Ask Liz Weston

Get smart with your money

Q&A

Q&A: When credit scores take a pandemic dive, how to figure out what caused it

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Dear Liz: My VantageScores as reported by TransUnion were in the 780 to 790 range until around February, when they all dropped 40 points for no discernible reason. My FICO 8 and 9 credit scores remained unchanged around 760 and still continue to increase. What would cause that?

Answer: VantageScores tend to react more than FICO scores when you apply for new credit, but 40 points is a pretty big drop. The other usual culprit when good scores fall is higher credit utilization, or using more of your available credit, but typically your FICO scores would have dropped as well.

Most credit monitoring services will offer you some kind of explanation for why your scores changed, so that would be the first place to look for clues. You also should check your credit reports, which are now available weekly from AnnualCreditReport.com.

Q&A: Learning an expensive car loan lesson

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Dear Liz: My grandson bought a new car with a loan that has a 24% interest rate. He owes $17,000, and the car is now worth $5,000. What options does he have to get out of this situation?

Answer: The best solution would be to refinance, but that can happen only if your grandson has some equity in the car or is able to get a lower-rate, unsecured personal loan to pay off the car loan. Your grandson probably would need good credit and steady employment to get a personal loan, as lenders are scrutinizing applications more closely these days.

Otherwise, his best course is to “drive out of the loan,” or keep making payments until he owns the vehicle free and clear. He should be making extra principal payments, if possible, to speed up that day.

You can encourage him to hang on to this car as long as possible after it’s paid off so that he can save up the cash for his next car. If he can learn from this experience to pay cash for cars, or to have at least a 20% down payment, then the expensive lesson may have been worth it.

Q&A: Social Security isn’t going broke

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Dear Liz: You have addressed Social Security in your column recently and detailed the benefits to waiting until age 70 to take payments. I read that Social Security funds are expected to run out around 2035. At that time I’ll be 76 and would only get six years of benefits versus 13 years if I start at age 62. Do you still think it is wise to wait on benefits as Social Security may go away?

Answer: Social Security isn’t going anywhere. What’s being depleted is its trust fund, which is used to supplement the taxes Social Security collects to pay benefits. This trust fund is scheduled to be out of money in 2031, according to a new Congressional Budget Office estimate that takes into account the effects of the pandemic. Even if the fund is depleted, however, the system will still collect enough in taxes to pay 76% of promised benefits.

So benefits won’t stop, and it’s highly unlikely Congress would allow benefits to be cut for retirees and near retirees. Social Security is a hugely popular program, and such cuts would be politically unpopular, to say the least, which is why most experts predict that lawmakers will fix the system before that happens.

If you allow yourself to be panicked into starting benefits early, on the other hand, you’re permanently reducing your benefit by 30%. If you’re married and are the higher earner, you’d also be locking in a lower survivor benefit. A lower Social Security benefit can have a huge effect on your standard of living in retirement, so make sure you understand the facts about the system before making a decision you may live to regret.

Q&A: Remodel the house or sell it?

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Dear Liz: Should we take out a home equity loan so we can do some improvements on our house and make it work better for us, or should we sell it and upgrade to a bigger house? We are not in a rush to move, so we are content to take our time to find the right new home at the right price. We are also considering staying and doing work on our current home. But we have a lot of equity and are wondering: Would it be smarter to cash that in? We both remember the housing crash and are very nervous about getting in over our heads.

Answer: People are spending a lot of time at home these days, and many are longing for a little extra space. Interest rates are low, which makes borrowing for improvements or a bigger home more affordable for many.

You’re smart to be cautious about taking on too much debt, though. Lenders are much more cautious than they were before the Great Recession of 2007 to 2009, but it’s still possible to borrow more than you can comfortably repay. Big mortgage payments could prevent you from saving for important goals such as retirement or your children’s college education.

If you like your current neighborhood, remodeling is often the more economical route. You spend roughly 10% of your home’s value when you sell it and buy another. Real estate commissions take a big chunk, as do moving costs. Bigger houses — whether through remodeling or moving — also can mean higher tax, insurance and utility bills. That’s not to say you should never upgrade, but you’re smart to consider all your options because the cost of exchanging homes is pretty high.

By the way, you aren’t really cashing in equity when you use it to buy another home or borrow against it to make improvements. Some people would say that’s “putting your equity to work,” but the idea that equity needs employment is what led many people to borrow excessively against their homes before the last recession. It’s perfectly fine, and often desirable, to have lots of equity just sitting around. That way, it’s there for you when you really need it. You can tap it in an emergency, for example, or to help fund your retirement.

Q&A: Managing retirement savings

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Dear Liz: I’m considering converting an old 401(k) to a Roth IRA. Will the gains from the 401(k) account be treated as capital gains? And can you only convert 401(k) plans you no longer participate in, or can you convert both current and former 401(k) plans?

Answer: You’ll pay income taxes on the conversion. Retirement plans, including 401(k)s and IRAs, don’t qualify for capital gains tax rates. You may be able to convert your current 401(k) as well. Ask your plan administrator if “in plan Roth conversions” are allowed.

Q&A: Here’s why you shouldn’t put that huge hospital bill on a credit card

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Dear Liz: Because of COVID, my 27-year-old son lost his job and health insurance. He was unable to afford continued health insurance and did not qualify for Medicaid. He contracted spinal meningitis and was hospitalized 12 days. The hospital reduced his bill to $28,000 from the original $80,000, but he is still unable to pay. He remains unemployed and without any savings. What would you suggest he do?

Answer: Your son should first call the hospital and ask about applying for financial assistance. Federal law requires nonprofit hospitals to offer this help to low-income patients, and many for-profit hospitals also offer programs that can reduce or even eliminate the charges.

He also should ask about a payment plan geared to what’s left of his income. He should resist any hospital pressure to put the bill on a credit card, because hospital payment plans typically don’t charge interest while credit cards do.

If he’s still left with a bill he can’t pay, he should consult a bankruptcy attorney, and do so as soon as possible. Bankruptcy experts are predicting a big uptick in filings as people and businesses struggle with fallout from the pandemic.