q&a

Q&A: Co-pays and collections

August 17, 2015 By Liz Weston

Dear Liz: My primary care physician referred me to a gynecologist for a medical issue. I called the office three times and asked that the appointment be made as an annual exam.
During the appointment, the doctor was rude and critical of my body and lifestyle. (I am obese.) I left the appointment in tears before it was over.

Five months later, I got a $160 bill for the appointment. My insurance denied the claim twice, saying the doctor was double charging, but the office fought back, saying the charge was for the referral, not the annual exam.

I have tried to work with the doctor’s office and my insurance, but now the bill has gone to collections. It’s knocked my FICO score from 780 to 680 in a matter of months.

Part of me does not want to pay the bill because of the abuse I received from the doctor. However, this is affecting my finances. Would it help my FICO score if I negotiated with the bill collector and then repaid a part of the bill? What are my options?

Answer: Your best option is to ask the doctor’s office, politely, to take back the collection account in exchange for your paying the bill in full.

The doctor should not have been rude to you. But you shouldn’t have tried to get a referral for a medical issue treated as an annual exam. You were probably trying to avoid a co-pay, because health plans typically cover this type of preventive care, but that’s not why you were there.

You could ask whether the bill collector will delete the account from your credit reports. You would almost certainly have to pay the bill in full to win this concession, and even then the odds are against it.

That’s why it’s better to ask the medical provider to take back the account. In many cases, medical providers place accounts with collectors on assignment and have the ability to pull them back if they want.

The latest version of the FICO credit scoring formula ignores paid collections and treats unpaid medical collections less harshly than other collections. But that formula is just starting to be adopted, and the more commonly used previous version, FICO 8, ignores only collections worth less than $100.

As you’ve seen, even one dispute can lead to a big drop in your scores. If you feel an issue is worth pursuing, it often makes sense to pay the disputed bill and then seek justice in Small Claims court.

Q&A: IRA contributions and tax deductions

August 10, 2015 By Liz Weston

Dear Liz: I am changing jobs because of a layoff. I contributed to my former employer’s 401(k) to the extent possible. My new employer also offers a 401(k), but I won’t be eligible for a year.

I want to use an IRA in the meantime. I do not understand how I should answer the question on the tax form about whether my employer offers a retirement plan when I am determining how much of my IRA contribution I can deduct. My employer does, obviously, but I can’t participate yet. Advice, please?

Answer: You’re smart to continue your retirement savings while you wait to become eligible for the new employer’s 401(k). Missing even one year of contributions could cost you tens of thousands of dollars in lost retirement income.

When you’re not covered by an employer plan, all of your contribution to an IRA is typically deductible.

When you are covered, your contribution’s deductibility is subject to income limits. In 2015, the ability to deduct an IRA contribution phases out between modified adjusted gross incomes of $61,000 to $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.

To be considered covered by an employer plan, you have to be an active participant, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. That means money has to be put into your account by you or your employer or both.

Here’s the twist: You’re considered covered for the whole tax year if you participated in a plan during any part of that year. So the IRS will consider you an active participant for 2015 because you were contributing to your former employer’s plan for part of this year.

If you start contributing to your new employer’s plan when you become eligible next year, you’ll be considered covered for 2016 as well.

You could decide not to contribute to the new employer’s plan until 2017 to preserve your IRA’s deductibility, but it probably makes more sense to start contributing to the new plan to get both the tax break and any match.

If your contribution to an IRA isn’t deductible, consider making a contribution to a Roth IRA instead.

In retirement, withdrawals from a regular IRA will be subject to income taxes while withdrawals from a Roth IRA will be tax free. In 2015, your ability to contribute to a Roth phases out between modified gross incomes of $116,000 to $131,000 if you’re single and $183,000 to $193,000 if you’re married.

Q&A: Credit score changes

August 10, 2015 By Liz Weston

Dear Liz: My Discover card started including a complimentary credit score with my statement. My first report was 840. Each month since has been lower.

Two months ago it was 812 and the last one was 800. I have not applied for any new loans, cards or other credit. My limit on this card is $4,000, and I never charge more than $500 each month, which is paid in full. Why does my number keep dropping when I’m doing nothing different?

Answer: You may not be doing anything different, but the underlying information used to create your credit scores changes all the time.

The company that creates the leading credit scoring formula, FICO, says 8 of 10 people experience changes to their FICO scores by up to 20 points from month to month.

One factor that typically changes: the balances reported by your creditors. The fact that you pay your credit card in full is wise, but irrelevant to your scores.

The balances transmitted to the credit bureaus and used to calculate your scores may be the balances from your last statement, or from a random date in the previous month. If you have other credit accounts and loans, the balances from those factor into your scores as well.

Other things can also change. For example, an old, closed account may “fall off” your credit report, which could affect your credit utilization (how much of your available credit you’re using) as well as the average age of your credit accounts.

Also, every month your active accounts get older, which is typically a positive factor.

So you’ll see changes even when you’re looking at the same type of score from the same credit bureau.

You would see even more variation if you could see all your scores, since lenders use various formulas and pull scores from three credit bureaus.

Although the FICO score is the leading formula, that doesn’t mean the FICO you’re seeing is the FICO a particular lender is using. The lender may use a newer or older version of the formula — or one tweaked to the auto lending or credit card industry, for example.

You don’t have much to worry about, in any case. Scores over 800 indicate that you’re quite unlikely to default, so lenders should give you their best rates and terms if you do decide to apply for credit.

Q&A: Paying off student loans vs saving for retirement

August 3, 2015 By Liz Weston

Dear Liz: I’m engaged to be married and need your advice on getting started in the world of shared finances.

My fiance is 43, I’m 31. He’s debt free, with a savings account but no retirement fund. I have $34,000 in student loans (consolidated at 4.25%) and it weighs heavily on my mind as I’m desperate to become debt free. I’m debt free otherwise with $10,000 in savings.

We both make good money but my income as a freelancer is sporadic, while his is steady with periodic bursts of additional income.

We want to be debt free as a couple, save up a solid emergency fund and start making up for lost time on retirement savings, all while being aware that a family and a house might not be far away.

He’s very supportive and wants to pay off my student loans. Should I let him and pay “us” back to the emergency fund or maybe a house down-payment fund? What’s our best course of action to start on a solid financial footing?

Answer: You’re already behind on retirement savings, which should have started with your first job. Your fiance is even farther behind.

Don’t let your zeal to repay your debt blind you to the very real risk that you might not be able to save enough for a comfortable retirement if you don’t get started now.

If your education debt consists of federal student loans, then your low rate is fixed. The interest probably is tax deductible, which means the effective rate you’re paying is just a little over the inflation rate. It isn’t quite free money, but it’s pretty cheap.

You don’t need to be in a rush to pay it off, particularly with all your other financial priorities looming.

Instead, get going on some retirement accounts. Your fiance should take advantage of his workplace plan, if he has access to one.

Most employer-sponsored workplace plans have company matches, which really is free money you shouldn’t leave on the table. An individual retirement account or Roth IRA can supplement the plan or be a substitute if he doesn’t have access to a workplace plan.

As a freelancer, you have numerous options for setting aside money for retirement, including Simplified Employee Pensions (SEP), Savings Incentive Match for Employees (SIMPLE) and solo 401(k)s that would allow you to contribute more than the standard $5,500 annual limit for an IRA.

Ideally, you would be saving around 15% of your income and your fiance 20% or more.

If you can’t hit those targets just yet, start saving what you can and increase your contributions regularly. Work your other goals around the primary goal of being able to afford a decent retirement.

Q&A: Social Security death benefits for a divorced spouse

July 27, 2015 By Liz Weston

Dear Liz: I have heard conflicting information about Social Security death benefits for a divorced spouse. We divorced after 18 years and I have not remarried. What percent of his benefit is available to me?

My own Social Security is low as it started as a disability payment and then converted to regular Social Security when I turned 65.

To the best of my knowledge, my former spouse was getting the maximum Social Security benefit. He was a very high wage earner. Can you provide a simple-to-understand answer? I have received conflicting information from numerous sources including three separate people at the Social Security Administration.

Answer: It’s concerning that you would get varying answers from Social Security representatives, since the answer is simple given the facts you describe.

You should be entitled to a survivor’s benefit that equals 100% of what your ex was getting when he died, said economist Laurence Kotlikoff, a Social Security expert who co-wrote “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

Your marriage lasted the required 10 years, and you would be starting survivor benefits after your own full retirement age, so the amount would not be reduced to reflect an early start.

The fact that you’re unmarried is irrelevant in this case. Survivors’ benefits are available even to those who remarry, as long as the subsequent marriage happens after the recipient reached age 60.

That’s different from spousal benefits for the divorced, which aren’t available after remarriage at any age unless the subsequent marriage ends.

It’s possible that some or all of the people you queried didn’t understand your question or thought you were asking about spousal rather than survivor benefits. Another possibility is that they just don’t know the rules.

That’s not unusual, Kotlikoff said. Social Security regulations are complex, and not all of its employees are experienced. Kotlikoff said he often hears from people who have been told things that are “outright wrong, partially wrong, incomplete or confused.”

Educating yourself with Kotlikoff’s book and the Social Security’s own site may be a better solution than relying on its employees for answers.