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Q&A: Why credit scores drop suddenly

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Dear Liz: The same thing happened to me as to the person in your column whose credit score dropped more than 100 points after large purchases. We bought plane tickets for international travel and our credit score took a significant but temporary hit. This also happened when we made a charitable gift by credit card. After an appeal, I was able to get the credit limit on the credit card we use the most increased, and I’m waiting to see if that prevents the credit score from dropping going forward. I did check our credit reports and there were no missed payments or other problems.

Answer: Credit scores can drop when you use a lot of your available credit, but a 100-plus-point drop is unusual and should be investigated. You’re smart to look for ways to mitigate the damage from high usage. Asking to have credit limits increased is one way; another is making a payment before the statement closing date. The balance on that closing date is what’s generally reported to the credit bureaus, and thus what’s factored into your scores. Just remember to pay off any remaining balance before the due date.

Q&A: HELOC situation improves

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Dear Liz: Your recommendation that a retired couple consider a home equity line of credit to pay for home repairs astonished me. According to news reports, HELOCs are becoming harder and harder to find. Banks that still offer them have gotten stricter. And to suggest a reverse mortgage for a couple who only need $10,000, I think, is not the best option for them.

Answer: Lenders did tighten their requirements for HELOCs after the pandemic began, and some stopped offering them entirely. But the situation is starting to ease, thanks to rising levels of home equity and a generally strong economy.

The original letter writer’s spouse had proposed using a low-rate credit card to pay for a new furnace and water heater. Using a low-rate card isn’t a bad option if the balance can be paid off quickly, but could become expensive otherwise. Low rates are typically teaser rates that expire after a certain period. The couple then could try to roll the balance onto another low-rate card, but there’s no guarantee they would be approved for such a balance transfer or that they would get a large enough credit limit.

You’re quite right that a reverse mortgage wouldn’t be a great solution if the couple needed only $10,000, but the letter writer indicated they had little in savings. A reverse mortgage or line of credit could provide an ongoing source of funds for those with few other options.

Q&A: Adding sister to a house deed

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Dear Liz: A reader recently asked about giving a rental house to the sister that has been living in it for 10 years. You mentioned that the reader would have to file a gift tax return since there is a max of $15,000 for a gift exemption. Couldn’t the owner simply add the sister to the title so when they pass the sister becomes the sole owner of the house without having to deal with taxes, probate, etc? Similarly, if the sister dies first the current owner would retain ownership to give, sell, donate as they choose.

Answer: Adding the sister to the deed would be considered a gift, so the reader would still have to file a gift tax return.

Owning the home together would avoid probate and give the surviving sister a tax break, and that half of the house would get what’s known as a step-up in tax basis at the first sister’s death. Another option, if the reader wanted to retain ownership, would be a transfer-on-death deed, which is available in many states. The reader was clear that she wanted to give an outright gift, but she could consult a real estate or estate planning attorney about other options.

Q&A: Be wary of advisor motives

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Dear Liz: In a recent column, you discussed the difference between fee-only vs fee-based financial planners. Most of my retirement dollars are in an IRA with one of the better-known investment companies. One of the advisors with that firm has advocated for an annuity with a well-known insurance company as a component of my portfolio. So, does this affect the advisor’s status of fee-only vs fee-based, or is this person to be only on the fee-based side of the equation? Or am I just confused?

Answer: You’re confused because it’s confusing — deliberately so. Many investment companies, including the better known ones, don’t make it clear that their advisors do not have to put your best interests first. Most are held to a lower “suitability” standard that allows them to recommend an investment that isn’t as good as the alternatives, simply because it pays them a higher commission.

If you want an advisor that puts your interests ahead of their own, seek out a fee-only financial planner — one who only accepts fees paid by clients rather than commissions and other incentives. This advisor should be a fiduciary, meaning the advisor is required to put your best interests first. The advisor must be willing to state, in writing, that they will put your interests ahead of their own.

It’s especially important to check with such a fiduciary advisor before purchasing an annuity, since these are complex products with potentially significant downsides that could be glossed over by someone who’s being paid to sell you one. An annuity could be the right fit for you, or it could be an expensive mistake. Get an objective review from a fiduciary before you buy one.

Q&A: Social Security windfall elimination provision

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Dear Liz: I was referred to an answer you wrote in 2017 explaining Social Security’s windfall elimination provision. It was the clearest explanation I have seen. I receive a government pension and a reduced Social Security check from the provision and am now fine with how it came to be, thanks to your post.

Answer: Many people are understandably upset that their Social Security benefits are reduced when they receive a pension from a job that didn’t pay into the Social Security system. Understanding why this happens may help. Here’s a reprint of the question and answer from 2017:

Dear Liz: I am a public school teacher and plan to retire with 25 years of service. I had previously worked and paid into Social Security for about 20 years. My spouse has paid into Social Security for more than 30 years. Will I be penalized because I have not paid Social Security taxes while I’ve been teaching? Should my wife die before me, will I get survivor benefits, or will the windfall elimination act take that away? It’s so confusing!

Answer: It is confusing, but you should understand that the rules about windfall elimination (along with a related provision, the government pension offset) are not designed to take away from you a benefit that others get. Rather, the rules are set up so that people who get government pensions — which are typically more generous than Social Security — don’t wind up with significantly more money from Social Security than those who paid into the system their entire working lives.

Here’s how that can happen.

Social Security benefits are progressive, which means they’re designed to replace a higher percentage of a lower-earner’s income than that of a higher earner. If you don’t pay into the system for many years — because you’re in a job that provides a government pension instead — your annual earnings for Social Security would be reported as zeros in those years. Social Security is based on your 35 highest-earning years, so all those zeros would make it look like you earned a lower (often much lower) lifetime income than you actually did.

Without any adjustments, you would wind up with a bigger check from Social Security than someone who earned the same income in the private sector and paid much more in Social Security taxes. It was that inequity that caused Congress to create the windfall elimination provision several decades ago.

People who earn government pensions also could wind up with significantly more money when a spouse dies. If a couple receives two Social Security checks, the survivor gets the larger of the two when a spouse dies. The household doesn’t continue to receive both checks.

Without the government pension offset, someone like you would get both a pension and a full survivor’s check. Again, that could leave you significantly better off than someone who had paid more into the system.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.

Q&A: Medicare Advantage questions

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Dear Liz: You posted a letter against Medicare Advantage plans. The letter suggested that you had to go to their doctors, which is false. You can go out of network with a higher deductible. I will also tell you that most of those same doctors accept your in-network deductible. I do this all the time when I’m at my summer home.

Answer: As mentioned earlier, Medicare Advantage plans are offered by private insurers as an alternative to traditional Medicare. The plans can differ in what they cover and how.

For example, if your Medicare Advantage plan is a preferred provider organization, you may indeed have some coverage if you use a medical provider outside the plan’s network. If the Medicare Advantage plan is a health maintenance organization, the plan may not cover out-of-network care except in an emergency. HMOs also may require you to get a referral to see a specialist.

Contrast that with traditional Medicare, which allows you to see any medical provider that accepts Medicare (which is most of them). One of the downsides to traditional Medicare is the co-insurance, including deductibles and copayments. However, you can purchase a supplemental, or Medigap, policy from a private insurer to cover those. There are a number of Medigap plans, but what they cover is standardized.

Medicare Advantage plans often pay for things that Medicare does not, such as hearing, eye care and dental. Many people who sign up for Medicare Advantage are, like you, pleased with their coverage. Others are not, though. Read on:

Dear Liz: Regarding the pros and cons of traditional Medicare versus Medicare Advantage options, I want to share a personal horror story about my parents. Both are now deceased, and I went through hell dealing with their Medicare Advantage plans.

These plans often send classy color brochures in the mail to seniors approaching 65, inviting them to a free lunch to hear all about the excellent care that they supposedly will receive when signing up with these health plans — all with no extra monthly premiums! Both my parents fell for the promises offered by these “free” plans.

As you wrote in your response, there are serious and inconvenient limitations to the quality of care and the hospitals and doctors covered in these networks. It was frustrating.

My mother’s primary care doctor always seemed exhausted and never explained anything correctly. He seemed to be annoyed when we asked him to repeat information. My dad’s plan told him it was not contracted with the hospital closest to him and referred him to a hospital much farther away. His primary care physician was rude, disrespectful and uncaring.

As my father’s health advocate, I was always arguing with his insurer. My dad became depressed at the poor quality of care and the lack of support from this company. I think he just gave up. He passed away in 2018 of prostate cancer, which had spread into his lower back. Had he received proper testing when it was supposed to be done, the cancer may have been caught early and treated. It was too far gone to treat by the time it was diagnosed.

If you stay with traditional Medicare, there are supplemental health plans that cost a few hundred dollars a month. I have heard from friends and relatives that the care is better through paid supplemental plans.

Bottom line: You get what you pay for. Probably best to stick with plain old Medicare; you might just live longer.

Answer: Like all private health insurance, Medicare Advantage plans can vary dramatically in quality. You can’t assume that one person’s experience with Medicare Advantage will be the same as another’s.

You can assume, however, that any insurance with lower upfront costs will have higher costs or more restrictions, or both, if you need a lot of care. If you want more freedom to choose your medical providers and you can afford the premiums, traditional Medicare with a supplemental policy may be a better fit.