their rates on balances run up after May 7th, 2010. For debts incurred before that, it depends on the type of card. Talk to your credit card company to find out what kind of interest rate agreement you were on.

For example, I have a balance on a card from debts I ran up before May 7th, 2010. The interest rate on my balance is a reasonable 7.75% and cannot go up. I am not going to charge any new debts on that card, because they can go up on the rate for new purchases, but I am in no hurry to pay that card off. Holding off on repayment gives me a little breathing room in tough fiscal times. In that circumstance only, it is safe to carry some old credit card debt. Avoid new credit card debt like the plague. Change your lifestyle if you have to.

Let’s talk about mortgages. The only kind of mortgage to have right now is one with a fixed interest rate. It’s the same principle as with the credit card debt. When inflation accelerates, debt with a fixed interest rate shrinks in real value. Debtors with fixed interest rate debt can win in inflation, because they pay back a debt taken in valuable dollars with less valuable dollars later. With variable interest rate debt, debtors can’t win because the cost of the debt goes up with inflation, usually at a time when increases in wages don’t keep up.

If you don’t have a fixed rate home loan, I recommend you try to refinance even if it does not lower your monthly payment. It eliminates the time bomb of coming rate increases with variable mortgages. Given a fixed rate loan, don’t walk away from your home if you can help it. Once inflation hits in a big way, everything will be worth more dollars. That home you have, valued now for $100,000 with $120,000 of fixed rate loans against it, may seem like a bad deal now. It’s not. In 5-10 years everything might double in price- in which case you have $120,000 in loans against a house worth $200,000!


Anonymous Rick said...

So if someone has a lot of equity in their home is it smart to borrow against it at the current low fixed rates or remain debt free? If interest rates are going to rise where can one invest to make the most money?

5:39 PM, July 03, 2010  
Blogger Mark Moore (Moderator) said...

I don't know about where to invest to make money. The strategy I am advocating is about survival in tough economic times. If your current rates are a point or more higher then, yes it makes sense to refinance. Taking all of the equity out to invest? I can't advise that. I am trying to put people in a situation where they can keep their homes even though the price of things goes up (while wages don't match the rise).

7:19 PM, July 03, 2010  
Anonymous Rick said...

I saw an article where Gerald Celente is predicting a collapse before 2011. I don't know when but I think its coming. I'm in a good situation in that my house and land will be paid for in 2 weeks but I don't have a clue where to put the extra income. Real estate is usually a good investment but I'm very concerned about taxes in the future. Gold and silver will be where I invest next but don't know what percentage to throw in that direction.

5:21 AM, July 04, 2010  
Anonymous Rick said...

Maybe liquidating all assets and leaving the country is the answer.

12:30 PM, July 05, 2010  
Blogger Mark Moore (Moderator) said...

Rick family and friends will be the most important asset in tough times, better than silver and gold. They won't be around you in a foreign land.

Find a place to make your stand, close to friends and family, and prepare.

7:32 PM, July 05, 2010  
Anonymous Anonymous said...

Store up now. A long winter is coming. We have only a short time to prepare (6 - 18 months probably).

8:43 PM, July 05, 2010  

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