Q&A: Multiple payments may help credit scores

Dear Liz: You recently wrote that using more than a small percentage of your credit cards’ available limit can hurt your credit scores, even if you pay your balances in full. I pay my credit cards in full each month and I also make several payments (via my bank’s online payment service) during the month. Do these multiple payments hurt or help my credit score?

Answer: They probably help. The balance that matters for credit scoring purposes is the balance that’s reported to the credit bureaus, and that’s typically what you owe on your statement closing date. Making multiple payments before the statement closing date should lower that balance. Just remember to make a payment between the statement closing date and before the due date to avoid late fees.

Q&A: When an online shopping money-saving scheme is tax evasion

Dear Liz: My father lives in Washington state. He often purchases higher-priced items online, has them shipped to relatives living in Oregon and picks them up later. That way he doesn’t have to pay sales tax. Is this a form of tax evasion? Does he need to pay a “use tax”? Could he (and the Oregon relatives) possibly be in any kind of legal danger? He claims it’s perfectly fine to do this because Washingtonians “do it all the time” by driving down to Oregon to do their shopping.

Answer: Yes, people do this “all the time” but it’s still a form of tax evasion.

Washington and other states with sales taxes typically have laws requiring people to pay a use tax when they bring home goods purchased in another state that either doesn’t charge sales tax or charges less. People may also owe use taxes when they purchase something from an individual who doesn’t collect sales tax. An example might be furniture purchased from a Craigslist ad.

But these laws can be difficult to enforce. While businesses can be subject to sales and use tax audits, individual taxpayers are unlikely to face the same scrutiny.

Q&A: Divorce complicates retirement benefits

Dear Liz: I was told by Social Security that because I remarried at 60, I could still collect half of my ex’s benefits once he died. He has just died, and half of his benefit is greater than my own retirement benefit. My current husband has not started benefits. If I collect half of my ex’s benefit but want to later switch to collecting benefits on my current husband’s record (once he starts to collect) or to survivor benefits should he die before I do, can I do that?

Answer: The short answer is yes, although you’ve confused divorced spousal benefits with divorced survivor benefits.

While your ex was alive, you might have been eligible for a divorced spousal benefit if you had remained unmarried. That benefit would have been up to 50% of your ex’s primary insurance amount (the amount he would receive at his full retirement age).

The rules changed once your ex died. As a divorced survivor who remarried after age 60, you are entitled to up to 100% of what your ex was receiving. The survivor benefit will be reduced if you haven’t yet reached your full retirement age (which is currently between age 66 and 67).

Survivor benefits also offer more flexibility to switch later than other types of benefits. If you choose to begin receiving a surviving divorced spouse’s benefit now, you can switch to your own benefit at any point through age 70, if your benefit is higher, says William Meyer, founder of the Social Security Solutions claiming strategies site. You also can switch to receiving spousal benefits from your current spouse’s record once he starts collecting, if that benefit is greater than what you’re receiving from your former spouse’s record.

Figuring out the right way to claim can be tricky, so consider consulting an advisor or using claiming strategy software to determine what’s best in your situation.

Q&A: Here are credit score quirks to know about before you apply for a loan

Dear Liz: I have been reading your Money Talk column for years and it seems that about a third of the questions pertain to credit scores. Why are people fixated on their FICO result?

I was unaware of my score until recently, when my bank accounts started showing my score when I am online. I am 65 and have had credit cards since college over 45 years ago. I pay my bill in full each month. I have never been late with a mortgage payment or any other bill. When I have gone to buy real property or an automobile, I have never been turned down.

In other words, I have used credit successfully for decades by behaving responsibly without knowing my score. Are people interested in their FICO mostly to be used as a status symbol or way to brag?

Answer: Some are, but most understand that credit scores are hugely influential in our financial lives. Scores help determine whether we can get credit and the interest rates we pay, but also whether we’re able to rent an apartment, get affordable auto and homeowners insurance (in most states) and qualify for a cellphone carrier’s best deals.

Credit scores do reward responsible behavior, but have some quirks that are worth knowing about. Using more than a small percentage of your credit cards’ available limit, for example, can hurt your scores, even if you pay your balances in full. And closing credit accounts might seem like the responsible way to deal with a card you no longer use, but that can hurt your scores as well.

Also, you should know that you don’t have a single credit score; you have many, and they will differ based on which credit bureau and credit scoring formula was used.

FICO is the leading credit scoring formula, but there are many generations of the FICO score currently in use, from the older versions that have long been used in mortgage lending to the most commonly used version (FICO 8), to the most recent version (FICO 10). Auto lenders and credit card issuers use versions of the FICO that are adapted for their industries.

FICO’s main rival is VantageScore, which also has different generations in use.

On top of that, credit scores change constantly, based on the ever-changing information in your credit reports.

Your bank is making it easy for you to monitor one of your scores, which can give you a general idea of how lenders might view you as a borrower. Just don’t be surprised if the score your bank shows you doesn’t match what a lender uses the next time you buy a car or refinance your mortgage.

Q&A: ‘Assets under management’ advisors

Dear Liz: We’ve been using a fee-only financial advisor for 25 years. We’d discuss what we needed, she would tell us how many hours it would take, then she invoiced us at an hourly fee.

She recently joined a company that charges 1% of investment portfolios to provide financial advice. Is this still considered fee-only financial planning? If so, how do we find a firm that charges an hourly rate? We don’t want to spend thousands of dollars for someone to just tweak the detailed roadmap that’s already been created.

Answer: So-called “assets under management,” or AUM, fees are indeed considered fee-only planning, as long as the advisor only accepts fees paid by the clients and does not receive commissions or other compensation for the investments they recommend. AUM fees are a common compensation method and 1% is a fairly standard fee. If the advisor is doing significant, ongoing planning and investment management for you, the fee may be worthwhile. If not, there are other compensation methods that may be a better fit. Garrett Planning Network represents fee-only advisors willing to charge by the hour, while XY Planning Network and the Alliance of Comprehensive Planners offer fee-only advisors who charge retainer fees.

Q&A: Getting your delayed refund

Dear Liz: Here’s another option for the person whose tax return got amended and who was still waiting for a refund. Contact your member of Congress or U.S. senator. They have constituent service staff who might be able to prod the IRS. This worked for our family when we learned my late father was owed two refunds from a few years before his death. The abysmal IRS phone system kept hanging up on me. My U.S. senator happens to sit on an IRS oversight committee and his staff is the only reason we finally received the refund checks after 11 months of wrangling.

Answer: Thanks for sharing your experience. Constituent service staffs can be helpful in resolving serious problems with various government agencies, although many people currently expecting refunds will simply have to wait to get their money. That’s extremely unfortunate, since refunds are a financial lifeline for many struggling households.

As mentioned in the previous column, the IRS is still slogging through a massive backlog created by the pandemic and years of inadequate funding. Getting through on the phone remains difficult, so people’s first stop should be the IRS.gov website, which offers a number of self-help resources for routine tasks, including the “Where’s My Refund?” tool, the “Where’s My Amended Return?” status tracker and a wealth of articles, publications and calculators.

The next stop might be the Taxpayer Advocate Service, which allows taxpayers to file a request for assistance if a missing refund is causing financial difficulties. The service is also warning about significant delays in helping taxpayers because of the IRS backlog.

Q&A: Why you need a credit score

Dear Liz: I use a credit card for most of my shopping and pay the balance in full every month. The card was opened years ago as a business card, but the business has since been closed. My credit scores are high but my card isn’t listed on my credit reports. I believe that is because it’s a business card. Should this be of concern to me? My wife and I own our home outright and have no other debt.

Answer: Your scores should be fine as long as you have (and occasionally use) other credit cards that show up on your reports at the three major credit bureaus.

If you didn’t have other active credit accounts, eventually your credit reports would no longer generate credit scores. That could make it much more difficult and expensive to borrow money, rent an apartment, get a cellphone and, in most states, insure a home or a car.

Q&A: Mom has dementia and credit cards. How does her family cancel the accounts?

Dear Liz: My mother has two credit cards that have had no activity for a year and a half due to being in an assisted living facility. She is living with dementia and no longer able to make any decisions (personal or financial) on her own. Should I or am I even able to cancel these cards or do I have to wait until she passes and send in a death certificate to the bank?

Answer: Theoretically you could close the accounts for her if you have a legal document known as a financial power of attorney. These documents are designed to help you take over the finances of someone who is incapacitated. Unfortunately, banks and credit card issuers sometimes refuse to honor powers of attorney despite legal requirements that they do so. You might need to hire an attorney to force them to accept your authority. You can get referrals to experienced attorneys from the National Academy of Elder Law Attorneys and the American Bar Assn.

If you don’t have this document and your mother is no longer of sound mind, you probably would have to go to court to become her conservator to make financial decisions for her. That can be an expensive process.

But there might be a simple solution. Some credit cards have an “off” switch that prevents anyone from making charges on the account. If the card has this feature and you can access the account online, you may be able to effectively disable the account even if you can’t formally close it.

Q&A: Offsetting home sale taxes

Dear Liz: We recently sold a house and have taxes to pay on the proceeds. I’m wondering if we can take some of the proceeds and put them into 401(k) accounts, and pay taxes on them later?

Answer: You can’t do this directly, since 401(k) contributions are made through payroll deductions. If you haven’t already maxed out your retirement contributions, however, you could increase your contribution rate to offset some of the taxable income you created when you sold the house. Some employers allow you to contribute 100% of your pay, up to the IRS contribution limits. In 2022, the limit is $20,500 for people under 50 and $27,000 for people 50 and older.

You also could contribute $6,000 to an IRA (or $7,000 if you’re 50 and older), but your ability to deduct the contribution depends on your income if you’re covered by a workplace plan such as a 401(k). If you’re married filing jointly and have a workplace plan, your ability to deduct an IRA contribution phases out with modified adjusted gross income of $109,000 to $129,000.

Remember that you can exempt up to $250,000 of home sale profits (or $500,000 for a couple) if you owned and lived in the property as your primary residence for at least two of the last five years. You also may be able to reduce the taxable gain if you kept good records of qualifying home improvements. For more information, see IRS Publication 523, Selling Your Home.