December 29th, 2011, by

With a New Year often come lots of changes. I’m looking forward to 2012 and what it may bring, not just for me, but many people who have struggled the last several years to get their financial life together.

But, with much regret, I will no longer be writing this column. I selected the title “A Wealth of Knowledge” because I believe that it takes so much effort to shield yourself in this economy. As Benjamin Franklin said: “An investment in knowledge pays the best interest.”

For the last several years, I’ve answered your basic personal finance questions every week. My hope was to help put you on the road to wealth. My first column started with an elderly couple that was taken advantage of when they purchased a home without getting a home inspection. The home turned out to need a lot of repairs that would have been discovered during an inspection. “We trusted our real estate agent, who advised that a home inspection was not necessary,” the couple wrote.

Over the years, I received many such letters from people who trusted a company or professional to do the right thing. But, as I told the elderly couple, when Ronald Reagan was negotiating with the Soviets, he famously said: “Trust, but verify.” There are good and fair people out there to help you with your financial situations. Still, you have to verify what you’re being told.

By far, the bulk of the questions were about debt. This question from 2009 was typical of the mail I received: “I lost a job that paid $73,000. I have done everything I can to find any other job, but at 53 and due to the current economy, I have been unable to find work. I have past due medical bills that are being garnished from the second job that I have always had (thank God!). My wife has gone from a domestic engineer to working at a low-paying job at a start-up business. Our vehicle was repossessed, and we still owe $10,000 on it. There is credit card and tax debt. We are hounded by the same companies that Congress bailed out. Before the loss of my income, we were in the process of paying down our debt. I don’t know what to do. Help, I’m drowning.”

Such cries for help continue. I’m so saddened by the level of debt that is still crushing so many families. But, debt is coming down. The Federal Reserve Bank of New York said that overall consumer debt dropped about $60 billion, to $11.66 trillion, in the third quarter.

I was grateful when I received feedback such as this note from a mother of four from Minnesota: “Thank you for providing the great resources, especially the budget planning and expense tracking information. Reading your column has helped me plan better for my future. I am saving and can see a brighter future, including being debt free. Keep up the great work.”

As I wrote to that mother, I understand the pull to live above your means. We are a debtor’s nation. Our government is in debt. Corporate America is still limping along in debt. It becomes easy to think debt is, and always has to be, part of your past and future.

But, it doesn’t have to be.

You can buy a car for cash and not get into auto debt.

You can use a credit card and pay it off the next month without rolling over debt for things you probably can’t even recall you purchased a month later.

You can go to college without student loans. It will be tough. You may have to live at home and stay in state, but it can be done.

And, you can pay off your home before they bury you six feet under.

Times are still hard and probably will still be rough in 2012. But, never give up hope. Save more. Spend less. Stay out of debt or resolve this year to get out of debt. All of this is possible with the right information.

Ultimately, I hope I left with you a legacy of knowledge to live the financial life you deserve.

December 26th, 2011, by

Q: I have enrolled with a debt settlement company. My debts are two and three months behind, which lowered my score before I even started. If I choose to opt out of the program, how in the world do I even start paying back my bills?

Cincinnati, Ohio

A: I’m not a fan of debt settlement. As you are finding out, there are a lot of down sides to such deals.

First, debtors often have to pay a lot of money, cash that could be used to pay down your debts. I’ve seen contracts requiring people to pay several thousand dollars. Debt settlement firms often make claims they can negotiate with your creditors to greatly reduce the amount you owe. Some companies claim that they help reduce your debt anywhere from 30% to 70%.

The companies typically tell people to stop making payments to their creditors, and instead, send payments to the debt negotiation company, where they will hold the money in an account on your behalf so they can make a lump-sum payment offer to your creditors. But, there is no guarantee your creditors will accept the offer. And, while you wait to see what happens, your debts are not being paid, further damaging your credit.

Under a new rule that went into effect last year, debt settlement companies that sell debt settlement and other debt relief services on the phone are banned from charging you a fee before they settle or reduce your debt.

It’s hard to get out of these contracts. But, if the company is not fulfilling its end of the bargain, you may have some options. Here’s a link to a laundry list of things to do, written by consumer advocate Steve Rhode, that may help you get out of the contract.

Before you sign up with a debt settlement company, get a clear idea of what you are getting yourself into. Here are some tips from the Federal Trade Commission.

• Get a clear explanation of price and terms. The company must explain its fees and must tell you about any conditions on its services.
• Find out how long it will take to get results—that is, how many months or years before the company will make an offer to each creditor.
• Make sure the company tells you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
• If the company asks you to stop making payments to your creditors—or if the program relies on your not making payments—the company must tell you about the possible negative consequences.

December 22nd, 2011, by

Q: I am 63 years old and thinking of retirement. However, I have lost so much since August 2011. Would it be better to just pull my funds out of my 401(k) and keep the cash in a savings account at a credit union? I realize there would be taxes to pay, but what is the difference? Pay tax or lose by Wall Street!

A: You are not alone in fearing losses from your retirement account.

You may want to be sure you have a certain amount of funds that are not subject to the ups and downs of the stock market. However, also consider that, if you are in good health, you need your savings to still grow, so that it can keep pace with inflation. You could live in retirement for another 20-25 years.

Consult a financial advisor who can help guide you on the best way to protect your savings as you enter into retirement. You can find a fee-only financial advisor by going to The National Association of Personal Financial Advisors website.

You might also consider putting some of your retirement savings in two types of inflation-indexed securities offered by the U.S. Treasury. They are Treasury Inflation-Protected Securities (TIPS) and I Bonds. Both of these types of securities were created for investors who want inflation protection and a guaranteed rate of return on their principal. You can buy TIPS and I Bonds from financial institutions and on the TreasuryDirect website.

With TIPS, the principal and interest payments are adjusted to compensate for changes in inflation. Interest is paid semiannually and is calculated using the adjusted principal amount.

The earnings rate on an I Bond is a combination of a fixed interest rate plus the rate of inflation. The I Bond is an accrual-type security, meaning interest is added to the bond monthly and paid when the bond is cashed. With an I Bond you can defer federal taxes on earnings for up to 30 years. The bonds are also exempt from state and local income taxes.

Also just so you know, as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions.

December 20th, 2011, by

Q: Please tell me the difference between increasing dependent deductions on my W-4 and asking my employer to sign me up for EITC. Which one will I get more money from on my monthly paycheck?

Columbia, SC

A: Before answering your question, I would like to explain how the W-4 form works.

When you get a job, your employer will ask you to fill out a W-4 or “Employee’s Withholding Allowance Certificate.” On this form, you report your marital status and the number of allowances you want to take. The information you supply allows your employer to calculate the amount of federal income tax to withhold from each paycheck.

You are entitled to take federal withholding allowances for yourself, your spouse and your dependents. Allowances reduce the amount of income that is subject to withholding. You can file a new Form W-4 at any time, and you can adjust the number of allowances you take. You can adjust your withholding at any time to increase your take-home pay by claiming allowances based on expected tax deductions and credits.

For example, if you itemize the interest you pay on your mortgage, you could boost the number of allowances you take so that you have more money in your paycheck. The more allowances you claim, the less money is withheld from your paycheck.

To figure out how many allowances to take, follow the instructions on the W-4. The form has a worksheet to help you figure this out, based on projected deductions and tax credits. However, just know that if you take too many allowances, you could owe the IRS, and you could be subject to a penalty for underpaying.

If you are having trouble doing the worksheet on the W-4 form, go to the IRS’ online “Withholding Calculator.”

Now, as to your question about the Earned Income Tax Credit (EITC), it is a refundable federal income tax credit that is intended to help low- to moderate-income working individuals and families. Your employer doesn’t sign you up for the EITC. To qualify, taxpayers must meet certain requirements and file a tax return, even if they do not have a filing requirement. To find out if you qualify for this great credit, go to the EITC Home Page of the IRS website.

In your question, I believe you are confusing the EITC with the AEITC or the Advance Earned Income Tax Credit program. The AEITC allowed people to get a portion of the Earned Income Tax Credit in their paychecks, instead of receiving all of it when filing their year-end tax return. The Education Jobs and Medicaid Assistance Act of 2010, signed into law in August 2010, repealed the Advance EITC. After December 31, 2010, workers could no longer get the benefits of this credit in their paychecks.

So, you should use the withholding calculator on the IRS site and find out if you are eligible for the EITC.

December 15th, 2011, by

Q: If I owe $28,000 in credit card debit, but only gross $40,000 a year, should I consider filing Chapter 13?

Las Vegas, NV

A: You certainly do have a lot of credit card debt, compared to your income and, as you point out, that’s gross not net (meaning what you get to take home).

Despite the amount of debt you have, I’m not sure if filing for a Chapter 13 is the answer or, for that matter, filing a Chapter 7. With a Chapter 13 bankruptcy, you set up a plan with the bankruptcy court to pay back your debts over time. Under a Chapter 7 bankruptcy, you are able to wipe out unsecure debts. But, before you can file for a Chapter 13 or a Chapter 7, you have to get bankruptcy counseling from a credit counseling agency approved by the United States Trustee’s office. The good thing about this requirement is that a counselor can help you determine if it’s possible to avoid filing for bankruptcy, which is a serious step and will stay in your credit files for 10 years. That will, in turn, significantly bring down your credit scores and impact your ability to get good credit deals.

Instead of filing for bankruptcy, you might consider getting on a debt repayment plan, which is similar to a Chapter 13 without having the same impact on your credit scores as a bankruptcy filing. You can discuss this with the credit counseling agency.

So, get some help from a credit counseling agency. To find an approved agency in your area, go to the website of the U.S. Department of Justice U.S. Trustee Program and search for “Credit Counseling & Debtor Education.”

December 13th, 2011, by

Q: I want to fix my credit, but I don’t know what’s on my credit report. I’m not working and don’t have any money. So, all the help I want and need has to be free. I’ve also tried to apply for the “bad credit” credit cards and still don’t qualify. What should I do?

Milwaukee, WI

A: First, you can easily get a look at your credit reports. By law, the three major credit bureaus—Equifax, Experian and TransUnion—must give you a free copy of your credit files every 12 months. You can order your reports by going to AnnualCreditReport.com. [By the way, this is the official and only site for you to get the truly free credit reports.]

You are not entitled to free credit reports. But, for your purposes, you can start with taking a look at your credit files. If you are having trouble getting one of those high-interest credit cards for people with “bad credit,” that means you’ve got a number of derogatory items in your files, which also means you’ve paid bills late, had a judgment against you or other things that indicate you may be a credit risk. And frankly, it’s a good thing you can’t get a credit card now, because that probably means you can’t handle it right now.

So, how can you “fix your credit,” as you say? Pay your bills on time. Seriously, that one tip is one of the best ways to improve your credit history. Your account activity and whether you are delinquent play a big factor in determining your credit score. If you are paying your bills on time, then work on reducing any outstanding debt you may have, especially on old credit cards that may have been cancelled.

Next, if you really need to improve your credit because you will be shopping for a home or a car or you’re afraid a poor history will affect your employment opportunities or insurance rates, then get a secured credit card. A secured credit card works like any other credit card except it requires you to put money in a bank account, which becomes a “collateral” account. For example, if you are required to deposit the typical $300 to $500, your credit line will reflect the amount of your deposit. If you put $300 in the collateral account, you can charge up to $300. But, you will still have to make monthly payments.

The key to using this type of card is to charge a little, and pay the balance off, to show you can handle credit. After several months of responsibly handling the secured credit card account, you may qualify for an unsecured credit card, at which point you can have the money in the collateral account returned to you.

Secure cards often come with a high interest rate and annual fee. So, make sure you don’t roll over balances from month to month. Also, watch out for a lot of fees. For a list of competitive secured credit card deals, go to BankRate.com. You should also check with your credit union if you are a member.

December 8th, 2011, by

Q: I would like to clear up my credit, so I can start the process of buying a home. How do I do that?

Myrtle Beach, SC

A: There are two top ways to improve your credit history, which will then help increase your credit scores. The better your credit scores, the better mortgage deal you will get from lenders.

The first way to improve your credit is to pay your bills on time. I know that sounds simple, but your payment history impacts your credit scores more than anything else that goes into the scoring formula.

Secondly, reducing how much you owe can help boost your scores.

Your FICO score, which is the system used by lenders, takes into consideration five categories of information. It looks at:

1) your payment history;
2) the amount of debt you owe;
3) the length of your credit history;
4) new credit;
5) types of credit in use.

About 35% of your FICO score is based on how you pay your bills, and about 30% of your score is based your credit utilization. Utilization considers the amount you owe compared to how much credit you have available. According to FICO, it’s found that people who use a high percentage of their available credit limits, compared to people using a lower level of credit, are more likely to have trouble making some payments now or in the near future.

So, by paying your bills on time and reducing your debts, you can increase your scores and get a better home loan.

For more information on how to improve your credit scores visit the MyFico Web site.

And here’s something you should know if you’ve applied for a home loan and got turned down or didn’t get great terms. Regulations now require lenders to provide you with a credit score and related information when they deny your request for credit or if they give you credit but with less favorable terms than other consumers with better credit histories would get. If you are denied, you should get a notice from the lender. You have a right to know why you were turned down and you are entitled to a free credit report and credit scores, if requested, within 60 days. So be sure to ask for the reports and scores before the 60-day window expires. The information you receive could help you figure out what you need to do to improve your credit history and get a better offer next time you apply for a home loan.

December 5th, 2011, by

Q: I am fast approaching 62 years of age and recently unemployed. My husband’s income is not enough for all of our bills. If I cannot locate a job soon, should I apply for Social Security benefits to supplement our income or try and wait it out until age 66 (full retirement age)? I’m afraid if we wait, we might end up filing for bankruptcy.

Columbia, SC

A: I’m sorry you are going through such a tough time and during your senior years when so many people hope to be financially secure.

Of course you can take an early payout at 62, but you get a reduced monthly amount. However, if you wait until your full retirement age, you get more in your monthly benefit. If you wait until you turn 70, you get an even larger check. So, for example, let’s say your monthly retirement benefit at your full retirement age of 66 would be $1,000. If you take it at 62 instead, you would get $750, a 25% reduction, according to estimates by the Social Security Administration.

“As a general rule, early or late retirement will give you about the same total Social Security benefits over your lifetime,” SSA says. “If you retire early, the monthly benefit amounts will be smaller to take into account the longer period you will receive them. If you retire late, you will get benefits for a shorter period of time but the monthly amounts will be larger to make up for the months when you did not receive anything.”

So, in the grand scheme, depending on your life expectancy, early or late, you end up with about the same amount of money.

More than half of those claiming retired worker-benefits in 2009 elected to receive them as soon as they turned 62, according to AARP. Many seniors are taking their benefits at 62 because, like you, they need the money and can’t afford to wait.

Considering your situation, you don’t have the financial flexibility to wait until your full retirement age to take your benefits. So, take the money now because you need it.

December 1st, 2011, by

Q: I want to know if credit counseling can help me if I had originally filed for bankruptcy, and the court dismissed the case. Now, I’m responsible for making the payments to the creditors myself. Will the creditors accept a payment plan?

Florissant, MO

A: You should definitely contact the creditors to see if you can work out a repayment plan. The last thing you need is for them to get a judgment and attack your wages. But, don’t promise a monthly amount you can’t pay.

Better yet, if you can save up enough cash, you could offer to settle your debts for less than you owe. Often, creditors will accept a cash settlement, because that’s a sure thing, as compared to waiting for payments over the long haul.

If your creditors aren’t willing to work with you, go to the website of the National Foundation of Credit Counseling and make an appointment with a credit counselor. The nonprofit agency can help negotiate with your creditors to set up a debt payment plan.

November 27th, 2011, by

Photo by Adam Selwood, Flickr Creative Commons

Q: This may sound like a crazy question, but I trust your judgment and the advice I read in your column and your posts. I’m not trying to avoid repayment of what I know I owe on various credit cards and am making progress, paying more than the minimum due, and have stopped using them. I am in my late 60s, not married and have no children, and I know that despite progress in paying down the debt, I probably won’t be able to be debt free anytime soon. So, what happens to the debt if I pass away before it’s paid off?

Chicago, IL

A: I’m so sorry you’re mired in debt. But, keep plugging away; you may get rid of it sooner than you think. And, your question isn’t crazy at all. It’s something that many people are concerned about. They don’t want their heirs strapped with their debt.

As for the credit card debt, it doesn’t necessarily die when you do. Unless there was a co-signer on the cards, when you die, your estate is responsible for your debts. Your personal representative, administrator or executor will take an account of all your assets and liabilities. Depending on the laws where you live, the executor will determine what bills get paid before any assets are distributed to your heirs. If your estate is insolvent, and there isn’t enough money to pay your bills, then the credit card companies could just be out of luck.

Here’s something your heirs should know. The Credit Card Act of 2009 has a provision that says when an estate administrator or executor asks a credit card lender for the outstanding balance of a deceased person, the company has to provide it within 30 days of the request. If the bill is paid within 30 days, no interest charges may be imposed. The credit issuer is also banned from adding fees and interest while the estate is being settled.

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