Q&A: Taking out a loan to boost credit scores

Dear Liz: I have little to no information — good or bad — in my credit reports. I am considering obtaining a secured loan from my credit union to establish better credit. Does it make any difference to my credit score if the credit union reports the loan as “secured”?

Answer: Credit scores don’t treat installment loans differently based on whether they’re unsecured, with just your promise to repay, or secured, which means backed by an asset such as an amount on deposit with the credit union.

What matters is how you pay off the loan (every payment should be on time) and whether the account will be reported to all three credit bureaus, so that you’re building scores at all three. Call and ask, because not all credit unions report to all three bureaus.

You also might want to consider a secured credit card, because having both types of credit accounts — installment and revolving — can boost your scores. Again, it’s important that you pay on time and that the card is reported to all three bureaus. You should use the card lightly but regularly and pay the balance in full each month for best results.

Q&A: Saving and investing for a child

Dear Liz: I recently got a court judgment for my daughter’s father to pay me child support. She is 1 year old, and it will be about $1,500 a month. I would like this money to be a gift for her when she is older. I’m told not to put it in her name now, as it may hurt her chance for financial aid for college later. How do you recommend I save and invest it for her? I’d like her to have it when she is a young adult.

Answer: This could be quite a gift for a young woman. If the money earned a 5% average annual return over time, you could be presenting her with a check for half a million dollars.

Consider putting at least some of the money in a 529 college savings plan. Withdrawals from these plans are tax-free when used to pay qualified college expenses. College savings plans receive favorable treatment in financial aid formulas because they’re considered an asset of the contributor (typically the parent), rather than the child.

Q&A: Getting rid of robocalls

Dear Liz: We’re getting daily robocalls from collection agencies attempting to collect debts from people with names similar to our own. Generally we ignore the calls on the advice of a friend whose mother died heavily in debt and who said nothing can be gained from a conversation with Repo Man. Is that good advice?

Answer: Ignoring debt collectors isn’t always the best advice — but in this case, it is. Using autodialers and pre-recorded messages is a hallmark of scammers hoping to scare people into paying debts that aren’t theirs.

If you’re not already signed up with the federal Do Not Call Registry at www.donotcall.gov, then do so. If you are on the list, file a complaint at that site. You also can make a complaint at the Consumer Financial Protection Bureau at www.consumerfinance.gov/complaint.

Another good option is signing up for a free service such as NoMoRobo, which detects many scam calls at the first ring and hangs up on them.

Q&A: Social Security survivor’s benefits

Dear Liz: I became a widow in my 40s. My children collected Social Security until reaching age 18. At age 60, I started collecting survivor’s benefits. Now that I’m 65, do I need to do anything to collect my late husband’s full Social Security amount at age 66?

Answer: Starting early means you won’t get his full Social Security benefit.

Survivor’s benefits are based on what your husband would have received at his full retirement age if he hadn’t started benefits when he died, or what he actually received if he had started benefits.

His benefit was reduced to reflect your early start, however. Only by starting at your own full retirement age of 66 would you have received 100% of his benefit.

Starting early with survivor’s benefits can be a good option if you had a solid work history and your own benefit eventually will be larger than the survivor’s benefit. If that’s the case, you can leave your own benefit to grow until it maxes out at age 70 while still receiving Social Security checks. If your own benefit won’t be larger, though, it may have been smarter to wait.

Q&A: Purchase protection

Dear Liz: A few months ago, I purchased a large television from a nearby store. I was offered no interest for 12 months using the store’s credit card. The TV was stolen from the back of my pickup truck before I was able to bring it into my apartment. I called the police and filed a report. The next day I returned to the store and asked if anything could be done. They said they could only offer another television for a discounted price. I wrote to the credit company and they responded that it wasn’t up to them and any deals would have to be made with the store, which I did not return to. I have since made small payments on the loan, and will expect to pay if off in a few months with no problem. The remaining amount is just over $900. My question is, how bad would it affect my credit score if I simply decided not to pay the balance? Currently, I have a great score. My only other debt is for another television I purchased.

Answer: Failing to pay what you owe will trash your credit, because a single missed payment can knock more than 100 points off good scores. You’ll lose more points the longer the bill goes unpaid and suffer additional damage when the account is turned over for collections.

A better approach is to pay what you owe and resolve to stop borrowing to buy televisions. Instead, use a credit card that reimburses you for such losses and then pay off the balance in full by the due date.

As you’ve discovered, store cards often don’t offer this “purchase protection” that kicks in if an item is lost, damaged or stolen. Purchase protection is a free benefit that comes with higher-end credit cards and shouldn’t be confused with overpriced paid add-ons such as “credit protection.” Check your current cards to see if any offer this feature. If none of your cards do, use your good credit to get one that does and use it in the future for all large purchases.

Q&A: Capital gains tax on mutual funds

Dear Liz: My mother, who is approaching 100 and in good health, has a significant mutual fund holding. It is mostly made up of capital gains. She does not need this fund for her daily living expenses. The question she has: Are the taxes on disposition the same before or after she dies? I am thinking of things like the capital gains tax exemption (never used) as well as inheritance taxes.

Answer: The capital gains tax exemption applies to the sale of a primary residence — a home, not a mutual fund. If your mother sold the fund today, she would owe capital gains tax on the difference between the sale price and her “cost basis.” Her cost basis is what she paid for the fund originally plus any reinvested dividends. The top federal capital gains tax rate is 20%, although most taxpayers pay a 15% rate.

If her objective is to get the maximum amount to her heirs and minimize the tax bill, she should bequeath this investment to them at her death. Then the mutual fund will get a “step up” in tax basis to the current market value. When the heirs sell the investment, they’ll only owe taxes on the appreciation that occurs after her death (if any).

You asked about inheritance taxes, but only a few states levy taxes on inheritors. Typically, it’s the estate that would pay the taxes, and only those above certain amounts. In 2016, the federal estate taxes exemption is $5.45 million

Q&A: Fee-only financial planners

Dear Liz: When you recommend a “fee-only adviser,” do you mean an adviser that charges customers by the hour for advice or one that charges a percentage of the customer’s portfolio that the adviser manages?

Answer: Fee-only planners charge their clients in a number of different ways. What distinguishes them is the fact that they are only compensated by their clients; they don’t accept commissions from the products or services they recommend.

Some fee-only planners charge by the hour, which is helpful for people just starting out or those who need targeted help, such as advice on their retirement portfolios. You can get referrals to fee-only planners who charge by the hour from the Garrett Planning Network at www.garrettplanningnetwork.com.

Many fee-only planners charge a percentage of your assets that they manage or a percentage of your net worth. Another popular method is to charge a quarterly or annual retainer fee. You can get referrals to these types of planners from the National Assn. of Personal Financial Advisors at www.napfa.org.

It’s a good idea to interview a few planners to discuss what they can do for you and the expected costs before making a decision. In addition, the Financial Planning Assn. has tips on choosing a financial planner at www.plannersearch.org.

Q&A: Social Security survivor benefits

Dear Liz: I am 63 and retired but have not started to collect my Social Security. My husband will be 67 in March. He started his Social Security at 62. Our plan is to wait until I am 70 to start my benefit, which would make my monthly amount significantly larger than his. If I predecease my husband, would he be able to collect my benefit instead of his own? If I started benefits now, our checks would be relatively close in size, although mine would be a bit higher than his current amount.

Answer: If you had started benefits already, your husband’s survivor benefit would equal what you were receiving when you died. Since you didn’t start early, though, your husband will get more.

If you should die before your full retirement age of 66 without starting retirement benefits, he would receive a survivor benefit equal to what you would have received at 66.

If you continue to delay benefits past age 66, your retirement — and thus his survivor benefit — would accrue the “delayed retirement credits” that boost your Social Security check by 8% annually between age 66 and age 70, when your benefit maxes out. In other words, if you die between 66 and 70 without starting benefits, he would get the delayed retirement credits and larger check you’d earned even if your checks hadn’t started.

As you can see, delaying the start of benefits is a great way to maximize what a survivor receives. It’s particularly important for the higher earner in a couple to put off filing for retirement benefits for as long as possible.

Q&A: Long-term capital gains tax

Dear Liz: I’m very confused about the long-term capital gains tax. Several years ago, I bought a house for $525,000 in Texas. I’ve been thinking about selling, and my real estate agent informed me that my home is now worth $1.5 million. I am a disabled veteran and have no tax liability because my income is tax-free. Since this is my primary residence, I know that the first $250,000 in gains is exempt from tax. What I just don’t understand is what my tax liability will be on the rest of the money.

Answer: If you sell this house, you’ll essentially go from the bottom tax bracket to the top. Single people with incomes over $415,050 in 2016 are subject to the 39.6% marginal tax rate.
Most people pay capital gains tax at a 15% rate, but those in the top bracket face a 20% rate.

Improvements you’ve made to the house and some other expenses, such as selling costs, can reduce the amount of gain that’s subject to tax.

This big windfall could have other effects on your taxes, so you’ll want to consult a tax professional before proceeding.

Q&A: Paying off student loan

Dear Liz: am going to pay off one of my daughter’s private student loans. One has a balance of $8,500 at 4% interest and the other is for $7,500 at 6%. Which one should I pay off?

Answer: You have a lucky daughter, either way.

In addition to balances and rates, the other variable you need to consider is whether the rates are fixed or adjustable. These days, many private student loans have fixed rates, but in the past most of this debt had variable rates. Variable rates mean higher costs and larger payments when interest rates rise.

If both loans have variable rates, or both are fixed, then paying off the highest rate debt first makes the most sense. If the lower rate loan is variable and the higher rate one is fixed, you’ll have to guess whether interest rates are likely to rise enough in the next few years to instead pay the larger balance first. Some people might want to pay off a variable debt just to eliminate the uncertainty, while others are willing to gamble that rates aren’t likely to jump two full percentage points before the loan is scheduled to be paid off.