September 3, 2013 By

Ex is trashing her credit scores

Dear Liz: How long must I be punished for my ex’s poor payment history? In our divorce he agreed to pay the credit cards and other bills. He defaulted and has filed for a Chapter 13 bankruptcy. My credit scores plummeted, and recently one of the cards I obtained on my own to help rebuild my credit has dropped me, stating my credit scores as the reason. Do I have any recourse here?

Answer: Not really. As you’ve discovered, creditors don’t have to pay any attention to divorce decrees that say who’s responsible for paying what. You agreed to pay the bill when you signed up for the card. So if your name is on the account, your credit scores will be hurt if it’s not paid.

That’s why it’s so important for separating couples to separate their credit as well. Jointly held accounts should be closed, and any balances transferred to a card that’s in the responsible party’s name only. Otherwise, missed payments and charge-offs will continue to affect both people’s credit for years.

Filed Under: Couples & Money, Credit Scoring, Q&A Tagged With: , , ,
September 3, 2013 By

Spousal vs. survivor benefits: the key differences

Dear Liz: I am 66 years old. When I was 60, my husband of 42 years died. He was a banker with more than 40 years of work history at a good income level. I remarried a year later. When I was 62, I was downsized and took early Social Security benefits based on my first husband’s earnings record. This amounts to about $2,000 a month. It would have been about $2,500 at full retirement age (66) and about $3,000 at age 70. I was not advised about survivor’s benefits at all or about any variance of survivor’s benefits versus Social Security based on my deceased husband’s earnings. Do you think I would have gotten a bigger benefit amount if I had taken survivor’s benefits at age 62?

Answer: No, because survivor’s benefits are what you’re getting.

Both spousal benefits and survivor’s benefits are based on the earnings record of the other person in a couple (whom we’ll call the “primary earner”). The maximum spousal check is 50% of the primary worker’s benefit. As with other Social Security benefits, the amount you get is permanently discounted if you apply before your own full retirement age.

Spousal benefits are available to current and former spouses, although former spouses must have been married for at least 10 years to the primary earner and must be currently single. (In other words, you can’t have remarried, unless that marriage has ended as well.)

Survivor’s benefits, on the other hand, can be up to 100% of the primary worker’s benefit. Survivor’s benefits based on a deceased spouse’s earnings record are not available to those who remarry before age 60, but can be claimed by those who remarry after that point.

Since the biggest Social Security benefit is around $2,500 a month and you’ve remarried, it’s clear that what you’re getting is the survivor’s benefit, discounted because you applied early.

Filed Under: Q&A, Retirement Tagged With: , , , ,
September 3, 2013 By

Missed deadline could limit inherited Roth IRA’s benefits

Dear Liz: I inherited my brother’s Roth IRA about three years ago. I find it hard to get any information about non-spousal inherited Roths. Can you tell me more about this type of Roth IRA?

Answer: It may be unfortunate that you didn’t ask sooner.

When a spouse inherits a Roth IRA, he can roll it into his own Roth IRA, and it’s as if he or she was the owner of the inherited funds all along. There’s no minimum distribution requirement, so the money can continue to grow.

If you’re not a spouse, you have the option of transferring it into an account titled as an inherited Roth IRA. You also have the option of taking distributions over your lifetime — which means keeping the bulk of the money growing for you tax-free — but to do that you must begin taking required minimum distributions by Dec. 31 of the year after the year in which the owner died.

If you didn’t start these required distributions on time, you have to withdraw all the assets in the account by Dec. 31 of the fifth year after the year your brother died, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. You won’t have to pay taxes on this withdrawal, but it would have been better to let the money continue to grow tax-free in the account.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: , ,
August 26, 2013 By

Will loan payoff help or hurt credit scores?

Dear Liz: Two years ago, my husband was denied a revolving $12,000 line of credit. The credit reporting agency indicated that denial was based on “little revolving usage, insufficient or no bank lines, and insufficient open accounts with zero balances.” Nine months ago, however, he was approved for a car loan and received a FICO Auto V2 Score of 808 from the same credit reporting agency. Another credit reporting agency gave him a FICO Auto 04 Score 836. We had wanted to pay cash for this car but thought it would be wise for my husband to improve his credit, so he got an interest-free loan. My husband was recently approved for and obtained a credit card with a $20,000 revolving credit limit. He previously had a card with a $2,000 limit. He will pay off the balances each month. Our question: How long should he wait to pay off the car loan so that the payoff helps his credit and doesn’t hurt it? We don’t like having outstanding debt and have no other loan obligations.

Answer: Occasionally there’s a conflict between doing what’s best for your finances and doing what’s best for your credit scores.

Paying off an installment loan early, for example, normally is good for your wallet since you’re saving money on interest. But this payoff may come with a cost. While the closed account can remain on your credit report for years, contributing positively to your scores, you’ll get somewhat more of a positive impact if you don’t rush to pay it off. The open account will do more good for your scores than a closed account.

In your case, however, there is no conflict. This is an interest-free loan, so you’re paying absolutely nothing for the option of keeping the account open as long as possible. If your primary concern is supporting your husband’s excellent credit scores, consider getting over your aversion to debt and enjoy the free use of the lender’s money.

(OK, it may not be totally free. Buyers who get zero-interest loans often pay more for their cars than those who get market interest rates, according to Edmunds.com. But we’ll assume you thrifty folks bargained hard and really did get free money.)

If your husband can’t tolerate having any debt, he can keep good scores simply by using those credit cards lightly but regularly. The less he uses of his credit limit on the cards each month, the better: 30% or less is good, 20% or less is better, 10% or less is best. Paying the balances in full will ensure he doesn’t have to pay a dime in interest to keep his scores in good standing.

Filed Under: Credit Scoring, Q&A Tagged With: , , , , , ,
August 26, 2013 By

Retiree burdened with unpayable student loan debt

Dear Liz: In a recent column, you fielded a query from parents whose son took out student loans in the mother’s name. You wrote, “If your only income is from Social Security and you don’t have any other property a creditor can legally take, you may be ‘judgment proof,'” which means “a creditor wouldn’t be able to collect on a judgment against you.”

I understand this advice was meant for the mom. But could it equally apply to the borrower who benefited from the loan?

In my case, I will be 70 next year and my only income is Social Security. I owe about $80,000 in private student loans and about $80,000 in federal student loans. I can’t afford to pay either loan. Is there hope for me to get out from under this burden by being judgment-proof? Right now, I can’t afford to see a bankruptcy attorney. It is a struggle just to pay the rent and put some food on my table.

Answer: You can’t afford not to see a bankruptcy attorney. Federal student loan collectors have enormous powers to collect, including taking a portion of your Social Security check.

The concept of being “judgment proof” applies to collections of private student loans. Collectors for those loans may be held at bay if you are, indeed, judgment proof. But you really want an experienced bankruptcy attorney to review your situation to make sure that’s the case. Fortunately, many bankruptcy attorneys offer free or discounted initial sessions. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.

Filed Under: Bankruptcy, Q&A, Student Loans Tagged With: , , , ,
August 26, 2013 By

Maximizing Social Security benefits requires some patience

Dear Liz: I am 65 and recently visited our local Social Security office to apply for spousal benefits. (My wife, who is also 65, applied for her own benefit last year.) I wanted to get the spousal benefit, even if the amount is discounted, so I can let my own Social Security benefit grow. The Social Security office manager advised us that I cannot claim spousal benefits until my full retirement age. You said in a recent column that I can. Who is correct?

Answer: You can apply for spousal benefits before your own full retirement age. But doing so means you’re giving up the option of switching later to your own benefit. The office manager gave you correct information, based on your goal. If you want the choice of letting your own benefit grow, you must wait until your full retirement age (66) to apply for spousal benefits.

Filed Under: Q&A, Retirement Tagged With: , , , ,
August 19, 2013 By

Stick to an investment plan for best results

Dear Liz: If I plan to stay invested for more than 15 years and I can tolerate the ups and downs of the market, why would I want to put any of my 401(k) money into bonds instead of putting it all in various stock funds? The bond funds in my 401(k) have a five-year return of 5% to 6% whereas the other funds are 8% to 13%.

Answer: If you look at the more recent performance of those bond funds, you’ll notice that their returns are considerably worse. Many have been losing money lately as interest rates have risen. That poor performance may worsen if the economy improves and rates continue to rise.

But you need to consider more than recent performance when allocating your portfolio. Bonds and cash can cushion your account against big downturns in the stock market. That can help keep you from panicking and selling at a bottom.

If you’re as risk tolerant as you think and decades away from retirement, you might be able to put as little as 10% of your portfolio into bonds and cash. If you’re 15 to 20 years from retirement, a 20% bond allocation may be more prudent. A fee-only financial planner can help advise you about sensible asset allocations, or you can check out the stock and bond mixes of target date funds offered by leading mutual fund companies (such as the Vanguard Target Retirement 2030 Fund, if you’ll be retiring around 2030).

Filed Under: Investing, Q&A Tagged With: , , ,
August 19, 2013 By

Will credit scores be helped by faster loan paydown?

Dear Liz: I had a 730 credit score and went shopping for a car. The inquiries on my credit report took my score down to 704. Now that I have the auto loan, does it help my score to make larger payments and reduce the principal faster? The payment is currently $375 but I could pay $500 a month if this is advantageous.

Answer: It’s unlikely the auto loan inquiries lowered your credit score by that much. An inquiry typically dings your scores by less than five points. Even if the dealership queried several lenders on your behalf, all the auto loan inquiries typically would be combined and counted as one. What’s far more likely is that other information on your credit report changed, affecting your score. A higher balance on a single credit card could have that effect.

By the way, you don’t have one credit score, you have many. Each credit bureau sells different versions of the FICO score to lenders, and auto lenders typically use a version of the FICO tweaked for their industry. It’s possible your lender used just one of these FICO scores to evaluate you, but others might use three — one from each bureau. Also, if you’re monitoring your score using a free service or one sold by a bureau, the number you’re seeing might not be a FICO at all but some alternate credit score that lenders don’t typically use.

To answer your question: Reducing the balance on an installment loan, such as a car loan or mortgage, would help your scores, but not nearly as much as paying down revolving accounts, such as credit cards. If you have any credit card debt, you’d be far better off using your extra money to pay off those bills. Not only would doing so help your scores more, but it also would have a bigger effect on your finances, since credit card interest is typically far higher than that charged on an auto loan.

Filed Under: Credit Scoring, Q&A Tagged With: , , ,
August 14, 2013 By

Son signed them up for overwhelming student loan debt

Dear Liz: Our son went to an expensive private school and ended up with more than $100,000 in federal and private loans by the time he graduated. My wife cosigned a private loan for $25,000 for the first year, and that was the last we heard of any loans until he graduated with a degree in social services. After he was out of school for six months, we started getting phone calls asking for payment. Turns out he electronically signed my wife’s name to the next three years of his student loans.

Just to keep the creditors from harassing us daily, we pay the interest, which is about $1,100 a month and equals two-thirds of my wife’s take-home pay. (I’m disabled and can’t work; she’s 64 and planning to retire soon.) Our son hasn’t paid a dime on any of the debt and seems to think it will disappear if you don’t talk about it. He makes only $15 an hour. He still takes college classes and he thinks that because he is in school, he doesn’t need to pay anything. But the interest is still accruing monthly.

After my wife retires, how much of our Social Security checks can they come after? Can they come after our house? We will be living on Social Security only as we were never fortunate enough to have employers who offered pension plans. I sometimes feel that we will have no real retirement because of this situation. Any suggestions and advice would be appreciated.

Answer: What a mess. If nothing else, your situation can serve as a warning to other families tempted to buy educations they can’t afford. Taking on six-figure debt for an undergraduate degree, let alone one in social services, is nuts. Generally, students shouldn’t borrow more in total than they expect to earn the first year out of school. Also, most people should stick to federal student loans. Using private loans to pay for college is a lot like using credit cards, although unlike credit card debt, these variable-rate loans typically can’t be discharged in bankruptcy.

It’s not clear whether your son committed identity theft in signing your wife up for additional debt. Some private loans include a clause permitting the origination of subsequent years’ loans in addition to the original loan, said Mark Kantrowitz, publisher of Edvisors Network. You’d have to review the promissory note to see if that’s the case. If not and if your son forged your wife’s signature, she potentially could get released from the obligation — but most lenders will require the son to be convicted of identity theft first, Kantrowitz said.

“When given that choice,” he said, “most families choose to handle it internally rather than see the student convicted of fraud.”

The only good news here is that private student lenders have fewer powers to collect, compared with the federal government. There is a time limit on how long collectors can pursue you because private student loans are subject to each state’s statute of limitations on debt. (There is no statute of limitations on federal student loan debt, which means collectors can pursue borrowers indefinitely.) Private student lenders can file lawsuits against you, but they don’t have the power that federal student loan collectors have to withhold tax refunds and take a portion of Social Security checks.

If your only income in retirement is from Social Security and you don’t have any other property a creditor can legally take, you may be “judgment proof.” That doesn’t mean you can’t be sued, but a creditor wouldn’t be able to collect on a judgment against you. To find out whether that’s the case, talk to an experienced bankruptcy attorney familiar with the laws in your state.

None of this reduces your son’s responsibility for his debt. If collectors can’t come after you, they will start to pursue him in earnest for payment and he’ll learn just how wrong he is about student loan debt. But that’s his problem, and he at least has a working lifetime ahead of him to pay back what he borrowed.

Filed Under: Q&A, Student Loans Tagged With: , ,