Ask Liz Weston

Get smart with your money

Q&A

How young ‘uns can build credit scores

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Dear Liz: Our son was recently turned down for a car loan even though my wife and I were willing to co-sign and we have excellent credit scores. The reason for the denial was “no credit history.” Because we had paid some college expenses and he had basketball athletic scholarships, our son graduated from college debt free.

My wife and I have always tried to live within our means. Other than a mortgage and the occasional car loan that we almost always paid off early, we have had no other debt. We encouraged our children to live the same way.

Did we give them bad advice? What advice can we give our daughter so she does not wind up in the same circumstances? Through a combination of work, academic merit scholarships and our savings, she is on track to graduate in 2013 without any student loans. Should she take one out in her name just so she can pay it back and have a credit history?

Answer: Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.

You may be able to give their credit histories a jump-start by adding them as authorized users to your credit cards, if you have any. Find out first whether the credit card issuer is willing to export your good history with the card to the children’s credit reports, because not all issuers will do this transfer. You may have heard that some credit-scoring formulas ignore authorized user information, but the formula used by most lenders, the FICO, still would incorporate this data in calculating your children’s scores.

Another option is for your kids to apply for secured credit cards. They would make a deposit to the issuing bank and get a credit line in the same amount. A secured card that reports to all three credit bureaus can help build credit scores over time. A number of websites highlight secured-card offers, including CreditCards.com, CardRatings.com and NerdWallet.

Tell the kids to charge no more than 30% of their credit limits (10% or less is even better), and certainly no more than they can afford to pay off in full each month.

If your daughter wants to build up her scores faster, she might want to consider a small installment loan. Having both installment and revolving accounts can lead to higher scores. Installment loans include auto loans, mortgages, personal loans and, yes, student loans. If she does decide to apply for a small student loan, make sure she fills out the Free Application for Federal Student Aid and takes out federal student loans only. Federal student loans have fixed interest rates, flexible repayment terms and plenty of consumer protections. Private student loans have none of those attributes.

How spousal benefits work

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Dear Liz: My wife has never worked outside the home and therefore has no Social Security credits. My understanding is that as a nonworking spouse, she is entitled to 50% of my benefit, assuming she is 66 years old and I have started receiving benefits. Is that correct?

Answer: You’ve got the right general idea. But spousal benefits are available to working spouses as well, your wife has the right to start benefits earlier (at a discounted rate) and you don’t have to actually receive checks for her to get this benefit.

Your wife is eligible for a spousal benefit based on your “primary insurance amount.” That’s the amount you would receive at your normal retirement age, no matter whether you’ve actually attained that age or started benefits. Normal retirement age is currently 66, but it will rise to 67 for people born after 1959. If she waits until her own full retirement age to start benefits, then she can qualify for a benefit equal to half your primary insurance amount. If she starts earlier, the benefit is permanently reduced.

If your wife had worked and qualified for her own retirement benefit, the Social Security Administration would give her whichever benefit paid the most — her own, or a portion of yours.

Because you’re still married, your wife wouldn’t be able to start spousal benefits until you’ve claimed your own benefit. However, if you’ve reached your full retirement age, you have the option to “file and suspend.” That means you’d file for benefits but immediately suspend your claim. That way, your benefit could continue to grow while she could begin receiving her payments.

If you were divorced but had been married at least 10 years, she could begin her benefits without waiting for you to file for your own. That exception was put into place so people wouldn’t have to seek their exes’ cooperation to get benefits.

How to make headway on student loans

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Dear Liz:I owe $75,000 in student loans. It took me seven years to graduate from college due to a car accident that happened during my second year. I am now 30 and doing all I can, working 12 to 14 hours a day, but I’m not making any headway. Most if not all of my loans have gone to collections. I get the phone calls, sometimes up to 30 a day. I need some advice on how to handle all of this. It is so overwhelming. Is it possible to consolidate all of this? Make one monthly payment to one entity?

Answer: You can consolidate your federal student debt into one loan and stretch out the repayment term, which could make the debt easier to pay. You may also qualify for the income-based repayment option. Most borrowers in the income-based plan have payments that are less than 10% of their gross incomes, said Mark Kantrowitz, editor of FinAid.org and author of “Secrets to Winning a Scholarship.” After 25 years of payments, you would qualify for forgiveness of any remaining balance. The payment period is shortened to 10 years if you’re in a public service job.

Private student debt isn’t nearly as flexible. You typically can’t consolidate private student loans, and lenders offer fewer repayment options — and no forgiveness.

If you have both types of debt, you may be able to make some progress on repayment by consolidating your federal loans and paying the minimum possible on those so that you can throw every available dollar at your private loans.

If you have only private debt, you’ll need to negotiate directly with your lenders to see what options are available for more affordable repayment plans. It’s important to do this as soon as possible, since if your delinquency drags on for nine months your loans will be considered in default. That can have serious consequences for your credit history and your finances.

The National Consumer Law Center’s Student Loan Borrower Assistance Project has a lot of information and resources for student borrowers, including information about loan rehabilitation and negotiating with lenders. You can also talk to the Default Resolution Group at the U.S. Department of Education by calling (800) 621-3115.

Daily money managers can help pay the bills

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Dear Liz: I read with interest your answers about older people who need a trusted gatekeeper to keep others from taking financial advantage. I want to let you know there’s great help out there for seniors: the American Assn. of Daily Money Managers. We daily money managers provide assistance to people who have difficulty managing their personal bill-paying responsibilities and associated personal paperwork. This service offers a cost-effective way for clients to get assistance with organizing, bill paying, balancing checkbooks and reviewing statements from a trusted source. A daily money manager does not replace the services of other professionals — such as CPAs, banks, financial planners and attorneys — but assists clients with daily affairs and helps maintain records and information that is essential for these professionals. People can find more information at the association’s website, http://www.aadmm.com.

Answer: Thanks for pointing out this resource. Many older Americans have trouble with household money management. They may forget to pay bills or keep track of their account balances, leading to bounced checks. Organizing their paperwork and collecting information for tax returns can become an ordeal. Some people have trusted family members who have the time to take over. For others, daily money managers can be the answer.

Daily money managers are distinct from conservators or guardians, however. They aren’t supervised by the courts, so potential clients need to take care in hiring one. In addition to the AADMM’s website, people may be able to get referrals from financial professionals such as a lawyer, financial planner or accountant. The daily money manager should be insured and willing to work with those professionals.

Daily money managers aren’t limited to helping only seniors. They also can help busy executives, travelers and people with attention deficit disorders who have trouble keeping up with daily financial details.

Helping an indigent parent navigate “the system”

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Dear Liz: Our mother just turned 64, and our father is divorcing her. She hasn’t worked in years because of significant physical and mental health issues. My sister and I have been trying to figure out how she’s going to survive on $750 a month, which is the equivalent of half his Social Security. She has always had serious issues with money management, which is why there are no retirement savings or a house. We are now about to embark on the maze of social service benefits that an older woman below the poverty line can receive, partly so we can decide whether she’s better off staying put where she is in Arkansas, moving to my sister’s in Texas, moving to be near me in Maryland, or moving to her childhood home of Chicago, where most of her friends are. For a lot of complicated reasons (mostly related to the mental health issues), we are trying to avoid having her live with either of us full time, and she expresses no desire to do so. So we have to figure out the ins and outs of Medicaid, food stamps, subsidized senior housing and anything else in four different states and then try to explain it to her. If you have any hints about helping an indigent and somewhat incapacitated mother access services, we would love to hear them. We feel a little overwhelmed at the moment and aren’t even sure whom to call in each place.

Answer: It’s understandable that you feel overwhelmed. You have a huge task in front of you.

You can start with the Eldercare Locator, a free service offered by the U.S. Administration on Aging that can connect you to services for older adults and their families. You’ll find it at http://www.eldercare.gov, or you can call (800) 677-1116.

Another resource you might want to consider is a geriatric care manager. These are professionals who help family members care for elderly relatives. The care manager can evaluate your mom, review her options and make recommendations. Their services aren’t cheap, but they can be especially helpful in managing a long-distance situation. You can find referrals at the National Assn. of Geriatric Care Managers’ site, http://www.caregiver.org. And speaking of distance: It might be easier to help your mom if she lives closer to one of you, or to a trustworthy friend who can check in on her and let you know how things are going.

You also should check with an Arkansas family law attorney, since your mother may be eligible for some kind of spousal support and possibly a property division that could help her financially.

Finally, if your father dies before your mother, she still will be eligible for survivor benefits that could bump her Social Security check up to 100% of what your father was receiving. Many people don’t realize that ex-spouses can qualify for survivors’ benefits as long as the marriage lasted 10 years and the person applying for benefits didn’t remarry until after age 60.

Don’t count on plastic to cover big expenses

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Dear Liz: I’m 27 and have no consumer debt, a decent salary and a boatload of student loans. I use my credit cards for most of my expenses to earn rewards points and generally pay off my cards each month. I also take advantage of the 0% introductory rate offered by many credit card companies. This grace period gives me a security blanket so that I can spread large expenses such as insurance or car repairs over several months without derailing my saving plans. Can I apply for these offers without wrecking my excellent scores?

Answer: Occasionally applying for a new card won’t affect your scores much. Typically such applications ding your scores by five points or less.

You should be budgeting and saving for large expenses, however, rather than leaning on your cards. (Car repairs, in particular, aren’t really “emergency” costs — if you have a car, you know they’re coming, and calculators like Edmunds.com’s “True Cost to Own” feature can give you a good idea of what they’re likely to be.) Those 0% offers often come with balance transfer fees or other charges that make the deals a lot less attractive than they seem at first glance.

Also, you should be in the habit of always paying your cards in full — always. “Generally” isn’t good enough, since you could easily be enticed into spending beyond your means, especially as you chase rewards points. Rewards cards are a good deal only if you don’t carry a balance. Otherwise, you can pay frighteningly high interest rates that offset any benefit you may earn.