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Q&A Category

Dear Liz: I have four private student loans that I would love to consolidate so that I can have one medium-size monthly payment instead of four large ones. How do I go about finding a company that will consolidate them?

Answer: If you have good credit and sufficient income — or a willing co-signer — several lenders now offer private student loan consolidation. That’s a change from the recent past, when recession-scarred lenders largely abandoned this market.

Unless you’re able to get a substantially reduced interest rate, though, you shouldn’t expect your consolidated payment to be much lower than the sum of your current payments. Your payment could even go up if the consolidation loan has a shorter repayment period.

You can start your search at cuStudentLoans.org, which represents not-for-profit credit unions. RBS Citizens Financial Group, Wells Fargo, Charter One and other banks offer consolidation options as well. Some lenders offer fixed-rate options and “cosigner release,” which enables creditworthy borrowers to remove a cosigner after a certain number of on-time payments.

Categories : Q&A, Student Loans
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Q&A: Mileage bonus credit cards

Sep 15, 2014 | | Comments (0)

Dear Liz: I’m attracted to the credit card offers that give substantial mileage bonuses for opening and using an account. Most also waive the first year’s fee. I have taken advantage of one such card, and then I canceled it before any fee was due. (I certainly enjoyed using the miles.) I hesitate to take another offer because I fear opening and closing extra accounts might have a negative effect on my credit rating.

On the other hand, I am in my mid-60s, have excellent credit and am debt-free. I also don’t plan to make any credit purchases. What’s your advice?

Answer:If you have good credit and aren’t in the market for a major loan such as a mortgage, you shouldn’t worry about opening or closing a credit card account occasionally. Yes, such actions can ding your credit scores, but the effect is likely to be minimal, especially if you have several other open accounts that you regularly use.

If you are going to open a new card with an upfront bonus, make sure you understand the fine print. Most cards require you to spend a certain amount within a certain time frame to get the extra points. Typically the bigger the upfront bonus, the bigger the required “spend.”

Categories : Credit Cards, Q&A
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Q&A: Keeping financial records

Sep 15, 2014 | | Comments (0)

Dear Liz:I have a garage full of old financial records. I believe I need to keep only seven years of information for tax purposes. Is that correct? However, I have decades of receipts on house repairs and improvements since I believe there is some cumulative tax credit that might someday be important. Also, I have kept receipts on personal and household purchases in case of a loss that required an insurance claim. Am I keeping too much paper?

Answer: Yes. Here’s what you need to know.

Many tax experts recommend hanging on to your tax returns indefinitely, but you can shred most supporting documents after seven years when the risk of audit ends (unless you’re significantly underreporting income or committing fraud).

When it comes to assets such as homes or stocks, you should keep supporting documentation for as long as you own the asset plus seven years.

That includes receipts for home improvements, but not repairs. You can’t take a deduction for either home repairs or improvements, but the cost of improvements may help you reduce any taxable profit should you sell your home. In Publication 530, the IRS defines an improvement as something that “materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses.” Examples include putting an addition on your home, replacing an entire roof, paving your driveway, installing central air conditioning or rewiring your home. You can’t include improvements that are no longer part of your home. If you install carpeting and then rip it out to install hardwood, for example, you can no longer include the carpeting cost as an improvement.

You would have to have a considerable profit for those receipts to come in handy. The first $250,000 of home-sale profit, per person, is tax free. If you’re married, that means you wouldn’t face capital gains taxes on your home sale unless your profit exceeded $500,000.

Keep in mind that the IRS accepts electronic records. If you’re concerned about tossing paperwork you might later need, consider scanning everything first and maintaining a backup copy off site, either in the cloud or in a safe-deposit box.

Chances are good your insurer also accepts electronic records and scans of receipts, but call and ask first. Keeping receipts for insurance purposes is a good idea, as long as you cull the ones for items you no longer own.

Categories : Banking, Q&A, The Basics
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Q&A: Repairing your credit score

Sep 08, 2014 | | Comments (0)

Dear Liz: After a divorce, I had to start my life over at 62. I got three credit cards. Somehow, I failed to see the online bills for one of them and neglected to pay it. The company didn’t contact me until three months had passed. I got a letter saying the small balance ($130) was forgiven and the card had been canceled. I was shocked. I made several calls but was told nothing could be done. Now one of the credit bureaus has my score at 640. I’m a reliable person and always pay my bills on time. This was a great oversight. Is there anything else I can do?

Answer: Even seemingly small missteps can have outsized effects on your credit scores. Missing even one payment can knock more than 100 points off good scores.

And as you’ve learned, creditors tend not to be sympathetic to the idea that you didn’t pay because you didn’t see the bills. You’re expected to know when your bills are due and pay them. A quick phone call or visit to the credit issuer’s website would have told you what you owed.
Fortunately, you still have the other two cards. Those should help you rehabilitate your credit scores as long as you use them properly and you don’t cause any further damage.

Before another day passes, set up automatic payments for both accounts. You typically can choose to have one of three amounts taken every month from your checking account: the minimum payment, the full balance or a dollar amount that you specify. Ideally, you would choose to pay off the full balance each month, since carrying a balance won’t help your scores and will cause you to pay unnecessary interest.

Mark the dates of the automatic payments on your calendar and set up alerts to make sure that there’s enough money in your checking account on that day.

Use both of your cards lightly but regularly, charging small amounts each month. Don’t use more than about 30% of your available credit — less is better. To rehabilitate your credit scores even faster, consider adding an installment loan to your credit mix, if you don’t already have one. Mortgages, car loans and personal loans are examples of installment loans.

Finally, make sure you don’t fall behind on any other bills or let any account, such as a medical bill, fall into collections. Another black mark would just extend the time it takes to rebuild your scores.

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Dear Liz: I am 64 and happily, gratefully receiving early Social Security benefits. My wife is 59, and when she turns 62 she will get half of my $1,650 monthly benefit. My question, though, is this: If she starts getting half of my benefit at 62, can she later switch to her own benefit? If she can get spousal benefits at 62 and switch to her own benefit when it maxes out at age 70, then starting early would be a no-brainer.

Answer: Yes it would, but that’s not how Social Security works.

First, your wife will not receive an amount equal to half of your check if she applies for spousal benefits before her own full retirement age, which is 66. Instead, she would be locked into a significantly discounted amount — closer to 35% of your benefit than 50% if she applies at 62. She also would lose the option of switching to her own benefit later. The “claim now, claim more later” strategy of starting with spousal benefits and then switching to one’s own benefit isn’t available to those who start early.

You’ve already left a lot of money on the table by starting benefits before you reached your own full retirement age. Having her begin benefits prematurely would just compound the problem. Remember too that when one of you dies, the other will have to live perhaps for many years on a single check. It makes sense to make sure that check is as large as it can possibly be.

AARP has excellent information on its site about Social Security claiming strategies, as well as a calculator that can help you see how much it pays to wait. Please educate yourselves before making a decision that you, or she, could live to regret.

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Dear Liz: I recently retired and started my own consulting business, which is doing very well. My question is on taxes. I have been told that I must pay quarterly taxes, but I have no idea if I will make $10 this month or $10,000. How do I estimate my income if I have no idea? Can I just wait till the end of the year and figure it out then?

Answer: You don’t want to do that. If you owe a significant amount at the end of the year, you’ll owe a substantial penalty on top of your tax bill.

The good news: The IRS requires you to figure your estimated quarterly taxes, not your “guesstimated” taxes. You’ll make the calculations based on what you actually earned that quarter, not what you expect to earn in the upcoming quarter.

Tax software programs such as TurboTax and TaxAct can help you make the calculations, but you’d be smart to hire a tax pro with experience advising small-business owners. The pro will have ideas about how to minimize and manage your tax bill. He or she also will be available to answer the many questions you’ll have about taxes, incorporation and other matters as your business grows. If you should be audited, a tax professional such as an enrolled agent or a certified public accountant would be able to represent you. (Even the most avid do-it-yourselfer should understand that representing yourself in an audit is not a good idea.)

You can get referrals from the National Assn. of Enrolled Agents at http://www.naea.org and the American Institute of CPAs at http://www.aicpa.org.

Categories : Q&A, Taxes
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Dear Liz: A friend of mine has told me that he thinks that I can apply for spousal benefits at my full retirement age and hold off getting my Social Security under my own work record until I am 70. Here is the scenario: My husband is 77 and has been collecting Social Security since he was 62. He continues to work. I will be 66 in November and I am still working. I plan to take Social Security at age 70. Can I apply for spousal benefits and receive an amount equal to half of what my husband receives from the age of 66 until I turn 70 and then apply under my own account at age 70 and receive my maximum benefit at that age? My friend feels strongly that this can be done, but I called Social Security and explained it clearly (or at least I thought I did) to them and they said that this could not be done. Then I went into the Social Security website and looked under “Spousal Benefits,” but the wording did not clearly say that this couldn’t be done.

Answer: What you’re describing is the “claim now, claim more later” strategy that can boost a couple’s lifetime Social Security by tens of thousands of dollars. It’s one of the approaches outlined in AARP’s excellent primer, “How to Maximize Your Social Security Benefits,” which you’ll find on its site, http://www.aarp.org, along with a calculator to help you understand how different claiming strategies could affect what you get.

These strategies capitalize on the fact that delaying the start of Social Security benefits results in substantially larger checks for life. In the case of two-earner couples, the “claim now, claim more later” strategy allows one spouse the option of getting checks (the spousal benefit) for a few years while allowing her own benefit to grow to its maximum.

As long as you wait until your own full retirement age to apply for spousal benefits, and your spouse is already receiving benefits, then you should be allowed to switch to your own benefit when it maxes out at age 70. If your spouse weren’t receiving benefits yet, but had reached his full retirement age, he could file for benefits and immediately suspend his application (“file and suspend”) so that you would be eligible for spousal benefits and his own benefit could continue to grow.

It’s not clear why you would have been told otherwise, since this isn’t exactly a secret strategy. But not all Social Security employees are equally informed. Sometimes calling back and asking your question again of another representative will result in a different or more complete answer.

When you file for benefits, make clear on the form that you are restricting your application to the spousal benefit only and aren’t collecting your own retirement benefit

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Dear Liz: My mother passed away unexpectedly in late 2008. She had a mortgage, and the house was under her name only. She didn’t leave a will. My family is still paying the loan, and the company does not know my mother passed away. We don’t have a lot of money and we need advice on how to get the house under my sister’s name (she has good credit). We need to get the loan modified since the monthly payment is almost $1,000 and only about $70 goes toward the principal.

Answer: Your mother may not have created a will, but your state has laws that determine what was supposed to happen after her death. Lying to the mortgage lender is not one of the legal options.

Federal law allows mortgages to be transferred to heirs. (Without a will, those heirs usually would include a surviving spouse and the dead person’s children.) Transfers because of death typically are exempt from the due-on-sale or acceleration clauses that otherwise would allow the lender to demand full payment.

To get the mortgage transferred, however, you usually need to have started the probate process.

At this point, you should consult a mortgage broker about the likelihood of getting a refinance or a loan modification. If the home is deeply underwater, it may not be possible or worth the effort. If foreclosure is likely, it would be better not to transfer the mortgage as the heirs’ credit would suffer significant damage.
If your plan is feasible, however, then you’ll need to consult a probate attorney. You may not have a lot of money, but you need to pool what you have to hire someone who can dig you out of this mess.

Categories : Q&A, Real Estate
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Q&A: Converting currency abroad

Aug 25, 2014 | | Comments (2)

Dear Liz: After reading your column about the best ways to pay while traveling in Europe, I want to share my experience. I was unhappy with the foreign transaction fee charged on my Citibank credit card, so on my next trip to Europe I primarily used my Capital One card. Imagine my disappointment to find that Capital One’s currency conversion formula was much less favorable to me than Citibank’s.

Answer: Credit card expert Odysseas Papadimitriou suspects you were comparing purchases made on different days, or even on different trips. Although one of your cards charges a foreign transaction fee and the other doesn’t, both cards get the most favorable rate from their card network’s exchange rate. Visa cards would get the Visa card network exchange rate, while MasterCard would get the MasterCard network exchange rate. If both your cards were Visas, for example, they would get the same exchange rate, but the one that charged the foreign transaction fee would increase your cost by that amount (typically 1% to 3%).

There may be “tiny” differences between those Visa and MasterCard exchange rates on a given day, but one wouldn’t be “much less favorable” than the other, Papadimitriou said.

And the exchange rates are certainly better than what you’d get by exchanging dollars for euros at a bank in advance of your trip, or by using currency exchange services once you got there.

So the fact remains that the cheapest way to convert currency is to do so automatically by making purchases with a credit or debit card that doesn’t charge foreign transaction fees. Here’s another suggestion for reducing fees abroad:

Dear Liz: One option for folks traveling to Europe to save money on ATM withdrawals is to check with their bank and find out if there is a checking or savings account that carries the benefit of the bank canceling foreign ATM fees as well as their own fees. Before I traveled to Scotland to visit my daughter, I switched accounts at my bank to one where there are no fees for using other banks’ ATMs. Worked brilliantly!

Answer: If your own bank doesn’t offer this option, it may be worth setting up a checking account with a bank that does. As mentioned in the previous column, Charles Schwab’s high-yield checking account offers unlimited ATM fee rebates worldwide with no foreign transaction fees, and Capital One 360, the online bank, waives ATM fees and absorbs MasterCard’s 1% foreign transaction fee. USAA Bank charges a 1% foreign transaction fee but doesn’t charge a fee for the first 10 ATM withdrawals.

Categories : Banking, Q&A, The Basics
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Dear Liz: I sold a rental property this year and will have a long-term capital gain of about $100,000. My normal income usually puts me in the 10% tax bracket and my Social Security is not taxed because my total income is under $25,000. I pay $104 per month for Medicare. Will the sale of the rental property count as income and make my Social Security benefits taxable? Will I suddenly be deemed “rich” enough to pay more in Medicare payments? If so, will the Medicare payments go back to normal because I will have total earnings under $25,000 after 2014? I am 66, single and by no means rich.

Answer: This windfall will affect your Social Security taxes and your Medicare premiums, but the changes aren’t permanent.

The capital gain will be included in the calculation that determines whether and how much of your Social Security checks will be taxed, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. That will likely cause up to 85% of your Social Security benefit in 2014 to be taxable.

Your Medicare premiums are also likely to rise based on your higher modified adjusted gross income, said Jay Nawrocki, senior healthcare law analyst for Wolters Kluwer Law & Business. The income used to determine Medicare premiums is the modified adjusted gross income from two years earlier, so your premiums shouldn’t increase until 2016. If your income reverts to normal in 2015, your premiums should also revert to normal in 2017, Nawrocki said.

The exact amount you’ll pay can’t be predicted, but people with modified adjusted gross incomes under $85,000 paid $104.90 per month in 2014. Those with MAGI of $85,000 to $107,000 paid $146.90, while those with MAGI of $107,000 to $160,000 paid $209.80. If your income for 2014 puts you in that last group, you should count on your premiums roughly doubling in 2016.
There is some good news. You’ll qualify for the 0% capital gains rate on the portion of the gain that makes up the difference between your income and the top of the 15% tax bracket (which is $36,900 in 2014 for a single person). If your income is $24,000, for example, then $12,900 of your capital gain wouldn’t be taxed by the federal government. The remaining $87,100 would be subject to the 15% federal capital gains rate. You may owe state and local taxes as well, so consult a tax pro.

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