Ask Liz Weston

Get smart with your money

Q&A

Q&A: Are you trying for a perfect credit score? Maybe you don’t need to

By

Dear Liz: My credit score fluctuates between 799 and 815. It used to be 850. I always pay my bills in full and on time, and keep the credit utilization low. The only comment I can find about why my credit score isn’t higher is that I lack a loan. I don’t owe any money and see no need to get a loan, so is there anything I can do to get the score back closer to 850?

Answer: Possibly, but there’s really no point in having a “perfect” credit score.

Most credit score formulas use a 300-to-850 scale. By the time your scores are in the mid-700 range, you’re typically getting the best rates and terms from lenders. Also, scores change all the time and vary according to the formula used. Even if you could achieve an 850 with one type of score, you might not achieve it with another score or keep that high number for long.

You typically need an installment loan such as a mortgage or car loan to get scores closer to 850. Borrowing money just to improve scores can make sense if you’re just starting out or trying to fix battered credit, but not in your situation.

If you’re determined to get higher scores, consider using even less of your available credit. Top scorers typically use less than 10% of the credit limits on their cards. The balance that matters for credit scoring calculations is typically your statement balance, so one way to reduce utilization can be making a payment right before the statement closes. Just be sure to pay off any remaining balance before the due date so that you don’t incur late fees.

Q&A: Survivor Social Security benefit

By

Dear Liz: When you discuss a survivor receiving 50% of their spouse’s Social Security benefit, are you basing the 50% on gross or net income?

Answer: The survivor benefit is up to 100% of what the deceased spouse or ex-spouse was receiving from Social Security, before taxes. If the spouse or ex starts Social Security early, that reduces the potential survivor benefit. If the spouse or ex delays Social Security beyond full retirement age, that can increase the benefit.

Spousal benefits, by contrast, are paid when the spouse or ex is still alive. Spousal benefits can be up to 50% of what the spouse or ex would receive at full retirement age.

Q&A: Surviving spouse’s home gains

By

Dear Liz: If a surviving spouse is selling the couple’s longtime home, are there any special provisions on the long-term capital gains?

Answer: When one spouse dies, their half of the home gets a new value for tax purposes. The value is “stepped up” to the current market value, so that the appreciation that happened on that half of the property is no longer taxable. In community property states, both halves of the property get this step up.

Let’s say a couple bought a home for $100,000 and that it was worth $250,000 when the first spouse died. In most states, the tax basis — what’s subtracted from the net sales price to determine potentially taxable capital gains — would rise from the original $100,000 to $175,000. The surviving spouse’s basis would remain at $50,000 while the deceased’s half would be stepped up to $125,000 (one half of the current $250,000 value). If the home was sold for $250,000, there would be $75,000 of potentially taxable capital gain.

In community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — the home’s basis would get a double step-up to $250,000. If the home was sold for $250,000, there would be no potentially taxable capital gain.

Even if there is a gain from the sale, a single person can exclude up to $250,000 of home sale capital gains from their income as long as they owned and lived in the home at least two of the previous five years. Couples can exclude up to $500,000. However, widows and widowers who sell their homes within two years of their spouse’s death can take the full $500,000 exclusion.

Q&A: A gift for the great-grandkids? Consider a 529 college savings plan

By

Dear Liz: Recently my granddaughter gave birth to twins. I’d like to put $500 into a trust for each of them to mature when they are 18. I’m hesitant to set up an education fund in case they decide not to go on to college. I would like something that includes growth and safety, the least amount of cost and minimal tax consequences. Is there something you could recommend?

Answer: A trust would be overkill, given the relatively modest amount you have to contribute. Consider instead setting up 529 college savings plans, which provide the benefits you’re seeking, including some flexibility in how the money is spent.

The money you contribute can be invested to grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses, which include costs at vocational and technical schools as well as colleges and universities. In addition, up to $10,000 per year can be used for private school tuition for kindergarten through 12th grade. If a beneficiary doesn’t use the money in their account, the balance can be transferred to another close relative. The account owner (you) also can withdraw the money at any time. You would pay taxes on any earnings plus a relatively modest 10% penalty.

Legislation passed at the end of last year offers another option: Money that’s not needed for education can be transferred to a Roth IRA, starting in 2024. After an account has been open at least 15 years, the beneficiary can start rolling money into a Roth. The amount rolled over can’t exceed the annual contribution limit (which in 2023 is $6,500), and the lifetime limit for rollovers is $35,000.

These plans are offered by the states and operated by various investment companies. You can learn more at the College Savings Plan Network.

Q&A: Checking survivor benefit eligibility

By

Dear Liz: I was widowed at 44, when my children were 10 and 12. I received Social Security benefits for myself and for them for a time. I then went back to work. I started taking Social Security at 65 even though I continued working until 70. I hear a lot about widows’ benefits and wonder whether I would be eligible. I need the funds.

Answer: Call Social Security at (800) 772-1213 and ask whether your survivor benefit, based on your husband’s work record, is greater than the benefit you’re receiving. If it is, you’ll get the larger of the two benefits, rather than both of them. If it’s not, you’ll continue to get your own benefit.

You first qualified for survivor benefits because you were caring for a deceased worker’s minor children. Your benefit probably ended when the younger child turned 16, although the children could continue receiving checks until they turned 18 or graduated from high school, whichever occurred later.

Otherwise, survivor benefits are typically available at age 60, although the amount available is reduced if you start benefits before your own full retirement age (which used to be 65 but is currently between 66 and 67). Also, benefits started before full retirement age are subject to the earnings test, which withholds $1 for every $2 earned over a certain amount ($21,240 in 2023).

When you applied for Social Security at 65, the agency may have compared the benefit you earned on your own record with the survivor benefit you were eligible for based on your late husband’s record, and given you the larger of the two. If not, ask them to make the comparison now and see if you’d be better off.

Q&A: Why you need to pay attention to your credit utilization

By

Dear Liz: Our credit scores are in the low 800s. We always pay all credit card balances off before the next billing period. We are presently charging a cruise for us and our daughter and her husband. We’re worried about using too much of our available credit and thus reducing our credit scores. We’re using one credit card and paying half the balance this billing period and the rest on the next billing period. I’ve never been able to calculate the “credit utilization,” but I’m sure we will exceed it for the next two months even though we will pay the amount charged in full. With this large charge, can you suggest anything else we can do?

Answer: Your credit utilization is simply the amount of available credit that you’re using. If your card has a $10,000 limit and you make $5,000 in charges, your credit utilization ratio is 50%. (If you’re not sure what your credit limit is, you can check your account online or call the number on the back of your card and ask.)

In general, the less of your available credit you use the better.

The balance that matters for credit scoring purposes is the balance that’s reported to the credit bureaus — and that’s typically what you owe as of your statement closing date.

Making a payment right before the statement closes can help reduce your credit utilization. Some people make payments every week, or even more often, to keep their utilization in the single digits.

If you don’t plan to apply for a new credit card or loan, however, you probably don’t need to worry about a temporary ding to your credit scores because they’re already so high. Your scores will probably still be quite good and will rebound once you pay off the balance.