Marketplace

Small business credit card

Question: We started a small business in July 08. We received an Advanta business credit card with a $20,000 credit line. It was perfect for me and 3 employees. We paid our balance every time. We were notified this week that Advanta was closing all business credit card accounts. Do you know of this? I tried Chase, CITI, and Bank of America for replacement cards but was denied because of too many credit requests on my personal credit report. Any suggestions what to do? This is really bad timing in the life of the business that otherwise is doing well. William, Fort Collins, CO

Answer: Well, you have plenty of company. After posting a $76 million loss in the first quarter, Advanta announced it was closing more than 1 million small business owner credit card accounts.

In the latest twist in the credit crunch, credit card companies are wary of small businesses. For instance, almost two thirds of small business owners said their interest rate had gone up over the past 12 months, and 41% reported that their credit limits were reduced, according to latest survey by the National Small Business Association.

The Credit Card Accountability Responsibility & Disclosure Act recently signed by the Obama only applies to consumer credit cards. Small business cards aren't covered. In practical terms, the credit card reforms protect you if you use your personal credit card for business. But the new credit card rules don't come into play for small businesses that are incorporated, limited liability corporations, and the like.

You can learn more about the current state of small business and credit cards at this Business Week story. To research getting a new card, here is a list of terms from 14 business card issuers (although some have already turned you down). I would also check out your local credit union or community bank. Both of these neighborhood institutions tend to work with local businesses. For instance, I just checked out the website of the Community Development Financial Institution that's a few blocks away from where I work in St. Paul and it offers corporate credit cards.

06/01/09 by Chris Farrell

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The $8,000 home buying credit

Question: My husband and I are looking to buy our first home. Since our annual income is around $34,000, we tend to get all of our tax money back at the end of the year (at least until I'm out of college). Is the tax credit a wash for us? Thank you for your help, Leslie, Lemon Grove, CA

Answer: No, it should be a real financial help for you. The tax credit is for qualified first-time home buyers that purchase a primary residence between January 1, 2009 and before December 1, 2009. The tax credit is equal to 10% of the home's purchase price up to a maximum of $8,000. You should qualify for the credit since you're a first time homebuyer and you come in under the income limits. (For instance, the income limit for married taxpayers is $150,000, and it phases out at modified adjusted gross income of $170,000.)

Like most tax law changes, the $8,000 homebuyer credit has created a lot of confusion. The National Association of Home Builders offers up detailed information on the tax credit here. I've also answered a number of other question on the credit on the Getting Personal blog.

Your question is about the tax implications. You have a choice when it comes to filing for the credit. You can amend your 2008 tax return to get the money quicker or you can elect to file for the credit on your 2009 return. However, you must have purchased the home before filling for the credit.

There is additional news this week on the $8,000 tax credit front: The Federal Housing Administration (FHA) has come up with new rules that allow new home buyers using an FHA-insured mortgage to tap the credit to pay for closing costs and the down payment. The lender must be FHA approved. You can find a list of qualified FHA lenders by tapping into this database. New home buyers still need to come up with an initial 3.5% down payment before taking advantage of the credit money.

You can read the official FHA statement on the program here.

06/02/09 by Chris Farrell

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Loan payment fees

Question: You mentioned on your May 22nd show that credit card companies will no longer be allowed to make people pay for phone and online payments. I was wondering if this applies to only credit card payments or also payments on other forms of credit, like mortgages and car loans? Jargen, Minnetonka, MN

Answer: No, when it comes to loans the main focus of the new law is on credit cards. (Although a provision attached to the legislation allows visitors to carry guns into national parks. Go figure.) However, a number of banks don't charge a fee for making mortgage or auto payments by phone or online, or they have "windows" where they don't. This is a classic example of it pays to shop around, especially checking into payment policies of a local credit union or community bank.

06/03/09 by Chris Farrell

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Fico score for free

Question: My credit union advertises a free service that provides members with their FICO score each month. Will signing up for this service negatively affect my FICO score? Is there any other reason why I should hesitate to register for this service? Jason, Indiana, PA

Answer: It will not have a negative impact on your credit score. Indeed, my guess is that you're with the Pennsylvania State Employees Credit Union which has negotiated a deal with Fair Isaac, the creator of FICO score, to offer its online checking customers free FICO scores monthly. "The Fair Isaac Scores on Statements program not only benefits our members by giving them a free view into their financial health, but it also helps PSECU by educating our members on the positive impact of responsible credit behaviors," said Gregory Smith, President and CEO of the Pennsylvania State Employees Credit Union.

The free credit score is a service other financial institutions are offering their customers, too. It looks like a new line of business expansion for Fair Isaac, and I expect it will become more commonplace with time. With this kind of program the customer of the bank or credit union not only gets their FICO score but the factors that went into the score. Customers can then see where they may need to make improvements in their credit habits to boost their score.

I don't see any downside to participating in a program like this other than my general stance that people are paying too much attention to credit scores. Simply put, being conservative with your household finances will pay off in a more secure lifestyle and a better credit score with time. I don't really see any need to look at it monthly. Not everyone agrees with me, and their personal finance advice is tailored toward manipulating credit scores higher. I don't agree. The goal should be to break the tyranny of the credit score.

06/04/09 by Chris Farrell

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A loss on a closed Roth

Question: I recently closed a ROTH account, feeling that the money could best be used elsewhere, since I still have a fair amount in other retirement funds, even after all the recent market trouble. I had been contributing $100 per month for about seven years, yet the cash out value, even before 10% government withholding and surrender fees, was less than the total of my contributions by several hundred dollars. What is my tax liability? Can I claim a loss on this year's taxes? Can I expect to get my 10% withholding back at some point? Thanks! Joe, Milwaukee, WI

Answer: There is nothing simple about Roth-IRAs and taxes. Yes, under certain conditions can claim a tax deduction for the loss from closing the Roth-IRA account. But there are a number of twists and turns in the tax code about liquidating a Roth. My best advice is to strongly urge you to consult a professional advisor.

That said, if you're in a similar position as Joe in Milwaukee you can stop reading this post right now. Go get professional help.

Here's a brief overview of the basic rules for those of you that remain curious. In order qualify for a tax loss from closing a Roth you must liquidate all your Roth-IRAs. The amount of money you have at liquidation must be less than your "basis." A basis is defined as the amount of money you contributed to the Roth; plus any money you may have added to it by converting a traditional IRA into a Roth; and subtract any sums of money you've withdrawn. (From Joe's email it looks like he has a loss by this definition.) You must itemize on your taxes to claim the loss. The amount that can deducted is limited to 2% of adjusted gross income. By the way, the 10% penalty doesn't apply if the Roth is made up from annual contributions.

There are a few more wrinkles, but you get the basic idea. And you see why I say work with a tax pro.

06/05/09 by Chris Farrell

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Borrow to buy land?

Question: My husband is the primary income, and I work 12 to 15 hours per week from home while I take care of the kids. We have a 5 month emergency fund, and he is saving 10% from his pay for retirement. Our only debt is the mortgage. We would love to build a house one day. The question is ... should we take money from our emergency fund to buy the land? We are nervous about doing this. We also hate to add another debt payment. Additionally, we are not investing other than in his 401k fund. Should we do anything differently? It is very hard because the emergency fund was a long hard process to build. Litsa, Charlotte, NC

Answer: When I read your question my first thought was that you've already answered the question. You don't think now is a good time for you and your family to drain your savings and take on debt to buy land. I would agree. Even though the economic news is less bad these days the economy remains weak with the unemployment rate at 9.4% and home prices still trending lower.

That said, it's terrific that you've managed to set aside a 5-month emergency savings account. That isn't easy to do. I would focus on continuing to add to that savings. It's a strong financial foundation for your household.

You should also have your own retirement savings plan. A SEP-IRA is an easy retirement savings plan to set up for the self-employed. You could also open up a traditional IRA (funded with pretax dollars) or a Roth-IRA (the contributions are with after-tax dollars.) You can learn more about these retirement savings IRA options on the Getting Personal site.

06/08/09 by Chris Farrell

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Make minimum credit card payments

Question: I recently gave 2 weeks notice at my job which I recognize is slightly insane in this economy, but I'm confident that it was the right decision. I have enough savings and annual leave to not work at all for at least 6 months, but I'm not expecting that to be the case as I also have some freelance work lined up and on the horizon. Over the last year, I've made a significant dent in my credit card debt. My question is: while I'm unemployed, should I continue to pay over and above the minimum balance as I've been doing or should I pay only the minimum balance until I have a full time job again? I should say that my budget calculations for not working for 6 months were based on paying only the minimum and on not having any freelance work coming in. Thank you, Antoinette, Brooklyn, NY

Answer: No, you are not insane. Far from it. Despite the economic downturn and all the financial problems we're living through you still need to weigh the odds and, when it makes sense, take a risk. It seems to me you've thought through your job change well. You have a plan and you have savings. For now, I'm comfortable with you keeping financial flexibility by making minimum payments for a couple of months.

Here's a small trick I picked up from a new book by Gerri Detweiler, Nancy Castleman and Marc Eisenson, Reduce Debt, Reduce Stress: Real Solutions for Solving Your Credit Crisis. (I know you aren't anywhere near a credit crisis, but I like the tip. I'll write more about the book another time.) It might be a smart financial move for you. It's at least worth considering assuming you don't add to your credit card balance.

The basic idea: You pay the minimum required credit card payment this month. Your minimum payment should go down slightly next month. But you send in last month's required payment and you continue to do that for the next several months. The financial impact is very slight at first, barely noticeable. Yet applying just a little bit of extra money every month eventually gathers momentum. With this technique you won't strain your finances, but when you get your next job it will be that much easier to eliminate the credit card debt.

I hope you find the kind of work you're looking for.

06/09/09 by Chris Farrell

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Mortgage tax deduction

Question: hey guys. someone had written in with a question recently, asking Chris if they should pay cash up front for a Townhouse, or take out a mortgage.

Chris responded that it was a good idea to start with a mortgage, which could be paid off a couple years down the road if the situation was right, giving the buyer some leeway with their finances. however, what he didn't address, and what I was expecting to hear, was a comment about the tax implications of having mortgage (aka, being able to deduct interest payments), versus paying cash upfront. so my question is: is it at all worth it to take out a mortgage in this case for the sole reason of being able to deduct the interest payments? thanks. Thomas, San Mateo, CA

Answer: No, I don't think it makes sense to take out a mortgage because of the interest deduction. What's more, the advantages of the mortgage interest deduction are exaggerated. It's a nice benefit for anyone with a mortgage but it's far from a financial windfall.

For one thing, most couples living outside the most expensive metropolitan areas or the more exclusive neighborhoods around the country can do almost as well taking advantage of the standard deduction. Put somewhat differently, the mortgage interest deduction becomes valuable the higher your income and the more expensive your home. But for most people it isn't that big a deal. For another, the mortgage interest deduction seems to encourage people to buy a bigger home than they need, and I think that's a mistake. Most importantly, the debt needs to be repaid and the interest payments add up over time.

So, the real question doesn't involve the tax deduction. The cash vs. mortgage issue is all about investment opportunity. Does taking out a mortgage let you put the cash into investments that potentially offer a higher rate of return? Is that what you want to do or would you prefer the security of ownership?

My bottom line: Don't let taxes determine your borrowing and investment strategy. It's the underlying economics of your household finances that matter. Only then take taxes into consideration.

06/11/09 by Chris Farrell

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Closed credit card accounts and your credit score

Question: I have repeatedly heard what you confirmed last week: Closing a credit card can negatively impact your credit score. The obvious question is Why? Better: Why in the world? Brenda, Newtonville, MA

Answer: Why indeed? I'm with you. The reason has to do with this table. The figures come from Fair Isaac, the creator of the FICO credit score, the 800-pound gorilla of the industry.

A Credit Score Comes From:

Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Types of credit use: 10%

The "Amounts owed" category, which makes up almost a third of the credit score calculation, takes into account the amount of debt you owe relative to your total credit limits. It's called your "utilization ratio." In the short run, when you close a credit card account or it is closed by the issuer the total credit available to you falls but the debt remains the same. In other words, your ratio of debt to credit limits is immediately worse. Of course, you can improve that ratio by paying down the debt. That's why the negative impact usually doesn't last long.

There is another reason that can come into play over the long haul. However, I doubt if it actually hurts many credit scores in the real world. If you had the closed credit card for a long time, it showed a good credit history and there is a $0 balance after 10 years the good credit news is deleted from your credit reports or history.

Want to learn more about the commonsense-less world of credit scoring? This article by bankrate.com is a good tutorial on credit scoring from Fair Isaac's perspective.

by Chris Farrell

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When is the company match mine?

Question: I was part of a "downsizing" in late January from an IT software vendor in New York City. During my tenure at the firm I was contributing to the company 401k program which has a matching and vesting component. Now that I am no longer working at the company, how does the vesting and company match work out? (Incidentally on January 1st, the company stopped matching in the 401k -- but most of my contributions predate that event.) In calling the 401k company it sounds like I will not receive the company match and vesting. Is this true, even though it was not my choice to leave the company? I wanted to check before rolling my 401k over to my IRA. There is a 6 year vesting period, and I am fairly happy with the low expense ratio index fund selected in the 401k. PS. I was only out of work for a few weeks. Seth, Forest Hills, NY

Answer: I'm glad you got another job so quickly. That's terrific. By law, any money you contributed to the 401(k) plan is yours. Period.

The issue with vesting is determining when the company's "match" becomes your money. It's a basic equation. It's partly decided by how long you've worked at the company and partly by the vesting schedule the company adopted. The two most common types of vesting timetables with 401(k)s are the "graded" and the "cliff".

Here is the minimum "graded" vesting timetable:

1 year of work: 0% vested
2 years of work: 20% vested
3 years of work: 40% vested
4 years of work, 60% vested
5 years of work, 80% vested
6 years and after, 100% is vested.

An alternative is the "cliff" vesting schedule:

After 2 years of work: 0% vested
After 3 or more years, 100% vested.

These percentages are the minimum standard companies must follow by law. But companies are allowed to be more generous if they choose. For instance, about a third of employers have 401(k) plans with the company match immediately owned by the employee. A four year vesting schedule is fairly common, too.

Now, when it comes to vesting it doesn't matter why you left the company, voluntarily or by being laid off. (The latter in your case.) So, from your email it looks as if you are under the 6 year 100% vesting rule. I'd check out the details of your plan and hopefully you're at least partially vested.

06/12/09 by Chris Farrell

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Assume a mortgage

Question: I own a house in Tennessee. An investor offered to buy the house by keeping my mortgage in place in order to save him the cost of getting a new mortgage and to save me the loss of selling short. He said he would buy the house as is and would assume ownership of the house as well as responsibility for paying the mortgage that I already have. As I have never heard of this before, I want to know if this is a good opportunity for me to finally get rid of my house without loosing money or could this be a trap? Nick, Sterling, VA

Answer: I would be very wary. The investor described the idea right: Assuming your mortgage means the buyer takes over the existing payments instead of getting a new mortgage. But most lenders no longer allow for their mortgages to be assumed. It's prohibited in the mortgage documents. So, I would look at your mortgage papers first to see if it's possible. If it is an assumable mortgage, the lender will still insist (rightly) on running a credit check on the buyer.

Finally, what concerns me is that I don't really understand the advantage to the buyer who will assume the mortgage. There are two real benefits to assuming a mortgage, a lower interest rate and cheaper closing costs. In your case the closing costs would be less. But the mortgage rate? Even though interest rates have crept up recently they remain remarkably low and, if you have good credit, there is plenty of mortgage money available from lenders.

The bottom line: Check this deal out very carefully, starting with your lender. It may not even be possible depending on your mortgage contract.

06/15/09 by Chris Farrell

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After-tax retirement savings

Question: The company I work for offers a 401k, both normal pre-tax contributions and after-tax contributions, and also a Roth-401K. Can you please explain the differences between the Roth-401K and the post-tax contributions to the normal 401k? Erik, Tulsa, OK

Answer: Yes, in both instances you're making after-tax contributions. There are a number of differences between the two options, but I want to highlight the critical one that becomes apparent in retirement.

When you take the money out of the Roth-401(k), assuming you are at least 59 ½ and have owned the account for 5 years or more, the investment gains are free of Uncle Sam clutches. The same isn't true for withdrawals from the after-tax account in a traditional 401(k). There isn't any tax levy on the amounts you contributed, of course. But you will pay ordinary income taxes on any investment earnings or gains at withdrawal.

By the way, in most cases it makes more sense for savers to open up a Roth-IRA on their own rather than put extra retirement money into an 401(k) after-tax account, assuming your employer offer the option. The reason is the value of withdrawing money free of taxes in old age with the Roth.

06/16/09 by Chris Farrell

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Inflation and an IRA

Question: I'm interested in finding a good investment for inflationary times. This would be about 7% of my retirement portfolio; around 10,000 in cash languishing in 2 different IRA accounts. I am 42, and will probably have to work until I croak. I am guessing I'll retire at 75 or so. I considered purchasing some I Bonds in an IRA account. I'd like to be able to sweep the proceeds of a dividend-yielding investment into the bonds once a year. I contacted my stock-trading account - no dice on holding I Bonds in my account there. I contacted Treasury Direct and they told me I needed to find a bank that would hold the bonds in an IRA and also contact the IRS. Do I need to call all the banks in town to see if anyone will do this? Is there a kind of bank that I should focus on? A directory that would help? Am I trying to do something completely wacko and ill-advised? Jill, Northfield, MN

Answer: I wouldn't say "wacko". But ill-advised? Yes. For a number of technical and legal reasons you can't get I-bonds into an IRA. More importantly, you wouldn't want to do that anyway. In a sense, an I-bond acts like an IRA. The money you put into an I-bond compounds tax deferred until you cash it in. At that point you owe ordinary income taxes on the gain. With an IRA, your investment grows tax deferred until you pull it out in retirement and pay ordinary incomes taxes on the withdrawal. You'd be wasting the tax shelter if you could invest it in an IRA.

That said, I like I-bonds. I would just buy them directly from the Treasury.

Inflation isn't much of a problem right now. The government reported this morning that the Consumer Price Index for the 12 months ending in May was down 1.3%, the biggest decline since 1950. I'm not very concerned that the Federal Reserve extraordinary actions to shore up the economy will end in a bout of hyperinflation, either. The formidable combination of an intensely competitive global economy and a competent central bank will keep inflation around its target level of 1% to 2%.

Of course, that forecast could be horribly wrong and a reprise of the inflationary '70s awaits us. Even if I am right low levels of inflation erode the value of a dollar over time. Long-term savers should worry about inflation a lot. That's why I like Treasury Inflation Protected Securities or TIPS. It's an ideal security for an IRA, although you'll have to buy them from a broker. I've written a fair amount about TIPS elsewhere on the Getting Personal site. The best overall source of information for investing in TIPS and similar securities for safety and security is Worry Free Investing by Zvi Bodie, finance professor at Boston University. You can check it out here.

06/17/09 by Chris Farrell

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The mortgage lock-in

Question: I am a first time homeowner ready to go ahead with the purchase except for the dreaded "lock" of the interest rate. My closing is set for August 10 so I am still at the 60 day lock rate which today at 4 pm is 5.375%. (Of course, if I was closer to my closing AND I had watched the rates after Obama's speech this morning, I could have locked in at 5 and 1/8!!) Am I the only one who is not only confused but resentful at just how much of a crap shoot this is? Who has the time or moxy to watch rates minute by minute? All I know is that for me the difference between 5 and 5 375% is $13,000. A lot of money in my book. Will rates come down before my closing? Is there any truth to the rumor that if unemployment rates are up at the end of the month, rates will be lower? Are there indicators that you can watch for? Or should I just resort to an Ouija board or the Psychic Hot Line? HELP! I am an avid listener and look to you for sage advice! Carol, Jordan, MN

Answer: No one knows where interest rates will be come August 10. You can consult an Ouija board, tea leaves, entrails, a psychic hotline, an economist or Wall Street money maven and the value of their prediction will be pretty much the same--not much. The unemployment rate could be higher at the beginning of next month and interest rates could be lower; then again, rates could be higher; and so on. As the movie mogul Samuel Goldwyn once remarked, "Predictions are very difficult to make--especially about the future."

Here's the thing: The advantages and disadvantages of a mortgage rate lock-in has nothing to do with forecasting interest rates. It's a risk management tool. If you lock in current mortgage rates you eliminate the risk that rates will be higher in the beginning of August. The price you pay for that security or promise is this: If rates go down you don't enjoy the lower rate.

You can't get rid of the uncertainty about interest rates. What you can do is manage the risk. The question for you then becomes which gamble makes the most financial sense. For most of us, it pays to get rid of the financial danger of rising rates before the closing date. That's what I would do. But some people are flush enough and have sufficient financial resources that it's a reasonable not to take the lock-in and bet that rates will be lower in the intervening weeks.

You can learn much more about the costs and benefits of the lock-in at this consumer guide published by HSH here.

06/19/09 by Chris Farrell

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Stick with adjustable rate mortgage?

Question: My wife and I have an Adjustable Rate Mortgage on our home with a current interest rate of 6.125%. We recently received two letters from the lender presenting us with two options. The first is to accept an interest rate adjustment which would decrease the rate to 4.125% and lower our mortgage payment by about $300 / month. The second option is to convert the loan over to a fixed rate mortgage with an interest rate of 5.00% for a one time fee of $250. This would decrease our current loan payment by $175.00 / month.

We will also have the option to convert the mortgage next year. My question is should we wait on converting the loan to a fixed rate and take advantage of the 4.125% interest rate for the next 12 months, and convert next year and hope to get a decent fixed interest rate. I know we are taking a gamble on the interest rates a year from now, but having an extra $300 / month for the next to put toward our savings would be pretty nice. Paul, Olive Branch, MS

Answer: Boy, the trade-off between risk and reward would push me to grab a fixed rate mortgage at 5%. That's an attractive rate. The $250 conversion fee is minimal. Once you have locked in the fixed rate it doesn't matter how high rates go in coming years. You're protected. If rates trend lower, you can always refinance. I wouldn't minimize the risk of higher interest rates when it comes time to reset the rate next year.

The savings aren't great with the ARM anyway. If you stick with the ARM you'll have an extra $3,600 for the year. That's a nice piece of change. But if you convert to the fixed rate mortgage you'll still have improved your yearly cash flow by $1,850 ($175 a month in savings minus the $250 fee). And you will have locked in that extra monthly cash cushion. So, for an extra $1,750 (he difference between your savings with the ARM and the fixed rate) you're accepting the risk of a higher rest rate a year from now. There's no guarantee the lender will offer the same deal, either. It doesn't seem worth it to me to stick with the ARM.

Why gamble? Our money lives are difficult enough these days. There is a lot to be said for grabbing for some financial certainty.

by Chris Farrell

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Save more or attack student loans

Question: I am trying to balance saving enough money in case I lose my job and paying down my current (and increasing) student loan debt. I work full time and am a part-time law school student. I have pre-existing school loan debt from another graduate degree (about $45,000). Now, I'm accruing more by attending law school. The pre-existing loans are deferred, but I could still make payments since I'm working. I am not sure how to balance making sure I have enough savings and paying off the debt. Right now, I have a solid 10 months of expenses in savings (not counting any of my retirement savings). Should I stop worrying about the savings and start paying down the school loans again? Rebecca, Hoboken, NJ

Answer: As you well know, the cost of living in the New York City area is expensive. It's impressive that you've accumulated a solid 10 months in savings. It's a decent financial cushion for anyone. It's a judgment call, but a key for answering this question is this: Is your job is really at risk or are you just feeling the general unease we all have about our jobs during the economic downturn. Assuming that you are reasonably secure in your job I would start paying down the student loans again. And then you can get even more aggressive when you get a job as a lawyer.

06/22/09 by Chris Farrell

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IRA contributions

Question: My 18 year old daughter is graduating high school and going on to college. She has had odd jobs, but has earned no more than $600. I would like to open an IRA for her to get her thinking and planning for her future. Can I open an IRA for her for more than what she has earned? Thank you. Olga, Hasbrouck Heights, NJ

Answer: I think it's a wonderful idea for her to open up an IRA. The contribution limit to an IRA if you're under 50 is $5,000 (and its $6,000 if you're 50 or over). However, the law says she can't put more into an IRA than her earned income. So her limit is around $600. By the way, I would set up a Roth-IRA. When she retires several decades from now she can withdraw the gain with no tax liability. What's more, the contributions are a stash of emergency money. She can always tap the contributions without penalty or tax.

06/24/09 by Chris Farrell

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Pay off student loans

Question: My only debt after I sell my house will be a student loan. Here is the info on that loan:

Principal: $13,741.43
Rate: 1.65%
Monthly payment: $123.63

I don't think that there is an early pay off fee. I'll have enough $ from the sale of the house and cashing in other investments to pay it off. Should I? Or should I invest it in something that is uber secure with a higher interest rate? I like the idea of living debt free...aside from house payment. Just want to know my options. Would love your thoughts. Thanks, Austin, Louisville, KY

Answer: It's wonderful to live debt free. Even though the rate on your student loan is extremely low it's still better to be free of a monthly debt obligation. I certainly felt that when I paid off my car loan. It's much easier to build up savings every month when you aren't paying down a loan, too.

Why wouldn't you eliminate the debt? The main reason would be if you're nervous about losing your job. I would park the money into an ultra-safe government-insured savings account if a layoff is in your near future or even if there is a strong possibility that you might get handed a pink slip. Another reason to hesitate might be if you don't have any emergency savings set aside. In that case, you might want to some of the money into savings and the rest into paying a chunk of the loan.

Still, if you're reasonably secure I'd pay off the loan.

06/26/09 by Chris Farrell

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Getting debt help

Question: My daughter recently lost her job in Las Vegas, NV, had to vacate an apartment & will be unable to complete the lease. She forfeited her deposit, a month's rent and otherwise fulfilled all terms of the lease. She advised the manager immediately but has since moved to another state to find other employment. She has gotten a notice stating the matter is being turned over to a collection agency to pay the remainder of lease, about $3,500.00. In addition to this, she also has outstanding student loans and the bank representatives have refused to discuss a reasonable payment program, meanwhile the payment amounts are rapidly escalating due to interest.

Where can she go for help to guide her through the process of negotiating rather than allowing the situation to get worse & worse? She simply cannot meet these obligations and is down to bare essentials of living and whatever small amount of help I can provide. Thanks, Claire, Tallahassee, FL

Answer: That's a tough situation. She should steer clear of the outfits that advertise on the radio and cable saying they'll renegotiate your debts for a hefty fee. Too many of these outfits take advantage of people already down on their luck. It's hard to figure which ones are legitimate and which ones aren't.

I'm not sure where your daughter is living right now. But to get started she should go to the website of the National Foundation for Credit Counseling (NFCC). It's the largest national nonprofit credit counseling organization and their website is www.nfcc.org. It's a legitimate organization, and she should set up a consult with an office near where she is living. A number of the NFCC consumer credit counseling services offer credit and bankruptcy advice over the phone and the Internet, too, and she can learn which ones at the website. But I always think it's good to have at least an initial meeting face to face, especially with such a difficult, emotional topic.

If you would like to check out this possibility on your own for your daughter, there is the CCCS of Central Florida and the Florida Gulf Coast in Tallahassee.

by Chris Farrell

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How many credit cards

Question: I have paid off all my credit cards, and am now looking to work on one car loan and then my student loans after that. I am trying to figure out what to do with these 4 credit card accounts now. Do I simply close them out? Do I keep them at a 0 balance but pay the yearly fees for the sake of an improved credit score? What do you recommend? Thank you, Ed, Key Largo, FL

Answer: I bet it feels good to get rid of your debts. It's terrific. I wouldn't clutter up your finances with multiple credit cards. I can't think of a good reason why anyone wants more than one. An exception to that rule is freelancers and other self-employed folks. It's a savvy move for them to have one card for personal use and the other for business expenses. It makes record keeping easier.

What's more, why pay a fee for something you don't need. Go through the cards and decide which offers the best features for the lowest cost. You should also take into account the length you've owned the card. The longer you've had it the bigger its impact on your credit score. Closing the remaining accounts will ding your credit score somewhat, but the effect is fairly limited and with good habits your score will bounce back. The only real issue is timing. If there is a major purchase in your immediate future, such as buying a home, leave your unused accounts alone until the deal is done. Then close them.

One last point: Do you really need a credit card? Or is a debit card enough? A debit card is an electronic checkbook and, with a debit card, you can't spend more than you have in your checking account. In an epic shift, consumers are now using debit cards more than credit cards. It's a wothwhile question to ask. I do need one, but a friend of mine decided he didn't.

06/29/09 by Chris Farrell

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"Claim and suspend" Social Security

Question: Is it worthwhile for me to defer receiving Social Security benefits for a few years until I actually need them? I am started receiving benefits at age 62 and am now 66. I would like to defer the payments until the age of 71 or longer, if possible. I have heard that the payments can be stopped and restarted at a later date, but I have been unable to locate any information on this on the Social Security website. Do you have any suggestions or comments? I am a faithful listener. Thank you for the informative and entertaining programs you present each Sunday night! Nancy, Mountain View, CA.

Answer: The tactic is commonly known as "claim and suspend." If you voluntarily suspend your Social Security payments you will earn retirement credits that will permanent increase your future monthly benefits. It can be a smart strategy if you earn enough to support yourself without the Social Security money. If the numbers work in your favor, suspending will increase the amount of future monthly Social Security benefits you'll receive. Those benefits are valuable since they're default free, payable for life and protected against increases in the consumer price index.

You can elect to suspend if you are at your full retirement age, which is age 66 for those born between 1943 and 1954. You must be 70 and under to do it. So, you can't defer to 71. You should be able to go to any Social Security office and make the request and the form. You can also call 1-800-772-1213. Anne Tergesen, a terrific reporter at the Wall Street Journal (and former colleague) did a nice piece on this.

For those interested in going into much more detail, the Center for Retirement Research at Boston College looked into claim -and-suspend. The information is good but the article is dense and scholarly.

06/30/09 by Chris Farrell

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