Ask Liz Weston

Get smart with your money

Credit Cards

Should you borrow to pay a tax bill?

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Dear Liz: Help! We’ve just received devastating news from our accountant that we owe around $11,000 to the IRS and the state for 2012 taxes. The reason for the huge bill is that we cleaned out my husband’s IRA to pay for our son’s college expenses. My husband is almost 65 and working part time after being laid off, and I’m 61 with a full-time job. What is the best way to pay this bill? Here are the options I can think of: 1) Cash out my three-month emergency certificate of deposit of $12,000 that I’ve saved to cover expenses in case I get laid off. 2) Take money out of my IRA. 3) Use a credit card check that will be at zero percent for the first 12 months and then will slide to 8.9%. 4) Arrange a payment loan with the IRS. 5) Sell our house in which we have 70% equity. Which is best?

Answer: Let’s take No. 2 off the table, shall we? If you learn nothing else from this experience, it should be that tapping retirement funds can trigger a big (and often unnecessary) tax bill.

Selling your house over an $11,000 bill is overkill, so let’s eliminate that option as well. Which leads us to three remaining possibilities: Use cash, borrow from a credit card or borrow from the IRS.

Borrowing incurs costs. That zero percent credit offer almost certainly comes with a fee, which is usually 3% to 5% of the total. If you can’t pay the balance within a year, you start incurring interest charges.

The short-term rate the IRS charges for installment loans is pretty low — lately it’s been around 3% — but you also typically incur late-payment penalties. The penalty typically is one-half of 1% of the tax you owe each month or part of a month until the bill is paid in full. If you file by the return due date, that rate drops to one-quarter of 1% for any month in which an installment agreement is in effect. The maximum penalty is 25% of the tax due.

How much either option will cost you depends on how long you take to pay the bill. The cost for cashing out the CD is, by contrast, almost zero. Whatever tiny amount of interest you’re getting is far less than what borrowing would cost you. If you should get laid off before you rebuild your emergency fund, your access to cheap credit could come in handy.

Going forward, let your son pay for his college expenses and conserve what’s left of your resources for retirement.

Should you pay to boost your credit scores?

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Dear Liz: I’ve seen advertisements for services that promise to help you raise your credit score by the exact number of points you need to qualify for a good mortgage rate. Are these services worth the money?

Answer: There’s one thing you need to know about these services: They don’t have access to the actual FICO formula, which is proprietary. So what they’re doing is essentially guesswork.

They may suggest that you can raise your score a certain number of points in a certain time frame, but the FICO formula isn’t that predictable. Any given action can have different results, depending on the details of your individual credit reports.

Rather than pay money to a firm making such promises, use that cash to pay down any credit card debt you have. Widening the gap between your available credit and your balances can really boost your scores. Other steps you should take include paying your bills on time, disputing serious errors on your credit reports and refraining from opening or closing accounts.

My book is out! Get it for free.

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DWYD cover2013“Deal with Your Debt” is now available, and I’m giving away five copies this week.

To enter to win, leave a comment here on my blog (not my Facebook page).

Click on the tab above the post that says “comments.” Make sure to include your email address, which won’t show up with your comment, but I’ll be able to see it.

If you haven’t commented before, it may take a little while for your comment to show up since comments are moderated.

The winners will be chosen at random Friday night. Over the weekend, please check your email (including your spam filter). If I don’t hear from a winner by noon Pacific time on Monday, his or her prize will be forfeited and I’ll pick another winner.

Also, check back here often for other giveaways.

The deadline to enter is midnight Pacific time on Friday. So–comment away!

Roommate may be not be telling the truth about his credit

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Dear Liz: I have a roommate who has truly bad credit. He has been turned down from getting a checking account at banks because his mom bounced checks on his account when he was 18 (he is now 31). What is the best way to rehab his credit? He can’t get a secured credit card because he doesn’t have a checking account. Is there a way around this?

Answer: You may not be getting the full story from your roommate. If his mom misused his checking account when he was 18, it shouldn’t still be affecting his ability to establish a bank account. Reports to Chexsystems, the bureau that tells banks about people who have mishandled their bank accounts, typically remain on file for only five years.

Your roommate should first request a free annual report from Chexsystems at http://www.consumerdebit.com and dispute any errors or old information. Even if he’s still listed in Chexsystems, he could get a so-called “second chance” checking account from several major banks, including Wells Fargo, Chase and PNC Bank. Responsible use of those accounts should allow him to graduate to a regular checking account. Then he can start the process of rehabilitating his credit.

The death knell for hotel rewards cards?

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credit card detailed 1Rewards card ninjas have long loved hotel rewards cards because the associated loyalty programs tend to be a lot more generous and easy to use than airline cards.

That may be changing.

Brian Kelly at The Points Guy has an excellent series of posts on the coming changes in hotel rewards programs, and there’s not much good news. (You can start with his post “The State of Hotel Loyalty Programs: A Devaluation Story.”) Starwood and Marriott are diluting their programs, but some of the most dramatic changes are in the Hilton HHonors program, which will not only require more points for most stays but will upgrade a bunch of properties to higher, more expensive categories. Hotels like the Conrad Tokyo will go from 50,000 points per night to 80,000 to 95,000 points.

In a warning to hotel loyalty programs, Kelly says these changes could come back to haunt them:

As you hack away more and more of the value proposition, I think you’ll realize that consumers are actually pretty smart and will start shifting their spend towards chains that actually reward loyalty and not punish it. This may not come in the form of traditional points, but many boutique hotels offer far more enriching experiences with more amenities and at cheaper prices. This Hilton devaluation was so brazen that I do think it will hurt them dearly in the end when Amex and Citi cardholders reduce their spend or cancel their cards. In fact, if the impact is so negative, I could see those issuers coming after Hilton since there are likely clauses in the contracts that state that Hilton can’t materially change the program (since the credit card companies are buying millions of dollars worth of points that their cardholders can use at a later time and date). I’ll be complaining to both American Express and Citi about the Hilton changes and hope everyone else considers doing so as well if you don’t like the changes.

Even if you plan to stay loyal to your card, the program devaluations underscore what has always been true: you don’t want to hoard rewards. Earn ’em and burn ’em to make sure you get the most value.