Ask Liz Weston

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Liz Weston

When Bankruptcy Is the Best Option

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bankruptcyBankruptcy isn’t the end of the world. It may even be good for you.

Bankruptcy stops collection calls, lawsuits and wage garnishments. It erases debt. And despite what you’ve heard, bankruptcy may help your credit scores.

Credit bureaus and scoring experts often say bankruptcy is the single worst thing you can do to your scores. Foreclosures, repossessions, charge-offs, collections — nothing else can drive your scores down as fast and far as a bankruptcy.

In my latest for NerdWallet, a look at when bankruptcy is the most helpful option.

Tuesday’s need-to-know money news

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Image9Today’s top story: The best way to invest $5,000. Also in the news: How a credit card helps with building credit, the life-and-death financial decision you don’t want to think about, and apps to help lazy people save money.

The Best Ways to Invest $5,000
Putting your money to work.

Building Credit? How a Credit Card ‘Gets You There Faster’
One way to build credit.

The Life-and-Death Financial Decision You Don’t Want to Think About
Life insurance is essential.

These Apps Are the Perfect Money Saving Tool For Lazy People
No more excuses.

Q&A: The ins and outs of credit scores

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Dear Liz: I’ve been using a free credit site to learn more about credit reports and credit scores. Recently I looked around and found reviews about how “horribly inaccurate” these free scores are. Where can I go to find my real FICO credit scores? I need the ones that matter, the ones that lenders use.

Answer: Some free scores aren’t used by any lenders. But many sites these days give out VantageScores, a FICO rival that’s being used in a growing number of credit decisions. So VantageScores are “real” scores, just not the most commonly used scores.

Here’s the thing, though: You generally can’t predict which scores a lender will use. Not only are there different name brands, but FICO offers versions customized for certain types of lending. The scores typically used by credit card issuers are different from the ones used by auto lenders, for example. These industry-specific FICO scores are on a 250-to-900 scale, rather than the 300-to-850 scale used by other FICO scores.

There are also different generations of each type of score, much like the different operating systems for your computer. Some lenders quickly upgrade to the latest version, just as some computer users upgraded to Windows 10 when it came out. Others use older versions of the scores, just as users may cling to Vista or XP. (For you Mac users, that would be something like hanging on to Mountain Lion or Snow Leopard instead of updating to El Capitan.)

Mortgage lenders, in particular, use relatively old versions of FICO. That’s because the agencies that buy most home loans, Fannie Mae and Freddie Mac, haven’t updated their requirements so that lenders can use newer versions.

Some credit card companies offer their customers free FICO scores, typically from one bureau. You can get a glimpse of the array of scores lenders might use by buying the most commonly used FICO, the FICO 8, for about $20 each from MyFico.com. Along with each FICO 8 you buy (you can buy three, one from each of the three major credit bureaus), you’ll get additional versions used for auto, credit card and mortgage lending.

If you’re going to be in the market for a major loan, such as a car loan or a mortgage, it makes sense to buy your FICOs so you can get a better idea of how lenders might view you. If you’re just interested in tracking your scores generally, though, the free versions can be perfectly adequate.

Q&A: More on Saving for Retirement

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Dear Liz: Here is another take on your response to the reader who questioned whether retirement calculators were a hoax that promoted excessive savings rates. You mentioned that current retirees had enough pensions, Social Security and savings to replace nearly 100% of their working income, while younger people likely would have only enough to replace 50%. You closed your advice by asking if the letter writer would be comfortable living on 50% of that person’s income. For a non-saver, that is a fair question. But for a saver, it isn’t an accurate comparison.

If one is presently saving, say, 10%, then that person is already living on 90% of current income. If saving 15%, then that person is already living on 85%. When you analyze the expected impact of having the compounded savings at retirement, the true “step down” in income is really the difference between the current 90% or 85% figure and what you will have with Social Security, part-time job income, pension (if you work for the government) and savings. The gap becomes much more manageable, because you already are used to living on 10% to 15% less than your current income.

The point? Savers are already accustomed to living on less — in some cases, significantly less — than current income. Between the already lowered current disposable income and the benefit from the accumulated savings and investments, the “step down” gap is made manageable. Saving helps on both ends.

Answer: That’s an excellent point. Taxes are another factor to consider. Working people pay nearly 8% of their wages in Social Security and Medicare taxes, an expense that disappears when work ends. Income tax brackets often drop in retirement as well.

Still, there are good reasons to shoot for a higher replacement rate than you think you may need. Investment markets don’t always cooperate and give you the returns you expect. Inflation can kick up and erode the value of what you’ve saved. Careers can be disrupted, leading to lower wages or an earlier retirement than you planned. People who have “oversaved” will be in a better position to deal with these setbacks than those who save only enough to scrape by.

Friday’s need-to-know money news

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downloadToday’s top story: Why more banks are turning to biometrics for security. Also in the news: How natural disasters can hurt your finances, how to get your late credit card payment waived, and 10 things that will cost you less this summer.

More Banks Turn to Biometrics to Keep an Eye on Security
Your eyes could hold the literal key to your account.

5 Surprising Ways Natural Disasters Can Hurt Your Finances
Incidentals alone can add up quickly.

How to get your late credit card payment waived
It can’t hurt to ask.

10 Things That Will Be Cheaper During the Summer of 2016
Where you can expect to save some cash.