Should you cancel an unused credit card that has an annual fee? What happens to a parent's debt when they pass away? TODAY financial editor Jean Chatzky, CNBC’s Carmen Wong Ulrich and David Bach, author of “Start Late, Finish Rich,” offer advice on these issues, plus wise words about protecting your credit, investing and more:
Q: My husband and I have contacted a bankruptcy lawyer and Debt Rescue USA for advice for our credit card debt. We both have jobs and no children. We pay all our bills on time and we are never late. We have approximately $90,000.00 in credit card debit. We pay the minimum payments on the credit cards and our total payments a month are just over $1800 and $568 is finance charges. I am 48 and my husband is 47. We have 2 mortgages and no car payments. We have 2 401K's that total $11,000.00. -Wendi, Geneva, Illinois
Jean Chatzky: Your first step should be contacting a credit counselor. You have to go through credit counseling anyway before you can file bankruptcy, and in many cases, it will help you avoid bankruptcy all together. The National Foundation for Credit Counseling recently launched a program called Call to Action, under which they asked the top ten creditors to begin offering deeper repayment plans through the Debt Management Plans offered by credit counselors. All ten agreed to do that, and the program is designed for people in exactly your situation — you're keeping your head above water, but just barely. Through this program, all accounts must liquidate within 60 months. So that's your first stop: Call 800-388-2227 to be connected with a NFCC member agency in your area.
I generally do not recommend debt settlement, but if that's the right option for you, your credit counselor will tell you. At that point, you can reach out directly to your creditors and arrange for a settlement — there is absolutely no reason to go through a company.
As far as bankruptcy is concerned, that's a last resort, but if it comes to that, you want to look at Chapter 13 if you qualify. Chapter 13 is for individuals with a regular income — like you — because it allows you to develop a plan to repay all or part of your debts. Chapter 13 also allows you to keep your home. To be eligible for Chapter 13, your unsecured debts must be less than $336,900 and secured debts less than $1,010,650.
In Chapter 7 bankruptcy, on the other hand, the goal is a discharge of your debts in exchange for the liquidation of some of your assets. You're only allowed to file Chapter 7 if the court deems that you won't be able to repay your debts under Chapter 13. You can typically keep vehicles up to a certain value, necessary furniture, part of the equity in your home, and jewelry up to value limitations, but you'll likely give up cash, bank accounts, investments, and your second car.
Q: We are a military family, and we were recently relocated from Missouri to Virginia. Due to the poor market, we chose to rent out our house in Missouri, which we purchased in September, 2006. We are losing $256 per month due to the difference between the rent and the mortgage. Our mortgage is going up another $98 per month beginning in June since our home owner's insurance doubled after we moved. The loss every month is very difficult and we'd like to know if there is any plan out there to help us reduce our mortgage payment to limit our losses. If not, can we claim these losses on our taxes next year. -Sherry, York, Virginia
David Bach: A huge thanks to you and your family for serving our country please know we are all grateful for the work you are doing. In regards to your question, the first thing you should do is try to lower your homeowner's insurance. It may take a bit of time but ask those around you which insurers they use for their homeowners insurance and give those contacts a call for comparative purposes in addition to a site like netquotes.com that will give you five free quotes. You can also go to the National Association of Insurance Commissioner www.naic.org for insurers by state along with any complaints against them. Check to make sure that the land under your house isn't included in the value of the home since it isn't at risk from theft, windstorm, fire and the other perils covered in your homeowners policy. Also, you may want to consider raising your deductible because it could save you as much as 10-20 percent on your premium
Next, look to refinance the mortgage you have on the home. You may be eligible under President Obama's plan "Making Home Affordable" which has $75 billion allocated to help as many as 9 mm homeowners in an effort to stabilize the housing market. Go to makinghomeaffordable.gov where they will ask you a few questions about the home and type of loan you have to see if you qualify. However, if you feel like you are falling behind and won't be able to keep up you need to contact your lender immediately to see if there is some way they may be able to help you devise a payment plan for the short term.
Finally, in regards to your taxes, you can deduct up to $25,000 of rental losses on your tax return, if your adjusted gross income is less than $150,000. If your adjusted gross income is less than $100,000, you can deduct the full $25,000.
Q: I think you have said before that it is not good for your credit score if you cancel a credit card even if you aren't using it. Instead you should use it once a month to keep it active. Is this true even if the card has an annual fee attached? And does it hurt your score if you keep a card open but do not use it? -Linda, Pittsburgh, Penn.
Jean Chatzky: I tend to say that if the card has an annual fee attached, and you're not using it, you're wasting money and you can go ahead and cancel it. But these are different times, and you really need to consider the impact that will have on your score. If that card has a high credit limit, and you've had it in your wallet for a considerable length of time, canceling it could really ding your credit score, which could end up costing you a lot more than that annual fee in the way of higher interest rates on any money you plan to borrow in the future. If you don't plan to borrow any money in the next year or so, you can cancel the card, but be sure to keep your nose clean in every other area — pay your bills on time, keep your debt levels low — and no that your score will take a hit for a little while.
And no, it doesn't hurt your score to have an open card and not use it, but you run the risk of the lender canceling the card of inactivity, particularly in this economy. That's why I suggest using cards every once in a while for small purchases that you can pay off right away.
Q: My question is regarding college and divorce. My ex-husband and I have two daughters in college and we haven't been able to come up with any type of plan or agreement because we don't agree on what the living costs are. I have been trying to track spending, and the girls helped come up with a budget and I am wondering if there is any type of service that could take a look at this budget and our resources and help us come up with a plan. I think it's hard enough for families that are in tact to come up with an agreement, and it's extremely hard for divorced families that are having a hard time communicating. -Betsy, Kalamazoo, Illinois
David Bach: Child support may or may not cover your child's college education costs. First question — does your divorce agreement stipulate how college education costs are covered. Second question is do you receive child support through the age of majority which could be 18 or 21 or even higher depending on state and agreement.
Best way to resolve this if you are speaking and communicating is to sit down without lawyers and honestly break out the real costs of school. Start with tuition, and housing (they are fixed costs), then add in extra's like the books, travel, food, etc. The fixed costs of education will be the easiest to agree on. Then decide what is fair based on your incomes and how you can both contribute to the cost. Also what will your two daughters contribute? This should be a family plan, not just a divorce plan. Don't use the cost of education to drive a wedge between your kids and your ex as so often happens. Use it to come together and as an opportunity to grow. I'm sure you both want the best for your kids.
If that won't work, consider Divorce Mediation before heading to court. It will save you money and hopefully heartache.
Budget lesson:
- Easiest way to quickly get a handle on expenses is to use a tool to track every penny you spend online instantly.
- Online tools can track, ATM and bank debits, credit cards, checks — everything instantly and automatically.
- They can help you budget and also save online using "online envelopes you create" to save for say "books", "meals out with friends"
- Some site today are free like Mint.com. or Wasabe.com
- You can try my FinishRich Money Management tool for 30 days for Free at FinishRich.com
Q: I have a question about priorities. I have about $8,000 on a credit card that has a 13.25 percent interest rate as well as a home equity line of credit with a $20,000 balance. The HELOC has an adjustable rate currently at 3.5 percent. With my available cash flow, should I pay more towards the HELOC or credit card? Logic tells me to focus on the one with the higher interest rate, but the adjustable HELOC scares me. Thank you! -Alicia, Mount Pocono, Penn.
Carmen Wong Ulrich: I'm a logical kind of gal too, but there's one piece of logic that you're missing from your calculations: your home has value. That HELOC, as scary as the adjustable rate is, is tied to your home. Therefore, it's secured debt — debt that has something you could sell to pay it off, and something, when the market turns around, that will earn you a return. That means that the urgency to pay it off is not as urgent as unsecured debt such as credit card debt that leaves you little to show for it.
Another point: there is some predictability when it comes to HELOC rates — they ebb and flow according to a prime interest rate that is widely reported so you in some effect, prepare for rate hikes. However, credit card interest rates these days can jump 10 points in 15 days! You may be paying 13.25 percent now, but if your creditor doesn't like one little thing about your credit even if it has to do with another card or loan, they can raise your rate to 29 percent or more! Pay off that credit card first, then, save up an emergency fund and fund your retirement savings too. Then, pay down that HELOC.
Q: I have an AES private student loan that has a variable interest rate (currently at 2.75 percent, it is has been as high as 8.75 percent). I have been paying more than I need to on it even though I am unemployed. Is there a way that this loan can be rolled into a consolidated loan along with my other federal student loan (which is locked in at 1 percent)? -Marisa, Kansas City, Missouri
David Bach: The simple answer here is no because you're looking to consolidate two completely different types of loans: a personal student loan and a federal student loan. And you can't mix the two.
The low interest rates and superior benefits offered on federal consolidation loans are not available to private education loans. You would need to look at other options for refinancing your private education loans.
Start by contacting your current lender to see what options they can offer you. AES services your loan, but look at your loan paperwork to see who your lender is and get in contact with them directly.
Since the interest rates on private student loans are based on your credit score, you may be able to get a lower, fixed interest rate through a private consolidation loan if your credit score has improved significantly since you first obtained the loan.
Ask your lender if they'll reduce the interest rate on your private loans rather than lose your loans to another lender. Again, these are private consolidation programs, so the interest rates are dictated by the lender, not the government.
Then shop around. There are a number of lenders that will consolidate private education loans. You can find a listing for them on many of the leading financial aid web sites like www.finaid.org, but just be sure that when you're evaluating a private consolidation loan, you ask whether the interest rate is fixed or variable, whether there are any fees, and whether there are any prepayment penalties.
Q: Recently I checked the online statement for my credit card and noticed a finance change/interest around $9. I have never been late for a payment and have always paid my full balance. As a graduate student with loans I work very hard to manage my money and avoid additional debt. I had mistyped my last payment and owed $0.90 from the full balance, but had paid well over the minimum payment one week before my bill was even due. It doesn't seem right that I was penalized for paying almost the entire bill on time. Is this something that the credit card reform bill is hoping to address? For larger purchases that I may need to pay over time, how can I avoid these extra charges? -Erin, Columbus, Ohio
Carmen Wong Ulrich: All's definitely not fair in the land of credit cards these days. This sounds like an interest charge, not a late charge so there's not much you can do to make it go away. Here's a rundown of some of the biggest changes coming w the new Credit Card Holders Bill of Rights (passed last week, though not in effect until next year) and the new Federal laws that go into effect in July 2010 will change:
- No more universal default
- 45 days notice of interest rate changes (currently 15)
- No more double-cycle billing
For larger purchases where you'll need to carry a balance you won't be able to avoid interest charges, however, your interest rate will be less likely to change and surprise you. Plan before you purchase — don't max out one card, use your lowest rate card, pay on time every time and pay it off as soon as possible.
Q: My dad just passed away and my mom is left with some credit debt. My question is what happens to the credit card debt that was just his? Does she have to pay his cards? -Jannae, Delano, Calif.
Jean Chatzky: This depends largely on your state. In many community property states — and California is a community property state — the debt would be passed to your mother if they were incurred during the marriage. If you have questions about this, you can contact a consumer law attorney.
In most instances, however, if the cards were in his name and his name only, your father's estate is responsible for paying the debt off. Once they are taken care of, the remainder of the estate will be divvied up as dictated in your father's will, if he has one, or probate, if he didn't. If there aren't enough assets to pay for the debt, the estate will be considered insolvent and his creditors will be notified accordingly. The debt will be forgiven.
As for any cards or debts that are joint accounts between your mother and your father — in other words, your mother was on the account as a co-signer — she'll likely be responsible for paying that debt off, with the help of your father's estate.