Ask Liz Weston

Get smart with your money

Q&A

Q&A: Can installment loans help repair bad credit?

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Dear Liz: I am working on paying my bad debt from the past to rebuild my scores. I have one credit card that I pay in full every month, but no installment loan. I recently was given the opportunity to take a car loan with monthly payments I could easily afford. Here is my confusion: Taking on more debt while trying to eliminate past debt is usually not advisable. But I also know creditors like to see both revolving and installment credit. Am I OK taking the car loan to give the “well-rounded use” credit, or should I just put that extra money to pay off my past debt?

Answer: Paying off old bad debts typically doesn’t help your credit scores. If these accounts are now in collections, the damage has been done and won’t be erased by your payments.

And if the accounts are in collections, the money you’re paying probably isn’t going to the creditors you originally owed. Those creditors probably sold your debts to collection agencies for pennies on the dollar. If that’s the case, those collectors may be willing to settle for 50% or less of what you owed the original creditor. If you have the cash to make lump sum offers and you decide to take this route, get written assurance from the collector — in advance and in writing — that any remaining debt won’t be resold to another collector. Also, reserve some cash for the tax bill, because forgiven debt is usually considered taxable income.

You also can request a “pay for deletion,” which means the collection agency stops reporting the collection account to the credit bureaus in exchange for your lump sum payment. Getting rid of the collection could help your scores, but many collectors resist this step.

Now, back to your question. Adding an installment loan such as an auto loan, mortgage or student loan to your credit mix can indeed help rehabilitate troubled scores. The scoring formulas like to see people responsibly handling a mix of credit accounts.

If you decide to take out a car loan, shop around for a lender before you commit. Those affordable payments you were shown could disguise a bad loan — one with a sky-high interest rate, a long repayment period or both. It’s wise to make at least a 20% down payment on any car purchase and to limit the loan term to four years or less.

Q&A: Student loan co-signer repercussions

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Dear Liz: I co-signed a student loan for my son. He was unemployed for a year and has now returned to work. The lender is not being cooperative with accepting a lesser monthly payment or any payment until he gives them a lump sum he does not have. They have been calling me about this debt. I am retired, 74, with a pension and Social Security as my sole income. I have no assets. What can they do to me?

Answer: If this were a federal loan, the government could take a chunk of your Social Security check and withhold your tax refunds. But your son also would have far more options for getting caught up, including a pathway out of default and income-based repayment plans.

Because it’s a private loan, evidenced by the fact it required a co-signer, the lender has fewer powers to collect, but you and your son also have fewer consumer protections. The Consumer Financial Protection Bureau recently released a report detailing people’s complaints about private lenders’ unwillingness to offer affordable payment options or modifications for unmanageable student loans.

That doesn’t mean your son should quit trying. The CFPB has a sample letter on its site that he can use to request a repayment plan he can afford. If he’s still having problems, he can make a complaint to the CFPB.

When you co-signed, you promised to pay if he couldn’t. Private collectors typically can’t take your retirement income, however. You may want to make an appointment with a bankruptcy attorney who can assess your situation. (Student loans, federal or private, typically can’t be discharged in bankruptcy, but the attorney will know the rules for creditors and borrowers in your state.) You and your son also should review the information about negotiating with private student lenders that you’ll find on the Student Loan Borrower Assistance site run by the National Consumer Law Center.

Q&A: When to start Social Security benefits

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Dear Liz: I am 63 and my husband is almost 64. He lost his job last year. We have been living on his $1,500 monthly pension plus what I could make from small contracts and drawing down our emergency fund. The fund and the contracts are now gone. We would like to get jobs, but we live in an isolated area and must sell our house first so we can move. It’s worth about $350,000 with no mortgage, but selling it could take a while.

My question: Is it better to pull from our retirement investments of $750,000, use our home equity line of credit until we sell our house or have me file for early Social Security benefits? We plan to have my husband wait to apply until his full retirement age and then file a restricted application so he gets only spousal benefits until age 70, when his own benefit maxes out. Meanwhile, we need money to live on. I ran a Social Security calculator, and it seemed to say the difference between my starting early and the maximum we could get for waiting was $35,000. Our financial advisor says to take Social Security, but he also manages our investments. We pay him 1% of our portfolio, so reducing it would reduce his income. Can you offer any guidance?

Answer: The benefit from delaying the start of your Social Security benefits is typically so great that knowledgeable financial planners would suggest tapping other funds, including your retirement account, if that’s the only way you can hold off.

If you followed the 4% rule for sustainable withdrawals, you could take $30,000 from your retirement fund the first year without having to worry too much about running out of money. You could take more, of course, and plan to cut back when the Social Security checks start flowing, but you run the risk of a downturn dramatically increasing the chances that you won’t have enough money to last your lifetimes.

Of course, everybody’s situation is different. If the gap between your strategy and maximum benefits is just $35,000 over your lifetimes, you’ll have to decide if that’s incentive enough to wait. Understand, though, that calculators designed to evaluate Social Security strategies aren’t all equal. The free ones tend to be simpler, while the ones that require a fee (typically $40) are more sophisticated and allow you to take more factors into account.

So here’s a game plan. Run one or more of the more sophisticated calculators such as MaximizeMySocialSecurity.com, SocialSecuritySolutions.com and SocialSecurityChoices.com. Then take the results to a fee-only financial planner who charges by the hour to get another opinion. You want a planner who uses Social Security maximizing software and who has received education in Social Security planning strategies (just ask). If you can’t find someone locally, there are plenty of good planners willing to consult long-distance via phone and email. You can get referrals from Garrett Planning Network, among other sources.

Q&A: Medical debt liability and separation

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Dear Liz: You recently answered a question about whether one spouse can be held responsible for the other’s credit card debt. My husband and I are separated and he recently was diagnosed with cancer. He is unemployed with no health insurance and high hospital bills and back child support payments. In the event of his death, will I be liable for his debts?

Answer: You need to talk to an attorney to determine your liability for his medical bills, since it depends on state law. Some states don’t hold spouses liable for these bills if they’re legally separated, while others do. In any case, his estate will still owe the unpaid child support, and child support typically has a higher priority for payment than most other creditor’s claims when an estate is settled. In general, creditors have to be paid before the rest of the assets can be distributed to heirs.

Q&A: Survivor benefits for domestic partners

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Dear Liz: Your answer to the reader asking about Social Security survivor benefits for same-sex couples was incomplete. If the person was a registered domestic partner in a state that did not allow them to marry, they still qualify for spousal death benefits. Please tell those affected so they know they should apply ASAP.

Answer: Thanks for pointing that out. Social Security survivor benefits are available to legally married same-sex couples whose marriage is recognized by the state where the couple was living at the time of the spouse’s death (assuming the deceased spouse meets all other qualifications for benefits). If the state where the couple lived doesn’t recognize same-sex marriages, a surviving partner may still qualify as a widow or widower for Social Security benefits if the intestacy laws of that state allow the surviving partner of a non-marital legal relationship (such as a civil union or domestic partnership) to inherit as a spouse.

Q&A: Credit card fraud and automatic payments

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Dear Liz: We’ve had three cases of credit card fraud. Each time, the credit card company issued new cards with new numbers and canceled the old ones (along with the fraudulent charges). We had nine monthly auto-payment authorizations set up, and we seethed at the fact that the card company would not offer to authorize our auto-payments via the new numbers. We eventually received late-payment notices and charges, since the old numbers were still on the record with payees. Are there companies that offer updates to payees when cards are canceled, and new ones issued, in such fraud situations?

Answer: Given all the database breaches lately, automatic updates to auto-payments might come in handy.

But it seems you’re on your own. Your agreements with your billers typically state that you’re required to update them whenever a card expires or its number changes. Many billers will alert you when an expiration date is near or if a charge doesn’t go through, but ultimately it’s your responsibility to keep track.

It’s a good idea to keep a list of your auto-payments so you don’t forget to update them all when this happens again. If you don’t have a list, simply checking your past statements should remind you which accounts are on auto-pay.