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Answers to your tough debt, 401(k) questions

TODAY financial editor Jean Chatzky shares practical financial advice on canceling credit cards, paying off debt, saving money in a tough economy and more.
/ Source: TODAY contributor

If you have questions about your money in today's economy, you're not alone. Here, TODAY personal finance editor Jean Chatzky tackles reader concerns about a few financially sticky situations.

Q: I am an international business executive who recently relocated to the U.S. after working in Asia for the last 30 years. I have no credit history here, and would like to begin creating one, however, I cannot get a credit card or buy a car since I do not have a history. What is the best and fastest way to solve this problem?David, Santa Monica, CA

A: What you need is a secured credit card. It looks like a credit card and works much like a credit card, but the difference is that you deposit a sum of money with the card-issuing company and that becomes your credit limit.  The best secured cards pay you interest on your deposit. Then you pay your bills every month and as long as you do so with no hitches — like not being late or going over your limit — 18 to 24 months down the road, the best of the secured cards automatically convert to a regular credit card. Voila, you have a credit history. You can find a list of secured cards on the web at

Q: I will be retiring soon. I have no debt, receive social security and alimony, but I don't know if they will cover my expenses. I have investments in the stock market and a 401(k), but the value of most funds is dropping. I could get a reverse mortgage or liquidate my mutual funds and purchase an annuity — I have heard you must be very cautious  when putting money in annuities. - Barbara, Reston, VA

A: This is the stage of your life where you want to stop taking as many risks with your money and lock into some sort of income stream. Both immediate annuities and a reverse mortgage could provide that for you, but reverse mortgages tend to have higher fees than good immediate annuities (and they're really best for people who know they want to stay in their homes forever). I'd look at immediate annuities first. An immediate annuity is purchased with a lump sum of your retirement funds and then provides a guaranteed stream of income for life.

How much you should annuitize depends on how much income you think you need. Some people feel comfortable covering much of their basic living expenses with Social Security and other sources of guaranteed income, like a pension or annuity payments. They can then tap other assets, like mutual funds, stocks and bonds for discretionary expenses like traveling and entertainment and emergencies. By keeping some money in stocks — which I know seems worrisome now but is the best bet long-term — you'll have the best shot at the long-term growth you need to keep your purchasing power ahead of inflation.

I used Money magazine's IncomeForLife calculator to run some annuity scenarios for you.

  • If you annuitized $50,000 you'd get a monthly payment of $373
  • If you annuitized $75,000 you'd get a monthly payment of $560
  • If you annuitized $100,000 you'd get a monthly payment of $746

Of course, you may be able to do better by shopping around.

Q: I am currently working a full-time freelance design job that I have had for nearly two years. In hopes of gaining more job security and better benefits, I have gone back to school to obtain my teaching license. I have finally reached the point in my schooling where I am required to complete 16 weeks of student teaching, which means that I will have to quit my full-time freelance job. I have been told that it is difficult to student-teach and work at the same time, but given our situation, my husband and I cannot afford for me to lose all my income. I have been trying to save up, but do not have enough in the bank to cover four months of lost wages. How can I prepare and stay on top of our mortgage and other bills while I am student teaching?– Ashley, Columbus, Ohio

A: I know you've been told it's difficult to teach and work at the same time, but I know people who have done it and right now, that's what you need to do. Why? Because if you don't, you're going to dig your family into a hole. Look carefully at the numbers and figure out how much you'll be able to save and how much you'll be behind, then structure a part-time work schedule to make up the slack. Also, see if for the short-term, your husband could pick up any overtime to help as well.

Q: How does canceling a credit card affect your credit rating? I really don't want to hold onto a particular card, but I am afraid canceling it will negatively affect my overall credit rating. – Kenneth, Queensbury, NY

Q: It is true (and not just urban legend) that canceling credit cards dings your credit score. That's because one important part of your credit score (about one-third) is something called your utilization ratio. It's the amount you have borrowed divided by the amount of credit you have available to you. By canceling a card, you shrink your credit lines (the denominator) so the ratio takes a hit.

If you really want to get rid of this card, however — and there are lots of reasons you may want to including annual fees, high interest rates, etc. — do the following: Make sure that you are not planning to apply for a big loan on a car or a house in the next six months. Then, pay down a little bit of debt (the numerator) at about the same time you're canceling the card. Don't cancel any other cards for the next few months and it should be a wash.

Q: I have over $25,000 in credit card debt. Also, my 401(k) is currently losing money, which I'm assuming is due to the economy. Do you recommend taking money out of my 401(k) to pay off my credit cards? Allison, East Providence, RI

A: It seems that more and more people are wanting to tap into their 401(k)s and other retirement savings these days, which isn't a surprise considering the state of the economy. We all need a little extra money to put gas in the car, but if you can pull it together any other way — taking on a part-time job for a while, working overtime at the one you have, or really scrutinizing your budget and cutting out the unnecessary expenses — that's always a better option.

Rule number one is that we do not pull money out of a 401(k) to pay off credit card debt. That's because when you pull money out of a 401(k), you're subject to taxes and penalties that can cost you 30 to 40 cents on the dollar for every one you withdraw. But also, and perhaps more importantly, if you were to ever file for bankruptcy, money in a 401(k) is protective. An in-between alternative is borrowing from your 401(k). That's better — no penalties, no taxes and interest is paid back from you to you — but not without its risks. If you lose your job, the plan can ask for the money back inside of 60 days.

I propose a different strategy: If you are feeling you are losing too much in your 401(k) move some of the money from stocks into the money market option where it will not lose anything further. Then, rather than making new contributions to pay off that credit card debt stop contributing for a little while and put that money toward the plastic.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .