Ask Liz Weston

Get smart with your money

Liz Weston

Insurance scores aren’t the same as credit scores

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Dear Liz: I have very high credit scores, but recently got a notice from my homeowners insurance company saying that my rates were rising because there had been a number of inquiries on my credit report. The inquiries were as a result of my looking for the best deal on a mortgage refinance, and we applied for a retail card to save the 5% on our purchases. Do many insurers use FICO scores as a rate determiner?

Answer: Insurance companies don’t use FICO scores to set rates, but they do use somewhat similar formulas that incorporate credit report information in a process called “insurance scoring” to set premiums. Insurers, and some independent researchers, have found a strong correlation between negative credit and a person’s likelihood of filing claims. (California and Massachusetts are among the few states that prohibit the practice.)

The formulas insurers use sometimes punish behavior that has only a minor effect on your FICO scores. Since insurers use different insurance scoring formulas, however, you may well find a better deal by shopping around.

Which cars retain their value the best?

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If you buy cars and then drive them until the wheels practically fall off–as I usually do–then you don’t need to worry much about “retained value.” You can take pride in squeezing all the value out of your vehicle before it’s hauled off to the dump. If you plan to trade in a car at some point, though, it can make sense to pay attention to how well the value of that make and model holds up over time.

Edmunds.com just released its 2012 Best Retained Value Awards, to single out the cars that depreciate less over time. Honda and Acura are the top brands, while Ford had the most model-level awards. You can see the complete list, complete with runners-up, here.

Most investors under 50 plan to work in retirement

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A new T. Rowe Price survey shows seven out of 10 investors aged 21 to 50 plan to work at least part time during their retirement years, and most (75%) will do so because they want to stay active. Only 23% expect to work out of necessity, because they won’t have saved enough.

T. Rowe Price has been surveying the investment practices of Generation X (defined as people aged 35 to 50) and Generation Y (ages 21 to 34).  Harris Interactive conducted the poll in December, surveying 860 adults aged 21-50 who have at least one investment account.

Gens X and Y are following in the path of the Baby Boomers, a majority of whom have told pollsters over the years that they plan to continue to work. The percentages who expect to do so by choice vary with economic conditions, but the polls show a new vision of an active retirement has emerged, said Christine Fahlund, CFP®, senior financial planner with T. Rowe Price.

Continuing to work into your 60s, if you can do so, can have hugely positive effects on your finances as well, even if you cut back on saving for retirement.

From T. Rowe Price’s press release:

“We believe that beginning to incorporate more leisure in your 60s, when you’re still likely to be in good health can be a fun way to make the transition from work to retirement easier,” she added.  “By working a little longer and playing, investors can maintain earned income to fund their activities, hold off on tapping their nest eggs earmarked for retirement, and defer taking Social Security payments.  Delaying Social Security, in particular, positions people to have potentially considerably higher guaranteed payments – adjusted annually for inflation – for the rest of their lives.”

If you want to read more about how you can work longer and have fun, too, read “Retire without quitting your job.”

Son-in-law badgers elderly couple for money

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Dear Liz: I am 84, and my husband is 88. We have two daughters, the elder of whom is married to a very controlling man. In the past, we lent them money and were paid back. But starting in 2009 his small business began to do poorly. They borrowed nearly $100,000 from us. Then in 2010, he begged us to get a home equity loan on our home, which was paid for.

They now owe us $300,000. We make the home equity payments of $800 a month because they are not able to pay that amount. He said he planned to sell a parcel of land to pay us back. Now he wants to borrow from my individual retirement account. He is telling our daughter to go after us and what to do. So I told my daughter and her husband, no more!

We are so sad. We didn’t expect to have money problems at this age. We wanted our estate to be divided equally between our daughters. But we’re wondering if we should make a new living trust to reflect the debt owed to us. Should we consult a lawyer?

Answer: You absolutely need a lawyer. Not just to draw up a new trust but to stand between you and the financial predator you call a son-in-law.

Badgering people in their 80s for money could be considered a form of elder abuse, and the amount he’s squeezed out of you is horrific. If either of you died or became incapacitated, he could swoop in to clean you out completely.

An elder law attorney can help you protect your finances and figure out what to do about this debt. It certainly would be understandable if you wanted to deduct the money you’re owed from your elder daughter’s inheritance, but you can expect this bully to cause misery regardless of what you decide.

Not that you needed more to worry about, but what you’re calling a home equity loan may well be a home equity line of credit. Although home equity loans come with fixed rates, lines of credit do not — which means the payments that are difficult for you to make now will be more expensive when interest rates rise. In any case, you might want to ask the attorney about the feasibility of a reverse mortgage, which could allow you to pay off the loan without having to make further payments.

You can get referrals to the National Academy of Elder Law Attorneys at http://www.naela.org. If your other daughter is trustworthy, please enlist her help in looking for and speaking with an attorney. She needs to know what’s going on so she can help in your efforts to protect yourselves from this man.

Hoard cash if unemployment looms

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Dear Liz: My husband and I have been aggressively paying down our debts and plan to be debt free by this time next year. We’re devoting about 20% of our income to debt repayment and saving about 6% (not much, I know, but we’re young and just starting out). We were building an emergency fund and currently have enough money in it to cover only a few months of our expenses, since we had to dip into it recently for unexpected car repairs.

My husband just lost his job. I make enough that we would just barely be able to cover all of our minimum payments and our bills, but my employer lost its biggest client and I may be out of a job soon too. Should we continue to make the same debt payments, reduce the amount or make only minimum payments until we are both securely employed?

Answer: As soon as you know that unemployment is a possibility, you should begin to conserve cash. That means making only the minimum payments on your debt and cutting your expenses to the bone. Although the job picture is improving, the average duration of unemployment is still close to 40 weeks. That’s a long time to go without a paycheck.

When you’re both employed again, you should reconsider your financial priorities. Getting out of debt is a great goal, but not all debt is created equal. Paying off credit cards should typically be a high priority, but you needn’t be in as much of a rush to pay off federal student loans, car loans or mortgages, because the rates on these debts is typically fixed and relatively low. Instead, make sure you’re taking advantage of retirement savings opportunities and building up a cash cushion to tide you through the next financial setback.

News you can use right now

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Here’s a round-up of good recent stories tied to Tax Day (deadline’s tomorrow) and one of my favorite topics, credit scores.

Can’t pay? Amy Feldman’s article “What if you can’t pay your taxes?” for Reuters walks you through what to do if you’re facing a big bill, rather than a refund. Bottom line: don’t ignore the problem.

Tax liens and credit scores. The IRS has many ways to make your life miserable if you don’t pay your taxes. One weapon used by the IRS and other tax authorities is the tax lien, which can trash your credit scores and which is one of the few negative items that can show up on your credit report indefinitely if you fail to pay. Learn more from Tom Quinn’s column “Not paying your taxes can hurt your credit score” on Credit.com.

Plan to buy a car with your refund? If you’re one of the many getting money back from Uncle Sam and considering using it to buy another car, beware. Dealers know you’re coming, and you don’t want to have a big red target on your back. “Dealers are well aware that buyers may suddenly have an influx of cash on hand this time of year, so it’s not uncommon to see promotions and offers tied to tax season,” says Carroll Lachnit, Consumer Advice Editor at Edmunds.com. “And while there are good deals to be had on new cars, we strongly encourage consumers to take advantage of every research tool at their disposal before they plunk down their refunds as down payments.” For more, read Edmunds.com’s “Do your research before spending tax refund dollars at the car dealership.”

Good credit scores and a fat down payment may not be enough. You’ve heard that it’s harder to get mortgage these days, but you might be surprised at how much harder it is. Real estate columnist Kenneth Harney details the average FICO scores, down payments and debt-to-income ratios of those who did and didn’t get a mortgage in February. Most shocking: the group that got turned down had numbers that would have made them great candidates for loans just a few years ago.

Unexpected ways to better your numbers. Speaking of credit scores, Daniel Bortz wrote “6 surprising ways to boost your credit score” for U.S. News. I’m quoted, along with Beverly Herzog of Credit.com, Bill Hardekopf of LowCards.com and Anthony Sprauve of FICO.