Ask Liz Weston

Get smart with your money

Q&A

Q&A: Credit cards vs student debt. Which should be paid off first?

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Dear Liz: I have $8,000 in savings. Should I use it to pay the accrued interest on federal student loans that go into repayment soon? Or should I pay credit card debts of $662 at 11.24%, $3,840 at 7.99% and $3,000 at 6.99%?

Answer: Pay off the credit card debt. The interest isn’t tax deductible, and balances you carry on credit cards just eat into your economic well-being.

Your student loans, by contrast, offer fixed rates, a wealth of consumer protections and tax-deductible interest. You needn’t be in any rush to pay them off, particularly if you’re not already saving adequately for retirement and for emergencies. Federal student loans offer the opportunity to reduce or suspend payment without damaging your credit scores should you face economic difficulty and the possibility of forgiveness. Those aren’t options offered by credit card issuers.

If your student loan payments exceed 10% of your income when you do go into repayment, you should investigate the federal government’s “Pay as You Earn” program, which offers more manageable payments for many people, especially those with large debts and small incomes.

Q&A: Will having no debt affect our FICO score?

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Dear Liz: My wife and I have paid off our mortgage, we have no car loans, and we pay our credit card balances completely each month, which means that we basically pay no interest. We have four credit cards that are active and a couple more that are rarely used. My FICO score is currently just above 800. At some point we will need to replace our cars and will need car loans, so our FICO scores will be important. Since we currently have no mortgage, no car loans or any other loans, will our FICO score slowly drop, and will that affect our car loans?

Answer: Paid-off loans typically don’t disappear from your credit reports, at least not immediately. Many lenders continue to report these closed accounts for years, which contributes positively to your scores.

Even if none of these paid obligations show up on your reports, though, your responsible use of credit cards should support your high scores. Just continue to use your cards lightly but regularly and pay off all balances in full.

Since you have time before you plan to replace your cars, consider paying cash for them, or at least making a substantial down payment. It’s typically best to use loans only for assets that appreciate — and cars certainly don’t do that.

Q&A: Which work years determine Social Security?

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Dear Liz: My wife and I are both 59. We expect to retire in two or three years. We would not take Social Security until probably 67 because we will not need it when we retire. But would our Social Security benefits be less because we do not work for those five years before applying to Social Security? Is Social Security affected at all by the last few years of income or simply by the total lifetime deposits into the system?

Answer: Your Social Security benefits are based on your 35 highest-earning years. So if you’ve worked more than 35 years, a few years at the end of your career in which you earn less or don’t earn anything at all shouldn’t affect your benefits.

While you’re researching your options for claiming Social Security, check out the “claim now, claim more later” strategy that would allow one of you to claim spousal benefits while allowing his or her own benefit to grow. It’s one of a number of strategies available to married couples that can significantly increase the amount of Social Security benefits over a lifetime. Another important factor to consider is that one of you is likely to survive the other, perhaps by many years, and will have to get by on a single check. You should make sure that check is as large as it can be to lessen the chances the survivor will face poverty in old age. You can find more information about Social Security claiming strategies at the AARP site (aarp.org).

Q&A: Consolidating multiple student loans

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Dear Liz: I have four private student loans that I would love to consolidate so that I can have one medium-size monthly payment instead of four large ones. How do I go about finding a company that will consolidate them?

Answer: If you have good credit and sufficient income — or a willing co-signer — several lenders now offer private student loan consolidation. That’s a change from the recent past, when recession-scarred lenders largely abandoned this market.

Unless you’re able to get a substantially reduced interest rate, though, you shouldn’t expect your consolidated payment to be much lower than the sum of your current payments. Your payment could even go up if the consolidation loan has a shorter repayment period.

You can start your search at cuStudentLoans.org, which represents not-for-profit credit unions. RBS Citizens Financial Group, Wells Fargo, Charter One and other banks offer consolidation options as well. Some lenders offer fixed-rate options and “cosigner release,” which enables creditworthy borrowers to remove a cosigner after a certain number of on-time payments.

Q&A: Mileage bonus credit cards

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Dear Liz: I’m attracted to the credit card offers that give substantial mileage bonuses for opening and using an account. Most also waive the first year’s fee. I have taken advantage of one such card, and then I canceled it before any fee was due. (I certainly enjoyed using the miles.) I hesitate to take another offer because I fear opening and closing extra accounts might have a negative effect on my credit rating.

On the other hand, I am in my mid-60s, have excellent credit and am debt-free. I also don’t plan to make any credit purchases. What’s your advice?

Answer:If you have good credit and aren’t in the market for a major loan such as a mortgage, you shouldn’t worry about opening or closing a credit card account occasionally. Yes, such actions can ding your credit scores, but the effect is likely to be minimal, especially if you have several other open accounts that you regularly use.

If you are going to open a new card with an upfront bonus, make sure you understand the fine print. Most cards require you to spend a certain amount within a certain time frame to get the extra points. Typically the bigger the upfront bonus, the bigger the required “spend.”

Q&A: Keeping financial records

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Dear Liz:I have a garage full of old financial records. I believe I need to keep only seven years of information for tax purposes. Is that correct? However, I have decades of receipts on house repairs and improvements since I believe there is some cumulative tax credit that might someday be important. Also, I have kept receipts on personal and household purchases in case of a loss that required an insurance claim. Am I keeping too much paper?

Answer: Yes. Here’s what you need to know.

Many tax experts recommend hanging on to your tax returns indefinitely, but you can shred most supporting documents after seven years when the risk of audit ends (unless you’re significantly underreporting income or committing fraud).

When it comes to assets such as homes or stocks, you should keep supporting documentation for as long as you own the asset plus seven years.

That includes receipts for home improvements, but not repairs. You can’t take a deduction for either home repairs or improvements, but the cost of improvements may help you reduce any taxable profit should you sell your home. In Publication 530, the IRS defines an improvement as something that “materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses.” Examples include putting an addition on your home, replacing an entire roof, paving your driveway, installing central air conditioning or rewiring your home. You can’t include improvements that are no longer part of your home. If you install carpeting and then rip it out to install hardwood, for example, you can no longer include the carpeting cost as an improvement.

You would have to have a considerable profit for those receipts to come in handy. The first $250,000 of home-sale profit, per person, is tax free. If you’re married, that means you wouldn’t face capital gains taxes on your home sale unless your profit exceeded $500,000.

Keep in mind that the IRS accepts electronic records. If you’re concerned about tossing paperwork you might later need, consider scanning everything first and maintaining a backup copy off site, either in the cloud or in a safe-deposit box.

Chances are good your insurer also accepts electronic records and scans of receipts, but call and ask first. Keeping receipts for insurance purposes is a good idea, as long as you cull the ones for items you no longer own.