Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?
Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.
Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.
If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.
Dear Liz: If your in-laws promised you and their son their house, and have for over 20 years, and the whole family is aware that was the plan — your mother-in-law even had a will and a deed made up — do you think the executor of the estate has the right to do away with the will and take matters into her own hands? Do you think the daughter-in-law and the son have a right to stick up for what the parents wanted?
Answer: There’s a big difference between drafting documents and executing them.
Presumably the deed wasn’t executed, or used to legally transfer the house into your names. Otherwise this dispute wouldn’t be happening. Is the same true of the will? In other words, did your mother-in-law sign it in the presence of disinterested witnesses (people who don’t inherit)?
If the will was properly executed, then in most states it must be filed with the probate court. The executor is supposed to follow the will’s dictates to the extent possible. (If your mother-in-law left more debts than assets, for example, there might not be enough left over to distribute according to a will.)
What seems likely is that your husband’s mother failed to follow through on her promise. If that’s the case, and there is no will, then the executor is obliged to follow state law to determine who gets what.
The results may not be what you hope. The home may need to be sold to pay creditors or to allow an equitable distribution of assets among all the legal heirs.
This assumes the executor is living up to her fiduciary duty. If she truly is taking matters into her own hands, however — deciding how the estate will be distributed without reference to a will or state law — then you and your husband should hire an attorney to file a lawsuit in probate court to get her removed and replaced with someone more responsible.
Dear Liz: I need to refinance my home. My credit score has slipped a bit over the last year (still pretty good) and my wife has lost her job. I’m concerned that if we get denied, that will impact my credit score. Some have told me that inquiries from potential lenders can hurt the score but being denied doesn’t show up. What are the facts?
Answer: The credit scoring formula used by most mortgage lenders, the FICO, combines all mortgage-related inquiries made within a certain period and counts them as a single inquiry. (The period is generally 45 days.) Single inquiries typically knock less than 5 points off your scores. The scoring formula also ignores any inquiries made within the previous 30 days. That allows you to shop for a mortgage without unduly damaging your scores.
Being denied credit doesn’t knock any further points off your scores. Given your situation, though — lower income and lower scores — it would make sense to talk to a few lenders before submitting any applications so you’ll have a better idea of whether you’re wasting your time. Also, consider talking with a housing counselor approved by the Department of Housing and Urban Development. (You’ll find a link at http://www.hud.gov.) These counselors keep up with various refinancing programs and may be able to guide you to one that works in your situation.
Dear Liz: You recently suggested people consider putting their charitable donations on automatic. While I have automatic deductions for savings because I do not want to constantly remind myself to do it, I want to remind myself of all other expenses. For me, prudent money management requires attention to all expenses. Your thoughts?
Answer: Many people find that automatic payments make their lives easier. They’re able to meet their obligations (and avoid late fees, in the case of bill payments) while minimizing time spent in repetitive tasks each month.
But none of your expenses should be “out of sight, out of mind.” Automatic payments don’t eliminate the need to carefully review your credit card and bank transactions each month. Reviewing your bills periodically, and making adjustments as necessary, is an important part of responsible money management regardless of whether you take advantage of automatic transfers.
Dear Liz: I’m in my late 60s and plan to retire in about two years. I have a pension that will pay close to my current take-home income. I also have about $500,000 in annuities and IRAs. These plus Social Security make retirement look good. But right now finances are tight. Should I continue to put $1,300 a month into my retirement plan or use that money for expenses and travel now — while we’re still relatively young?
Answer: You appear to be in the fortunate position of being able to try a “practice retirement.”
The term was created by mutual fund company T. Rowe Price after it discovered that people who have saved substantial amounts for retirement by age 60 may not have to save much more to have a comfortable retirement. Just putting off the day when they take Social Security and tap their retirement funds may be enough. That’s because Social Security benefits grow about 7% to 8% a year, plus inflation adjustments, for each year you delay starting your checks. Not starting retirement plan distributions also allows your nest egg to grow, and the delay shortens the length of retirement you’ll need to cover.
T. Rowe Price found that people who have saved four to eight times their annual income by their early 60s may be able to crank back on their retirement contributions. Instead, they could use the money to “practice retirement” by taking some trips and doing some of the other things they had planned for golden years while continuing to work.
The company recommends practice retirees continue to contribute enough to employer retirement plans to get any available match (it’s free money, after all), while delaying the start of Social Security to age 70 if possible.
T. Rowe Price researchers assumed that its practice retirees would live only on their savings and Social Security. The fact that you have such a generous pension means you may not need as much saved as they recommend. In any case, if this idea appeals to you, run it past a fee-only financial planner who can review your situation and ensure the plan is viable for you.
Dear Liz: I’m beginning to realize that I have no idea how to budget. I make plenty of money but always seem to come up short. I’m trying to find the best person to help me make a budget. Do I talk to a CPA or a financial counselor? If so, how do I find the right person?
Answer: Budgeting has three basic steps: figuring out where your money is going now, deciding where you want it to go in the future, and monitoring your spending to make sure you stay on track with those goals.
Just because something is simple doesn’t mean it’s easy, however. People often fail to account for predictable but irregular expenses, such as car repairs. Once those crop up, the budget is thrown into disarray and people often give up on the spending plan.
Budgeting also can be difficult if you’re overspending on your overhead. If too much of your income is going for basic expenses, you may not have enough left over to live a comfortable life, pay off debt and save for the future, regardless of how many other expenses you trim. People who spend too much on shelter (mortgage or rent) and transportation (car payments and attendant costs) in particular often find they can’t create a balanced budget. Your “must haves” — shelter, transportation, food, utilities, insurance and minimum loan payments — ideally should be 50% or less of your after-tax income to create a workable budget.
Some people find that online solutions, such as the Mint.com financial tracking site, are enough to get them started with a budget. Other people need hands-on help. If your tax pro or financial advisor has experience helping people create and monitor budgets, that’s certainly one place to turn. Otherwise, check to see whether your local community college offers basic money management courses. Another option is a nonprofit agency affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org. Many of these agencies offer classes or hands-on help creating budgets.
Dear Liz: I’m in my early 30s and never carry cash. I charge everything on my debit card. This seems to be a topic of discussion in my office. My co-worker keeps getting his identity stolen and says that using debit cards to pay for everything wreaks havoc on your finances. He says I should use my credit card instead. I just finished paying off all the expenses that creep up when buying a house and really don’t want to start using credit cards again. I don’t think I’d be as good as keeping track of where my money goes when it’s not coming automatically out of my account. But I don’t want to end up losing it all now that identity theft is running rampant. What’s the best solution here?
Answer: What you like most about your debit card — that the charges come directly out of your checking account — is also its greatest flaw. A bad guy who gets access to your account can drain it, and you’re left fighting to get your money back.
Contrast that with fraud on a credit card: You’re not required to pay the disputed charges while the credit card issuer investigates.
That doesn’t mean you should never use a debit card, but you should avoid using it in higher-risk situations. Using a debit card for online purchases isn’t smart, because your computer could be compromised with malware and because merchants often store purchase information in less-than-secure databases.
You also shouldn’t hand your debit card to anyone who could take it out of your sight, such as a waiter at a restaurant, since that person can swipe it through a device called a skimmer to steal the card’s relevant information before handing it back to you. Gas stations and outdoor ATMs can be risky as well, since criminals can more easily install devices to swipe your information than at more protected, better supervised locations.
Even at trusted merchants, though, things can go wrong. Tampered debit card terminals at Michaels craft stores allowed thieves to access customers’ bank accounts.
Using a credit card clearly has advantages, and doesn’t have to be an invitation to debt. Most issuers allow you to set up text and email alerts that let you know when balances exceed limits you set. Apps on your smartphone can help you keep track of charges as well.
Vigilance is the key to limiting the damage caused by identity theft. You should review transactions regularly on all your credit and bank accounts, regardless of what method you choose to pay.
Finally, keep in mind that debit cards do nothing to improve your credit scores, since debit cards are not attached to credit accounts. Light but regular use of credit cards can help achieve good scores, which in turn will save you money on mortgages, auto loans, utility deposits and, in most states, insurance premiums. You don’t need to carry a balance to have good scores, so exercising a little discipline in tracking your balances and paying them in full each month can save you money.
Dear Liz: The writer who wrote in about her mother’s medical bills should check to see if she took those bills as a schedule A deduction on her 2010 and 2011 federal tax returns. She still has time to amend those returns, if that is useful.
Answer: That’s a terrific suggestion. The writer’s mother may qualify as her dependent if the writer covered more than half of the mother’s necessary living expenses, including in-home care, and the mother’s situation met certain other requirements, such as not having gross income in excess of IRS limits. Gross income does not include nontaxable Social Security checks or other tax-exempt income. The limits for gross income were $3,650 in 2010, $3,700 in 2011, $3,800 in 2012 and is $3,900 for 2013, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America.
Even if the mother didn’t qualify as a dependent, a deduction may still be possible, Luscombe said. As long as the writer provided more than one-half of the mother’s support, the writer might still be able to claim a deduction for medical expenses if all of the writer’s medical expenses, including those paid for the mother, exceed 7.5% of the writer’s adjusted gross income in 2010 and 2011. (The medical expense deduction threshold increased from 7.5% to 10% in 2013 for those under age 65.)
Dear Liz: I am almost finished with my associate degree at my local community college and will be starting my undergraduate degree in January. I have been lucky enough to accrue no college debt so far but know I will when I start my bachelor’s degree. I am considering taking out a home equity loan to cover this cost, borrowing around $10,000. I got a great deal on my house and it continues to grow in value even with this economy. Your thoughts on this?
Answer: Home equity loans are actually more expensive than most federal student loans. Home equity loan rates for people with good credit range from 7% to 9% in many areas, while the current rate for direct, unsubsidized federal student loans is 5.41%. Furthermore, home equity loans aren’t as flexible and have fewer consumer protections than federal student loans.
You may initially get a lower rate on a home equity line of credit, but these variable-rate loans easily could get more expensive as interest rates rise.
Not only do federal student loans offer fixed rates, but they provide many affordable repayment options plus deferrals or forbearance if you should lose your job or run into other economic setbacks. You don’t have to demonstrate financial need to get federal student loans, although people with such needs can get subsidized loans with a lower interest rate. Your college’s financial aid office can help you apply.