Ask Liz Weston

Get smart with your money

Q&A

Q&A: Finding your real credit score

By

Dear Liz: I’ve been thinking of buying a house, and I want to get a good deal on the mortgage. To do this, I’ve been working on getting my credit score high. I only have one credit card and have had it for less than two years. This credit card has gotten my FICO score to 788. I’ve never had a loan. Would you recommend getting a credit builder loan, to try to increase my score and get a better mortgage deal? Or is 788 good enough?

Answer: Mortgage lenders typically use older versions of the FICO scoring formula. The resulting scores can be quite different from the free scores you can find online, or even the FICO 8 or FICO 9 scores that your bank and credit card companies may show you.

You can get your mortgage credit scores, along with FICO scores used for auto lending and credit cards, for $19.95 per credit bureau at MyFico.com. (Be sure to click on the tab that says “one time reports,” because otherwise you’re signing up for a subscription service.) Be sure to get all three bureaus’ scores, because mortgage lenders use the middle of the three numbers to determine your interest rate. If your scores are 800, 740 and 720, for example, the lender would use 740 to determine your rate and terms.

If the middle of your three mortgage scores is 740 or higher, you should get a mortgage lender’s best deal. If it’s not, the MyFico.com report should give you some clues how to get it higher.

Q&A: Credit scores and card limits

By

Dear Liz: I have a 780 credit score but noted that one of my cards doesn’t count in the percent of credit used. I have had this card for 44 years and I could charge a couple hundred thousand dollars on a single purchase if I chose to, yet credit scoring formulas don’t figure in the “credit I have available” from Amex. Seems unfair?

Answer: As credit cards with six-figure limits are rare, what you’re describing is probably a charge card. Unlike credit cards, charge cards don’t have preset spending limits. They also don’t allow you to carry a balance from month to month, typically.

The “percent of credit used” you mention is called credit utilization, and it’s a large factor in credit scoring formulas. Credit utilization measures how much of your available credit you’re using, and the bigger the gap between your credit limits and your balances, the better.

But the credit utilization calculation can’t be made if one of the numbers — the credit limit — is missing. The only way the formulas would be able to calculate credit utilization in that case would be to assume that whatever amount you charged is equal to your credit limit, and that would be disastrous for your scores.

Q&A: Withdrawals from an inherited 401(k)

By

Dear Liz: A relative inherited a 401(k) as a listed beneficiary, and it was simply rolled over into an IRA in her name. Now another family member wants some of the money. The relative keeps trying to explain that if she pulls out any or all of the money, it will be taxed and reduce the amount available if she did want to share it. She is already retired and doesn’t need to use the money. She wants to keep it as part of her joint estate with her spouse, who could possibly use it later to pay off their mortgage. Wouldn’t she be foolish to pull the money out just because another family member thinks he should get some of it?

Answer: Your relative needs to talk to a tax professional.

Required minimum distribution rules prevent people from keeping money in retirement accounts indefinitely, and the rules recently changed regarding inherited retirement accounts. Your relative needs to understand the rules that apply to her, since failing to follow those rules can incur hefty penalties. Exactly how those rules apply depends on when she inherited the money and her relationship to the deceased.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 eliminated the so-called stretch IRA, which allowed non-spouse beneficiaries to minimize distributions so that inherited retirement accounts could continue to grow tax deferred for decades. Now, non-spouse beneficiaries are typically required to drain the account within 10 years of the original owner’s death. These rules apply to retirement accounts inherited after Dec. 31, 2019. Even if she inherited the money earlier, she would still need to begin distributions at some point. Failing to make these required distributions incurs a tax penalty equal to 50% of the amount that should have been withdrawn but wasn’t.

Of course, just because she has to withdraw the money and pay taxes on it does not mean she has to cave to the family member. The withdrawals are hers to spend, invest, share or save as she wishes.

Q&A: What you need to do when free health insurance for unemployed people ends Sept. 30

By

Dear Liz: My husband lost his job and we are on COBRA continuation coverage for our health insurance. We won’t have to pay the premiums through Sept. 30, thanks to the American Rescue Plan, which passed in March. Is there anything we can take advantage of Oct. 1 if my husband is not back to work? I understand that there’s a special enrollment period right now for Affordable Care Act coverage that ends Aug. 15. My husband’s 18 months of COBRA coverage ends in December but it’s very expensive and we’d like something cheaper.

Answer: The two of you should be allowed to switch to an Affordable Care Act policy once your free COBRA coverage ends.

COBRA allows people to extend their workplace health insurance for up to 18 months after losing their job, but as you’ve noted, the costs can be high. COBRA coverage requires paying the entire premium that was once subsidized by the employer, plus an administrative fee. ACA policies, by contrast, are typically subsidized with tax credits that make the coverage more affordable.

The American Rescue Plan requires employers to pay COBRA premiums for eligible former employees for April through September. The employers will be reimbursed through a tax credit. (The subsidy may last fewer than six months if someone’s COBRA eligibility ends before September, or if they become eligible for group coverage through their job or their spouse’s job.)

When the premium-free coverage ends, your husband would be qualified for a special enrollment period that allows him to switch to an Affordable Care Act policy.

Not only that, but anyone who is unemployed at any point during 2021 will qualify for a premium-free comprehensive policy through the ACA for the rest of the year. HealthCare.gov will have details later this month.

Q&A: Account closure and credit scores

By

Dear Liz: My mother is very focused on her credit score, which is consistently excellent. I found out that she recently called her bank and asked it to lower her credit limit on one of her long-held credit cards from $32,000 to $5,000. She uses the card only to charge infrequent, small amounts and always pays it off. She believes having a large credit limit counts as “potential debt” and hurts her credit profile, whereas I believe having a high credit limit on a lightly used card is very good for your credit. I guess we’ll find out who’s right next month when my mom diligently checks her credit score. In the meantime, could you weigh in?

Answer: You are correct. Credit scoring formulas like to see a big gap between the amount of credit you’re using and the credit you have available. Lowering your credit limit on a card can have a negative effect on your scores.

Before the advent of credit scoring, lenders did worry that someone with a lot of available credit would suddenly run up big balances and default. Data scientists discovered, however, that people who had been responsible enough to be granted high limits tended to remain responsible with their credit.

If your mother has several other credit cards and uses this one lightly, the effect may not be significant. If she wants to keep her scores high, however, she probably shouldn’t repeat the experiment with any other cards.

Q&A: Dad didn’t trust banks. How to handle the hoard he left behind

By

Dear Liz: My father was eccentric and given to conspiracy theories. He didn’t trust banks or the stock market and invested the bulk of his money in gold coins and bars. We are talking millions of dollars at current gold prices. My parents set up a living trust, so when my mother dies, I am confident the gold will be distributed equitably to myself and my siblings, without a lot of hassle in probate. But I have no idea how to convert all that gold into a more liquid investment like an IRA or money market fund. How do I do it and not be overwhelmed with fees and taxes?

Answer: Let’s hope the gold is safely stored and properly insured. It would be a shame if burglars walked away with your inheritance.

If your mother’s estate is large enough to owe estate taxes, the estate will pay those — not the heirs. (The current exemption is more than $11 million per person, so very few estates owe this tax.)

Under current law, the gold will receive a new, “stepped-up” value for tax purposes on the day your mother dies, said Jennifer Sawday, an estate planning attorney in Long Beach. You should note the price of gold on that day, using a reliable gold pricing site, and print out the information for future tax purposes, Sawday said.

Once you receive the gold, you can take it to a precious metals exchange and cash it in. If the price you get is higher than the price of gold on the day your mother died, you would have a taxable capital gain. If the price is lower, you would have a capital loss. You wouldn’t owe any taxes and could use the loss to offset capital gains elsewhere or, if you don’t have gains, as much as $3,000 of income per year until the loss is exhausted.

You can deposit the cash in a bank account, or open a brokerage account and choose your investments from there. Those investments might include a money market fund as well as stocks, bonds, mutual funds and so on.

An IRA is a type of retirement account, not an investment, and requires you to have earned income to contribute. The contribution limit is $6,000 this year, or $7,000 if you’re 50 or older, so you wouldn’t be able to put much of your inheritance into an IRA in any case.

An excellent use of some of this cash would be to hire a fee-only, fiduciary financial planner who can help guide you on how to invest the money wisely and with an eye to minimizing taxes.