Ask Liz Weston

Get smart with your money

Credit & Debt

Q&A: Paying credit card debt after death

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Dear Liz: I am 80 and I have a substantial amount of credit card debt, approximately $30,000. What becomes of this credit card debt in the event of my death? Will it become a future liability for my two sons or will this eventually become a bad debt for the credit card company? I would hate to see this become a financial burden for my sons.

Answer: Any credit card balances you leave behind will be a liability for your estate, not for your sons — although the debt could reduce any inheritance they get. Creditors have to be paid before any remaining assets are distributed. If you don’t have enough assets to cover the bill, creditors will get a proportionate amount of whatever’s left after paying your final expenses. Any remaining debt will be a write-off for the creditor, and your sons typically wouldn’t get anything.

You didn’t ask for help dealing with this debt, but you shouldn’t assume you can just tread water until you die and leave it for someone else to sort out. Your life expectancy at age 80 is another eight years if you’re male and nearly 10 years if you’re female, and you could live considerably longer. If overspending or medical bills led to the debt, you could accrue a lot more before you’re done. If you rack up so much debt that you can’t make the minimum payments, your interest rates could skyrocket and you may have to fend off collection calls.

You should at least discuss your options with an experienced bankruptcy attorney and with a nonprofit credit counselor.

Q&A: What to consider before paying off a vehicle loan

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Dear Liz: In January, I used financing to buy a used car, and now I have about $8,000 left to pay off. I recently received a windfall and can pay off that debt in full. Is there any reason to not go ahead and do that? This car loan is my only current debt. However, I do anticipate buying a home and thus getting a mortgage in the near future. Additionally, would paying off the car loan help lower my auto insurance payment?

Answer: Having an open installment loan showing on your credit reports can help your scores, according to credit expert Barry Paperno, who used to work for leading credit scoring firm FICO. But paying it off shouldn’t hurt you much if at all. By contrast, paying off revolving debts such as credit card balances can give a real boost to your scores.

Paying off the loan should save you some interest and eliminating the payment could help you qualify for a bigger mortgage. Those are real advantages. Still, there may be better uses for your windfall. Are you taking full advantage of your 401(k) match, if your company offers one? If you don’t have a workplace retirement plan, are you contributing to an IRA? Do you have an emergency fund?

A paid-off car doesn’t automatically qualify for lower insurance rates. You can consider dropping collision and comprehensive coverage on older cars, since you’re no longer required to carry that coverage, but make sure that you’re comfortable with the risk of not getting anything from your own insurer to repair or replace your car if, for example, you cause an accident and your car is damaged.

Q&A: Divorced, and in debt

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Dear Liz: I recently got divorced and found myself in about $50,000 of credit card debt. While I’m struggling to slowly pay off this debt, I do have some money saved in a tax-sheltered annuity as well as a small Roth IRA. Should I use those, take a personal loan or file for bankruptcy?

Answer: A good rule of thumb is to leave retirement money alone for retirement. Early withdrawals can trigger taxes and penalties that eat up one quarter to one half of what you take out. You can always withdraw your contributions tax free from a Roth, but any earnings can trigger taxes and penalties. The biggest cost, though, is the loss of future tax-deferred compounding that can equal 10 times or more of what you take out.

If your credit is good, low-rate balance transfer offers could help you lower the interest rate on your debt so you can pay it off faster. A personal loan from a credit union, your bank or an online lender could work if it offers a low, fixed rate and a repayment term of five years or less.

If you can’t pay this debt off within five years, then you should talk to both a credit counselor (visit the National Foundation for Credit Counseling at www.nfcc.org) and a bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).

Q&A: Are credit checks a scam?

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Dear Liz: In July last year, I accessed the website for my free credit report before applying for a car loan. I have also been in recovery from cancer treatment and haven’t been great about checking my Visa statement until now. For the past year, my credit card has been charged $19.95 each month for some kind of “credit check” service. I never authorized this, nor did I request this service. I contacted the site, and they will refund me only one month of billing. Is this some kind of scam? How do they get away with this, and what can I do?

Answer: It may not technically be a scam, but the site’s business model profits from people’s confusion about how to get free credit reports.

The site you used is not the federally mandated site for free credit reports. It’s likely one that you found by typing “free credit reports” into a search engine and then clicking on one of the first results, which was probably an ad. To find the real site, you need to type www.annualcreditreport.com into your browser. You won’t need to give your credit card number to get your reports.

You may be able to get another month’s fee refunded by contacting your credit-card issuer and disputing the charge. By federal law, you’re supposed to make such disputes within 60 days after the statement containing the disputed charge was sent to you. Write to the issuer at its address for billing inquiries (not the address where you send your payments) and send it certified mail, return receipt requested.

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: Defaults on a co-signed student loan

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Dear readers: A recent column about private student loans prompted financial aid expert Mark Kantrowitz to reach out with some additional advice for people who co-signed student loans for someone who has stopped paying. Although private student loans don’t have the same rehabilitation options as federal student loans, Kantrowitz encourages anyone in this situation to ask the lender, “What are my options?” and “Can you remove the default?”

“I’ve seen lenders not only remove the default from the co-signer’s credit history, but even reduce the interest rate if the co-signer agrees to make the payments by auto-debit,” said Kantrowitz, coauthor of the book “File the FAFSA.”

Someone who agrees to make payments may get a better deal than someone who pays off the loan in a lump sum, Kantrowitz said, because lenders want to be paid interest. But there would be nothing to stop a co-signer who makes payment arrangements to pay off the debt in full after a few months.

“This way he potentially can have the default entirely removed from his credit history, restoring him to his previous credit score,” Kantrowitz said. “It also leaves the account open, so that he can pressure the [borrower] into making payments.”