Ask Liz Weston

Get smart with your money

Q&A

Q&A: Credit card useage

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Dear Liz: I recently refinanced my home and one of the perks was a 0% interest credit card. The problem is that I have two credit cards and I am happy with them, but I am afraid that having a third will adversely affect my credit score. I have no plans to borrow money in the near future but I can’t shake the feeling that it is a detriment to have the card. I haven’t activated the new card and I never carry a balance on either of the older cards I use. What do you advise?

Answer: The new card affects your credit reports and scores whether or not you activate it. Chances are good, though, that the overall effect will be positive.

Yes, your scores may have been dinged a few points when the new card was issued, but over time responsibly handling multiple credit cards will help, not hurt, your numbers.

Failing to use the card, on the other hand, could cause the issuer to close it, and that could negatively affect your scores.

Just do what you do with your other cards: Charge lightly (no more than about 30% of the card’s limit) and pay the bill on time and in full. There’s no credit score advantage to carrying debt.

Q&A: State tax breaks for 529 plans

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Dear Liz: You recently answered a question from grandparents who were contributing $20,000 to their grandson’s college education. You correctly told them they did not qualify fdownloador federal education tax credits or deductions because he was not a dependent. You might let grandparents know, however, that they may get a state tax break for contributing to a 529 college savings plan.

Answer: Most states that have state income taxes offer some sort of a tax break for 529 college savings plan contributions. (The exceptions are California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey and North Carolina, according to SavingForCollege.com. Tennessee has a tax on interest and dividends but no 529 tax break.) In some states, even short-term contributions qualify for a deduction, so grandparents could contribute money that’s quickly withdrawn to pay qualified higher education expenses and still get the break. SavingForCollege has details on each state’s tax benefits.

Q&A: Thrift Savings Plan

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Dear Liz: I am a federal government retiree with a very small retirement account in the Thrift Savings Plan. Where can I invest my small savings so it can safely grow? The balance has not changed for over six months now. If I keep it in the Thrift Savings Plan, what fund is the safest?

Answer: “Safe growth” is an oxymoron. If your balance isn’t changing, then you’re probably in the safest option — which means you won’t see much if any growth in the future, either.

You probably chose TSP’s G Fund, which invests in Treasury securities. You won’t lose money, but you probably won’t earn enough to offset inflation. If you want your money to grow, you need to have at least some of your retirement account in stocks.

Fortunately, the plan offers several “L” or lifestyle funds geared to when you expect to begin withdrawals. L funds offer professional management and a mix of investments that grow more conservative as that date approaches. Retirees who are tapping their accounts typically invest in the L Income fund, which has about 20% of its balance in stocks. If you are five years or more away from using the funds, the next most conservative lifestyle option is L 2020, which has half of its total invested in stocks.

Q&A: Paying for credit repair

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Dear Liz: I’m seeking help in reviewing my credit report and how to fix any issues. I am not financially distressed, but have FICO scores in the 675 range. Could you recommend someone I can hire to assist as I need to refinance a house I bought for cash?

Answer: There’s so much fraud in the credit repair industry that you’re likely better off doing it yourself rather than exposing yourself to rip-offs.

Credit repair companies aren’t supposed to take money upfront or promise things they can’t deliver, but many do.

One of the scammers’ most common ploys is to flood the credit bureau with disputes and to take credit for any negative information that temporarily disappears. By the time the negative information pops back up on the file, the scam artists have disappeared with your money.

Another approach they recommend is starting over with a “clean” slate, sometimes using borrowed or stolen identification numbers. That’s fraud, and even if it works, you’ll often find yourself worse off with no credit history than with a flawed history.

The Federal Trade Commission has some helpful advice on do-it-yourself credit repair.

You’ll need to first get copies of your credit reports from each of the three credit bureaus, which you can do once a year for free at www.annualcreditreport.com. Dispute any inaccurate information, such as collection accounts that aren’t yours or late payments that you made on time.

Follow up with any creditors that persist in reporting bogus information.

One relatively fast way to improve your scores is to pay down any credit card debt to 10% or less of the accounts’ credit limits. Don’t close any accounts while trying to improve your scores, since that won’t help your score and could hurt.

Opening new accounts can ding your scores as well, but it can be worth it to add another credit card to the mix if you only have one or two.

Q&A: Shopping for insurance

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Dear Liz: I pay about $670 per month for insurance for four cars, our home and a $1-million umbrella policy. We’ve been with the same well-known national insurance company for over 30 years. About five years ago, I checked with another well-known national insurance company about the estimated total premium, which was not significantly different from what I paid.
We filed a claim for a very minor accident about two years ago. My 21-year-old son, 17-year-old daughter, my wife and I drive these cars.

Should I have my coverage reviewed by another company?

Answer: Of course you should. And you should check with more than one.

Premiums can differ dramatically, particularly for younger drivers. A recent Consumer Reports investigation found that although some companies doubled or even tripled auto insurance rates for a teen driver, others barely budged.

Premiums also can change over time as insurers try to build or protect their profits. Insurers will lower premiums to attract more business and raise them to cut losses.

Price isn’t the only thing you should consider. Customer service is important too, so review your state’s complaint survey to see which insurers tend to draw customer ire.

Shopping for insurance isn’t fun, but saving hundreds or even thousands of dollars is. You should make the effort at least every few years.

Q&A: Best way to pay for college

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Dear Liz: We have two children in college, both entering their junior years. We have two more in high school. The two currently in college need additional financial assistance, as they’ve tapped out their federal student loans.

We are middle class, grossing about $125,000 a year, so we don’t qualify for much financial aid. We’re considering a cash-out refinancing of our home, but we feel as though we can do it only once, since each time we refinance it will cost us some fees, plus interest rates are likely to start edging up soon.

However, if we take out a big chunk of cash that could last us for the next two years for the first two children, and possibly some for the other two, we’re concerned that having that much cash sitting in the bank will reduce the amount of financial aid we receive, which would be counterproductive.

Is there a way to earmark the extra cash clearly for education expenses so that it doesn’t count negatively on our Free Application for Federal Student Aid (FAFSA)? Or do we just need to take this year’s cash out now, and refinance again each year (which seems crazy)?

As an aside, now that we have a little experience with this college thing, we will guide the two younger ones to community college or living at home while attending a less expensive public college, or something along those lines.

The first two just sort of went — without a lot of financial forethought.

Answer: The chunk of cash from such a refinance would be counted as a parental asset, provided the savings account is in your names and not those of your child.

So a maximum of 5.64% of the total would be included in any financial aid calculations. That’s not a big bite, but if you’re not getting much financial aid it could offset or erase the small amount you’re getting.

The bigger danger is that you’re taking on debt for something that won’t increase your own wealth or earning power. If you should suffer a severe-enough financial setback, such as a layoff, you could wind up losing your home.

In general, parents shouldn’t borrow more for their children’s college educations than they can afford to pay back before retirement — or within 10 years, whichever is less.

This rule of thumb assumes that you’re already saving adequately for retirement and will continue to do so while paying back the debt. If that’s not the case, you shouldn’t borrow at all.

If you’re going to borrow and can pay the money back quickly, a home equity line of credit may be a better option than a refinance. Interest rates on lines of credit aren’t fixed, but the costs are significantly less and you can withdraw money as needed.

Yet another option: parent PLUS loans, which currently offer a fixed rate of 6.84%. Approach these loans cautiously. It’s easy to borrow too much, since the program doesn’t consider your ability to repay. And like federal student loans, this debt typically can’t be erased in Bankruptcy Court.