Ask Liz Weston

Dear Liz: I was deep in credit card debt but, because of a stroke of good fortune, came into enough money to completely pay off all my debts except my home. My house payment is now easy to make and my family is in the best financial shape we have ever been in. We even have several thousand in the bank for emergencies. After paying off the credit cards, we began receiving notices from many of the credit card companies canceling our cards or increasing the interest to astronomical rates. Each time I told my wife not to worry, because it was just one less card we had to worry about monitoring, but this trend is continuing. Recently we got a letter from a major retailer we have had an account with for over 25 years saying our credit debt was considered too risky and they were closing our account. I do not understand this because I do not have any credit card debt anymore. My question is why am I being penalized for paying off my debt or is there something I happing I do not know about?

Answer: Run, don’t walk, to your computer and point your browser to the free credit report site, www.annualcreditreport.com. (This is the only address to use; beware of fake and lookalike sites.)

You need to check your reports to see if your good name has been hijacked by an identity thief. While many issuers are closing inactive accounts and raising interest rates for broad swaths of their customers, most aren’t referring to nonexistent debt as the reason to do so.

If you discover credit accounts or collections that aren’t yours, you’ll need to file a police report and dispute the errors with the credit bureaus. The Identity Theft Resource Center at www.idtheftcenter.org has fact sheets and other helpful information to guide you through this process.

If you have been the victim of identity theft, you should at least put fraud alerts on your reports at the three bureaus and consider freezing your credit. A fraud alert signals to lenders that they need to verify the identity of anyone trying to open an account in your name, while a credit freeze would prevent the lender from accessing your credit reports, which should halt new credit accounts altogether unless you “unlock” the report in advance. Again, the Identity Theft Resource Center has more information.

If you don’t spot any obvious problems, it could be that the retailer was using outdated information. You can ask it to reconsider its decision, although most issuers are reluctant to reopen accounts once they’re closed.

If you’re concerned about further account closures, simply use one or two of your cards to make small purchases each month and pay the balances off in full. This should prevent further account closures.

Dear Liz: I am looking at a layoff in the near future, possibly in 2 to 4 months. I have paid off all my credit card bills and use them sparingly now. I have several loans, including $25,000 left on my mortgage plus car, truck and personal loans that total about $60,000. I have enough savings to pay them off. If I get laid off, is it better to pay off the loans or to use the saving to continue to pay them monthly?

Answer: When you’re facing a layoff, you should be conserving cash. That means paying the minimums on any debt and looking for other ways to trim expenses as much as possible. Selling one of your vehicles might also be in order.

Try to avoid tapping any retirement savings, since you’re likely to incur penalties and taxes if you do so, plus you’ll lose all future tax-deferred return that money could have earned. Dip into other savings sparingly, as you may be without a job for awhile.

You need to batten down the hatches because you may be without a job for months. The median length of unemployment in July was nearly 15 weeks, up from 10 weeks in July 2008. A whopping five million people have been without jobs for 27 weeks or more. Given the environment, you should consider any job that will provide income and help you conserve your cash.

photo credit: jocelynmarie

Snagging a date with that cute dude, getting good grades, banishing that zit. Yup, teen girls worry about a lot of stuff. Now add the economy and money to that list.

According to a survey from Bank of America and “Seventeen” magazine, teen girls are slightly more anxious about the economy (85 percent) vs. teen boys (75 percent).

Girls’ fears range from not having enough cash to pay for things they want – like lip gloss and mini dresses – to how to pay for  the big, important stuff – like college.

The research, based on interviews in April with 2,000 teens ages 16-21, also shows:

• Teen girls are more likely to be stressed about finding a way to pay for college than teen boys (69 percent vs. 59 percent).
• 40 percent of teen girls think their parents should bail them out of a tough money situation, no matter how old they are. (Ack!!)
• About 65 percent of teens said they had changed their spending habits as a result of the economy.
• 4 in 10 teens have altered their college plans because of the economic slowdown, while 1 in 5 had to either go with their second choice of college because of cost or attend a state school instead of a private one to save money.

Whoa – some of you are in need of a reality check. (C’mon girls – your parents should bail you out no matter how old you are?!) Getting a financial education doesn’t cost. Teens and parents can start below with a few MSN columns:

• Parents, stop scaring your kids
• What kids need to know about money
• Teach your teens how to handle credit cards
• Should parents bail out their kids?
• Money woes? What to tell the kids
• Teens need debt driver’s licenses

Dear Liz: I lost my job earlier this year. I think I will soon be expected to take the money that was in my 401(k) account—nearly $70,000–and put it elsewhere. I know I need to be sure the check is not payable to me personally, and I think I need a custodian (is that the right word?) which I think would be a bank. I don’t have a clue how to proceed or even to investigate my options. Can I just walk into any bank and handle it, or do I need to find a specialist? If I need to find a specialist, where do I look? Are there any pitfalls that I need to beware of? Thank you, I’ll appreciate any guidance you can offer.

Answer: Take a deep breath. There are a few steps involved, but this isn’t rocket science.

First of all, understand that you may not need to do anything with the money. Some employers allow you to keep your money in their plans even after you leave, although others will require you to move it. Call your former company’s human resources department and ask about your options.

If you are required to move the money, you’re correct that the money should transferred directly to an individual retirement account custodian, which can be any bank, brokerage or mutual fund company that offers IRAs.

You want to transfer the money directly so that 20% of the money isn’t withheld for taxes.

Any IRA custodian you contact will help you with the paperwork and the transfer. Consider contacting a discount brokerage or mutual fund company, since these tend to charge lower fees than banks and full-service brokerages. Some companies to check out include The Vanguard Group, Fidelity Investments and T. Rowe Price.

Dear Liz: I have only one credit card which I pay off every month, and don’t really need another one. I recently received an offer of many frequent flier miles—enough to pay for a nice vacation—if I would open another account. If I accepted the new card, used it occasionally and always paid in full, then canceled it after about a year, would that hurt my credit score? It’s currently pretty decent, about 750.

Answer: Opening and closing accounts can hurt your more-than-decent score. That’s why the company that created the leading FICO credit scoring formula recommends we apply for credit sparingly.

At the same time, it’s a good idea to have more than one credit card. Having a “spare” card can be handy if your other card needs to be closed temporarily because of fraud, or if your issuer decides to change your terms for the worse.

Opening a card just to get an introductory benefit, such as a pile of miles, isn’t the best idea—particularly if you would have to pay a substantial annual fee, which is typically of frequent flyer cards, to keep the account open. Instead, look for a card you can live with for a good long time. Many rewards cards offer cash back or other benefits and don’t have an annual fee. You can find current card offers at CreditCards.com, CardRatings.com and Bankrate.com, among other sites.

Dear Liz: I have earthquake insurance through the California Earthquake Authority that costs $42 a month for my home and $72 a month for a duplex I own. The policies have a 15% deductible. Is the coverage worth it or am I wasting my money?

Answer: Do you have the cash on hand to rebuild your properties if they’re destroyed in an earthquake? If not, would you be comfortable walking away from the properties, including any equity you have in them and any mortgages you owe on them?

If the answer to these questions is no, then buying earthquake insurance is a prudent move. The deductibles are substantial, but the point is to protect you from the catastrophic expense of rebuilding.

You can probably get somewhat lower deductibles, by the way, if you’re willing to pay higher premiums. The CEA has a 10% deductible, as do a few private insurers that offer coverage.

Either way, you should try to keep a cash reserve equal to the deductible, or at least have access to an adequate line of credit established in advance. Once the Big One hits, you won’t be able to get a home equity line on your rubble.

Dear Liz: When you create a will and appoint someone to be the guardian of your children, must that person be present to sign legal documents accepting the job? And can that person later change his or her mind?

Answer: The person you name to be the guardian of your children does not have to be present when you create your will or other estate-planning documents.

But you better make darn sure that you have the potential guardian’s willing consent.

Taking care of someone else’s children is a huge responsibility, and not one that should be taken, or given, lightly. You’ll want to have a full and frank discussion with this person in advance, including what financial arrangements you’re making to take care of your children should you die while they’re minors.

Even if the person consents, understand that nothing is written in stone. Should you die, the person still could change his or her mind and decline the job. That is one of the reasons why you’ll want to name at least one back-up person in case your first choice can’t or won’t serve.

Also, many attorneys would advise you to name one partner in a couple as primary guardian, rather than both parties. If the couple later splits up or one dies, you don’t want any confusion about who you wanted to take care of your kids.

As difficult as these discussions and choices can be, you should make the effort. If you don’t name a guardian, they could wind up at the center of a bitter court battle, or in foster care. Your kids deserve better.

Dear Liz: I did not like your answer to the person who was hit by overdraft charges. You blamed the lower-income banking customer for the bank’s policy of using the larger overdraft to create her subsequent multiple overdrafts and thus take more money from her.

It’s the bank’s anti-customer policy that is in error here, not the person living paycheck to paycheck. Your answer should have started out by telling the customer to find a new bank, rather than essentially defend the bank’s policy. Your final 4 words in that answer — “take your business elsewhere” — just doesn’t give the rest of your answer credibility. I am disappointed enough to write you.

Answer: There’s no question banks aren’t being consumer friendly when they deliberately process the largest transactions first to increase the chances that subsequent transactions will bounce and generate more fees.

There’s also no question that low-income folks and seniors on fixed incomes pay a disproportionate share of these fees.

But the person living paycheck to paycheck isn’t a powerless victim. She can sign up for true overdraft protection instead of “courtesy overdraft” or “bounce protection,” and set up a balance-monitoring system that alerts her when her funds are low. (Most banks offer email or text alerts, or she can simply call in to check her balance frequently.)

Most importantly, she can take steps to change the way she handles money so that she’s no longer living paycheck to paycheck and instead has a cushion in the bank. If she doesn’t understand how to do that, there are a wealth of Web sites and blogs written by people who once lived paycheck-to-paycheck and have since figured out a better way. Two good blogs to start with are The Simple Dollar and Get Rich Slowly.

Dear Liz: This is in response to the column about outrageous bank overdraft fees. The customer who got stiffed should have gone into the bank in person and “pitched a fit.” A similar thing happened to my daughter when she went away to college. I went into the branch to complain and was pretty riled up with my voice escalating in outrage. They took care of the fees very quickly and set up a better overdraft system for her as you said to do. They did not want a shrieking woman in front of the other customers.

Answer: That bank was smart to take care of a mama bear defending her cub. Unfortunately, most banks that inflict “bounce protection” on their unwitting customers are used to hearing, and dismissing, protests over the outrageous fees that result.

photo credit: captg

Home values have dropped across the nation. But that doesn’t mean you should reduce the coverage under your home insurance policy.

Why? The real estate value of your home is very different from the rebuilding cost. You could wind up seriously underinsured, says the Insurance Information Institute, a nonprofit group supported by the insurance industry. It suggests asking these key questions about your policy:

1. Do I have enough insurance to rebuild my home?
Your policy needs to cover the cost of rebuilding your home at current construction costs. The cost to rebuild your home is not based on the price you paid for your home, the real estate value in today’s market or even the cost of new construction, the III says. Rebuilding costs are often higher than new construction costs because of demolition and debris removal fees.

Extra coverage you should check on:

• Water back-up (damage from sewer or drain backup)
• Disaster coverage (floods and earthquake aren’t covered on the typical policy, and wind damage may or may not be)
• Building code upgrade, also known as ordinance or law coverage (pays for additional expense of rebuilding your home to comply with building codes that didn’t exist when the home was originally built).

2. Do I have enough insurance to replace all of my possessions?
Most homeowner policies provide coverage for your personal possessions of about 50 percent to 70 percent of the amount of insurance you have on the structure of your home. For example, if you have $100,000 worth of coverage on the structure, you would be covered for $50,000 to $70,000 worth of the contents of your home. You may need  more, particularly if you own antiques, guns, furs, expensive jewelry and artwork or business equipment–all of which may require separate “riders” to ensure adequate coverage.

You can insure your possessions in two ways: Actual cash value or their replacement cost. Actual cash value is the amount it would take to repair or replace your belongings  — minus depreciation. That $1,000 sofa may be only worth $50 today, which is all you’d get under an actual cash value system. A better bet: Replacement cost, which gives you the amount it would take to replace your belongings with items of comparable value and quality without deducting for depreciation.

3. Do I have enough insurance to protect my assets?
Home insurance also provides liability protection, which covers you against lawsuits for bodily injury or property damage that you or your family members cause to other people. The coverage pays for the cost of going to court (your defense) and court awards – up to the limit of your policy.

Most standard home and renter’s insurance policies provide at least $100,000 of liability coverage, but additional protection is available. You want to make sure you have enough insurance to protect your assets and finances should someone sue you. A good rule of thumb is to have liability insurance at least equal to your net worth. Even better: Get enough to cover twice your net worth. Extra liability coverage is not that expensive, and if you max out the available coverage on your policy you can get an “umbrella” policy that gives you $1 million or more for $200 to $300 a year.

Want to know more? Check out my columns for more tips:

• Is your home underinsured? 8 key points
• 3 costly myths about insurance
• Homeowners, demand your (insurance) rights

photo credit: Qiao-Da-Ye賽門譙大爺

Behind on your credit-card payments? Your credit score isn’t the only thing at risk. You’re also very quickly blowing up any chance of collecting those rewards that come with your card.

CardHub.com, a leading online marketplace for credit cards, conducted a mini-study that examined the fine print of reward programs for the top six major credit-card issuers.  Among its findings:

• In the last 12 months, 15% of U.S. adults have been late making a credit-card payment. The credit-card default rate in 2009 is the highest since 1991.
• If an account becomes delinquent, all points earned under American Express rewards program may be lost.
• If an account becomes two months or more delinquent, all points under the Discover rewards program will be lost.
• Other issuers, such as Bank of America, Capital One and Citibank, generally will not allow you to earn rewards while your account is delinquent. (According to the survey, Chase did not disclose any information about its programs.)

What’s a cardholder to do?

Face the cold hard facts. Reward programs only make sense if you pay your balance in full each month. If you carry a balance or can’t make the payment on time, a reward program isn’t for you.  If you’re pinched, you need to curb your spending and pay off the debt.

And let’s be clear here: Issuers can change the terms and conditions of their reward programs at any time or for any reason. There’s no notification period. No warning needed. That’s different from the current rules that require at least 15 days notice before issuers change your interest rate or fees. (Under the new law, that notification must come at least 45 days before any changes are made to your account.)

Yes, rewards are super under the right conditions.  Just make sure you’ve picked a card and program that work for you – and pay on time so you don’t blow your bennies.

Want to learn more? Check out my columns for more tips:

• 20 cards that pay you back
• Credit cards with the happiest users
• 9 big credit card myths