Ask Liz Weston

Debt settlement is the real Wild West–lots of bad guys and no sheriff in sight. Even the companies that aren’t outright scams might charge you thousands of dollars and not resolve your debt problems.

Federal regulation may be on its way, but until then (and probably even afterward), it’s buyer beware.

Here are three signs that indicate you’re dealing with one of the bad guys:

• They refer to a “new law” or “federal bailout package” that allows consumers to cut their debt “legally.” There’s no such animal.
• They say or imply you can settle debt without affecting your credit. Debt settlement trashes your credit scores.
• They use “as seen on CNN” or other media outlets, but when you click on the link it simply brings you to another debt settlement advertisement.

Anyone who is considering debt settlement should first talk to an experienced bankruptcy attorney about his or her options. If you truly can’t pay your bills, you may be better off getting them erased through bankruptcy than throwing money at debt settlement.

For more, read:

Debt settlement: a costly escape

When debt settlement makes sense

Damned by debt consolidation: settlement could be a trap

Dear Liz: I am freaking out and losing sleep. I got a letter about five years ago from the IRS telling me I owed it money, so I stopped filing my taxes. Now I feel scared and nervous and don’t know how to fix this. I have my paperwork and want to file all my returns and see how much I owe. I usually get refunds so hopefully the tax bill won’t be too bad, but I just don’t know where to start. Should I hire an attorney or just throw myself on the mercy of the IRS? Money is tighter than ever, but I feel that I can’t move forward until I resolve this issue.

Answer: It’s too late for you, but others who may be tempted to ignore their obligation to file tax returns need to know two things.

The first is that the failure-to-file penalty is much worse than the failure-to-pay penalty. Since the IRS offers payment plans, it’s better to file than not, even if you can’t pay right away.

The second is that you have only three years to file a tax return before you lose any refunds to which you might have been entitled.

In short, not filing can cost you, big time. You don’t need to throw yourself on the IRS’ mercy, but you should find a good tax preparer who has dealt with this issue before. Many have, as there seems to be no shortage of people like you. Your local certified public accountant society or the National Assn. of Enrolled Agents, at www.naea.org, can provide referrals.

Dear Liz: We are fortunate to be debt free with a nice cash reserve. We typically pay our bills in cash, by check or by a credit card that’s connected to our brokerage account. Imagine our surprise when we applied for credit at two retail stores to get a discount on items we wanted and were turned down on the spot at both places. We have asked for, and received, the government-required reports from the three major credit bureaus, and the information provided seems correct, to the best of our interpretation. Short of a significant effort to get more credit, which we can survive without, what do you recommend we do?

Answer: Under the Equal Credit Opportunity Act, you have a right to know why you were turned down for credit. Simply referring you to the credit bureaus isn’t sufficient — the retailers should have given you the reasons your applications were refused. If you haven’t received letters by now explaining their rationale, write each retailer’s credit-granting department and point out that they’re required by law to give you an explanation.

It could be that your scores weren’t high enough. Even though your finances are in good shape, the fact that you have only one active credit account might be damping your scores. If that’s the case, simply adding another credit card could boost your scores and make you eligible for instant credit offers.

Or it could be your scores are fine and the problem is your income, or what the retailers think your income might be. Credit card lenders are under regulatory pressure to consider borrowers’ incomes, and some are using various services that purport to estimate incomes based on other information in your credit reports, such as the size of your mortgage or your credit limits. If you have no mortgage and only one card with a low limit or no limit reported, that estimate could be way off.

But you don’t have to guess. The retailers should tell you. If they don’t, you can report them to the Federal Trade Commission.

Dear Liz: I am trying to rebuild my credit and am following many of the tips I’ve read in your articles. I recently obtained a secured credit card and an auto loan just to help with rebuilding my credit. Can I increase my credit score even if I pay off the entire credit card balance due each month before any finance and interest charges are incurred? And can I increase my credit scores over time even though I currently have a tax lien and judgment on my credit report?

Answer: Let’s tackle your last question first. You can mitigate the effect of serious negative marks such as tax liens, judgments, bankruptcies, foreclosures or repossessions by being responsible with your other credit accounts, but these missteps will still drag down your score as long as they’re on your credit reports. Most negative marks will drop off after seven years, although bankruptcies can be reported for up to 10 years and there’s no limit to how long unpaid tax liens can remain on your report — which should be a good incentive to pay those off.

Being responsible with your credit accounts means paying them on time and using only a fraction of your available credit card limit. (Using less than 30% is good, and using less than 10% is even better.) It does not mean you have to carry a balance. Credit reports and credit scores typically don’t distinguish between balances that are carried month to month and those that are paid off, so you might as well save the finance charges and pay your bill in full each month.

Earlier this week I told you how to shop for new bank (or credit union); a week before, I’d written about why you might want to.

As promised, here’s what to do after you’ve made the decision to jump ship.

1. Make a list. Review your transactions for the last few months and list all the automatic and recurring payments being made out of your current account. Don’t forget to include any automatic payments that occur less often, such as quarterly, biannual or annual payments.
2. Open your new accounts. If you open your accounts with a check, there will typically be a holding period before you can access your funds. Also, ask about getting true overdraft protection, which links your checking account to a savings account, credit card or line of credit.
3. Set up online access. Familiarize yourself with the new bank’s system and add the accounts to any personal finance software or site you use (Quicken, Mint, Yodlee, etc.) If you use online bill pay, you can start adding payees to the new bank’s system.
4. Switch any direct deposits. You’ll typically need to contact your employer’s human resources department and fill out a form with your new bank’s routing number and your account number.
5. Transfer any automatic or recurring payments. If you were making payments from your old bank’s bill pay system, set up the payments on the new bank’s system. If the automatic debits are coming from billers, contact those companies and give them your new bank’s information. (You may be able to do this on the billing companies’ Web sites.)
6. Monitor both accounts for a few weeks. Check in frequently to both banks to catch any messed-up or missing payments.
7. Shut down the old accounts. Contact your old bank and ask how it wants you to proceed. Ask that any remaining balances in your accounts be mailed to you or transferred to the new bank. Cut up debit cards and checks associated with the old account.

Public radio’s Marketplace Money has asked me to help field listener questions about their money.  In this segment, Tess Vigeland and I talk about ways to cope with credit card debt, and what a dad needs to know about his adult son’s debt.

CLICK HERE to listen to the latest show.

Too many people stick with a bank that they hate because they don’t know there are better options—and because they dread the hassle of switching their money.

In this post, I’ll cover how to shop for a new bank or credit union. In this post, I write about ways to make the switch as painless as possible.

The best fit for you will depend on how you use banking services and your priorities.

Start by looking at your transactions for the last three months or so. What was the lowest balance in your checking and savings accounts over that time? If you constantly run on fumes or close to it, you’ll want accounts with low minimum balance requirements or that waive minimums when you arrange direct deposit of your paycheck. (My credit union requires a $1 minimum for its basic checking account. Big banks may require a $500 to $1,000 minimum balance to avoid a fee unless you have direct deposit.)

Cast a wide net. Don’t limit your search to name-brand banks. Community banks and credit unions can be good options as well. Move Your Money can help you find top-rated community banks by ZIP code, while Find a Credit Union and CULookup offer similar services for CUs. Community banks are covered by the FDIC insurance that applies to bigger banks, and most credit unions are covered by the National Credit Union Share Insurance Fund, which like the FDIC is backed by the full faith and credit of the U.S. government.

Check your target institution’s Web site for the closest branches and ATMs. You can always get extra cash at a grocery store with a debit card, but most people like to have a fee-free ATM and a branch or two close to where they live or work. Credit unions usually belong to the Co-Op Network, giving you access to more than 28,000 fee-free ATMs across the country.

Also check interest rates for checking and savings account. Getting any interest on your checking at big banks typically requires a huge balance ($10,000 and up), but some community banks offer decent rates on so-called rewards checking accounts. Get all the details before you sign up, since a certain number of transactions and a minimum balance are typically required.

Savings account rates vary as well. My big-bank savings account offers a fraction of 1%, while my credit union currently offers a 7% return on the first $500 deposited.

Test their customer service. Don’t just check them out on the Web. Call and talk to a human to ask questions, so you can see how you’re treated. Then, before you commit, visit a branch and ask some of the same questions again in person. What an institution promises and what it actually delivers in customer service can be worlds apart, and there’s nothing like face-to-face contact to help you decide.

What to ask (and make sure to write down the answers so you can compare your options):

• What are the minimum balance requirements (if any) for each account? What monthly fee will I pay if my account goes below the minimum or if there is no fee-free minimum?
• Do you reimburse for transactions made at other banks’ ATMs? If so, how many fee-free transactions can I make each month?
• Do you charge to talk to a teller? If so, how much?
• Do you offer online bill pay for free? Is there a limit on the number of bills I can pay?
• Do you charge for paper statements? If so, how much?
• What do you charge for transfers to outside accounts?
• Do you offer overdraft protection? How much does it cost? (What you want is true overdraft, which links your checking account to a savings account, line of credit or credit card in case a transaction exceeds your available balance. Don’t settle for “courtesy overdraft” or “bounce protection,” which can cost you a fortune in bounced-transaction fees.)
• If you use Quicken, QuickBooks or other personal finance software, ask about fees for those services.
• If you frequently send money out of the country, find out how much is charged for that service.

Next up: How to say goodbye.

W-2s and other tax documents are starting to arrive in the mail, signaling the beginning of the U.S. tax season for individual taxpayers.

Oh, yay.

Not only are taxes a pain to confront, but they’re easy to get wrong. Here are five big mistakes to avoid:

Failing to file. Every year, I hear from people who have hidden under a rock for years–years–when tax season rolls around. They want to come clean, but are afraid the IRS will send storm troopers to carry them away. Relax: simple failure-to-file isn’t a crime, although it can be costly. Failure to file penalties are much worse than failure to pay penalties, and you lose out on any tax refunds you might have gotten after three years have passed. The fix is straightforward: find yourself a CPA or other good tax pro, bring what documentation you have and take your medicine.

Doing complicated taxes themselves. I’ve used a tax pro ever since starting my first freelance business many years ago, and that was even in the years when I was doing our taxes eight or nine times a year to test out various tax software. My pro has always found deductions I missed and been a great resource year-round. If you’ve got a business or a lot of investments, find yourself an expert. At the very least, you should be using software like Turbotax–today’s tax code is simply too complex to tackle by hand.

Paying with a credit card. Whatever rewards you’re getting from using a card are more than offset by the fees charged to use plastic. If you can’t pay right away and have a very low rate on your card, charging could make sense, but the IRS’ payment plans also come with pretty low interest rates.

Using rewards points to pay your taxes. American Express just announced that you can do this with their rewards cards, but the exchange rate is awful. You need 200 points to pay $1 in taxes, according to CreditBloggers.com. (Normally, you want an exchange rate of at least 1 cent per point or mile; CreditBloggers points out you can get a $25 Barnes and Noble card on Amex’ site for 2500 points, and even the less desirable exchange rates that typically apply for merchandise typically give you 100 or so points to the dollar.)

Taking out a refund anticipation loan. If you file electronically and opt for direct deposit, you can get your refund in about 10 days. That’s all. It’s insane to pay an interest rate that’s effectively in the triple digits to get your money faster from a tax preparer that offers refund anticipation loans. If you need the money so badly, then file earlier in the season; your wait time may be even shorter.

Dear Liz: My husband is quite a bit older than I (about 18 years). When we married, we agreed that we should put all our savings into joint funds and into his retirement accounts. Our thought was that since I’m younger, we’d have much earlier access to retirement money by funneling it into his retirement accounts (as opposed to mine), and that it was unfair for me to sock away money that he may never have access to.

Intellectually it feels like the fair way to go, since we both work and are equally responsible for our family’s finances. The money we’ve been putting in his retirement accounts will ultimately belong to both of us. But emotionally, I feel anxious about not having my own accounts. Should I just work this out in therapy (joking) or am I right to be concerned? What would you advise for a couple like us with an age difference?

Answer: You are likely to outlive your husband by at least two decades. Rather than focusing on early access to retirement funds, you should be making sure that money lasts for a lifetime: your lifetime, not just his. By the way, considering your own needs is not unfair — it’s sensible. A loving husband wouldn’t want to leave you old, alone and impoverished.

You may not need a session with a therapist, but you should definitely have a meeting with a fee-only financial planner who can review your situation and make sure the needs of both of you are considered.

Dear Liz: I applied for a 10-month, interest-free loan at an appliance store to purchase a washing machine and was refused. We own our house, have no outstanding debt and pay our credit cards in full each month. I’m worried that if something happens to my husband and I want to buy a car or whatever I need, I won’t be able to get credit.

Answer: If you were turned down for credit, you should have been given free access to the credit report the lender used to make its decision. In any case, everyone in the United States can get a free look at their credit reports from the three bureaus once a year at www.annualcreditreport.com. You should peruse the reports to see whether there are any obvious errors, such as accounts that aren’t yours or late payments when you paid on time.

The problem could be that all the credit you have is in your husband’s name. If that’s the case, you should begin building your own credit. If you’re already an authorized user on his cards, see if the credit card issuers will report the accounts to your credit reports as well as his. Opening a credit card account in both your names, as joint account holders, also can help build your history.