What happens to a parent’s debt when they pass away? Does a high debt-to-credit ratio negatively impact credit scores? TODAY financial editor Jean Chatzky, “Start Late, Finish Rich” author David Bach and CNBC personal finance correspondent Sharon Epperson offer advice on these issues, plus wise words about protecting your credit, investing and more:
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.
Q: I'm a graduate student going into my third year in a Ph.D. program. I have around $35,000 in debt from college and graduate school combined (all Stafford Loans). I recently viewed my free annual credit report and am concerned about my debt-to-credit ratio. Right now my only debt is student debt. I have three open credit cards with no outstanding balances on them. My debt-to-credit ratio according to the report is 95 percent! I think this is because my student loans have been in deferment since I'm still in school. Does this high ratio negatively impact my credit score? — Caitlin, Vernon, Conn.
Jean Chatzky: I wouldn't worry too much about this. Student loan is considered good debt, which means that it is viewed favorably by creditors as long as you pay your bills on time once you graduate. You're being very responsible with your credit cards, and once you graduate, you can start expanding your credit file, maybe with a mortgage if you have the income to support it or a car loan. In the meantime, I'd keep doing what you're doing, because you're certainly on the right track by paying attention to your credit standing and staying away from credit card debt. You should also make a point to use those cards for small purchases every so often, and pay off the balance in full, so that the credit card companies don't close your cards or reduce your limit because of inactivity.
Q: I am a 26-year-old female with a part-time job that pays me $15,000 a year with full benefits. Somehow I am able to pay for my apartment, my monthly car payments, my cell phone, etc, with no problems. I am even able to add money to my savings each month. Because I'm pretty good at managing my money I have never had a credit card besides a few store credit cards. I believe my credit score is 690. Do you recommend that I get a credit card, and if so, how do I choose the right one for me? — Lauren, SUNY New Paltz
David Bach: Lauren, first of all I read this question twice to make sure I read it correctly and it wasn't a typo! You are earning $15,000 a year, living within your means, have no debt and a decent credit score, you are great example for America! We need to interview you on how you do this.
Now to your question, your score of 690 is decent. FICO scores range from 300-850 and the median FICO® score in the U.S. is 723. The reason your score at this point isn't higher is because you are young and don't have a credit record because you don't have a credit card (other then a store card) or a loan payment history. This is easy to fix in minutes and you should. Having a major credit card and using it responsibly helps you to build up your credit history. A solid credit history means a higher credit score. Your credit score plays a major role when you apply for a mortgage to buy a home or when you get a car loan, cell phone — even a job.
My recommendation is you go down to your bank (where you bank) and ask for a credit card. See if they will give you a card with a limit of $5,000. Then use the card for a regular payment like a phone bill. Have the phone bill debited each month from your credit card and then pay the card on time in full each month. This will start a monthly credit history for you.
To find a card that's right for you, log on to Web sites like bankrate.com, lowermybills.com or lowcards.com and start comparing. There are several questions you'll want to find the answers to before you sign up and these include:
- What's the annual fee?
- What's the interest rate?
- What happens if you are late with a payment? How much is the penalty?
- Does the contract include a Universal Default Clause and does the issuer practice double cycle billing? (If either are "yes" then find a different credit card company to do business with.) Both practices are, in my opinion, bad for the consumer and Congress is working to stop them with new legislation.
Also, be sure you always read the fine print before signing on the dotted line.
Q: My husband passed away 10 months ago and I am trying to consolidate my debt. We currently own a summer cottage in Michigan (which is for sale but no takers right now) and our primary house in Ohio. I have two girls: one in high school and one in college. I cannot refinance either home because I have no income coming in. I cannot find a job because no one is hiring. My husband died before the stimulus date for help. I do not have enough income to refinance but too much to receive loans for college. I am 46 years old and stuck in the middle of a tornado! How can I lower my payments or receive college help so down the road the government does not have to bail me out? I am trying to do the right thing but no one seems to want to help! — Gretchen, Loveland, Ohio
Sharon Epperson: Gretchen, I am very sorry for your loss. You are dealing with so much all at once — and these are major battles that have to be waged at the same time.
On the first front, I'm sure getting a full-time job is already your top priority. Even an entry level position that brings in close to what you're making part-time — but with heatlh benefits — would help immensely. Check out www.monster.com, contact friends, relatives, everyone in your network to let them know that you're looking and that you're open to many different types of positions.
Refinancing with a new lender will be difficult. The lender will want to see that you have enough income to pay back the loan. But you still may want to talk to your current lender about refinancing on your primary residence to see if they could refinance your current loan or alter the loan without checking income, since it won't be a brand new loan. It's a long shot, but worth a try. For now, rent the cottage, if you haven't already. Try to rent it so that you can cover your housing costs, but you may have to rent at a loss.
Paying for college is a bit more straightforward. The college should review your new family situation. Go to your older daughter's financial aid office and ask for a "special circumstances review" or "financial aid appeal." Tell the financial aid officer about the changes in your family situation, have a copy of the death certificate on hand, last year's income tax return or W2, and information on your current income (Social Security or other sources). The college can adjust the inputs on the FASFA form (the financial aid form requested by all colleges and universities) to reflect the change in your family's circumstances and that should result in an increase in financial aid.
You can also ask the financial aid office to increase the unsubsidized Stafford loan limit for your daughter or apply for a PLUS loan yourself. Even Bill Gates can get an unsubsidized Stafford or PLUS loan, there are no income restrictions. Increasing the limit on the Stafford loan (up to $4,000/year for a freshman or sophomore or $5,000/year for a junior or senior) is probably your best bet since the interest rate is lower than a PLUS loan. But you could take a PLUS loan to cover the entire cost of her education, minus any aid that she receives. Go to www.finaid.org for more information. Also www.fastweb.com is a great resource for finding scholarships.
A non-profit credit counselor or certified financial planner can also help. Find a credit counselor in your area at www.debtadvice.org and a financial planner at www.napfa.org or www.fpanet.org.
Q: Are debt settlement companies like Novadebt a good solution to credit card debt or are you better off trying to pay on your own? My high interest rate is killing me and makes it impossible to gain any headway on my balance. — Trent, Brooklyn, N.Y.
Jean Chatzky: I don't know about that particular company in particular, but in general, my position on debt settlement companies is that they're simply not necessary. If you have high credit card debt and high interest rates, you should check into a credit counselor through the National Foundation for Credit Counseling. They have a new program, called Call to Action, that works with the top ten creditors to help consumers enrolled in counseling pay off their debts in under 60 months. To make that math work, the creditors may need to reduce your interest rates.
If a counselor doesn't think it's possible for you to finish off your debt in that amount of time, he or she may suggest debt settlement. But you can contact creditors directly; you don't need a debt settlement company, which will charge you hundreds if not thousands of dollars in fees. Particularly now, in this climate, credit card companies are willing to work with you — but you have to pick up the phone and call the toll-free number on your bill. Ask to speak to either a supervisor, or someone in the settlement department if the creditor has one. Be ready to provide a clear, legit excuse for why you can't pay — you lost your job, a divorce, a medical emergency — and provide proof. And remember that when you make an offer, you should be ready to send in that amount in full immediately.
Q: I've tried to get I-bonds because I've heard so much about them from the Today show but I can't find any place to get them. Where do I get them and what do you suggest for 23-year-old college, married women who wants to start saving for her and her family? — Jina, Bonita Springs, Fla.
Sharon Epperson: You can buy inflation-adjusted Savings Bonds, or IBonds, directly from the government. But you'll get the same return with this investment as if you kept the money under your mattress. Earlier this month, the Treasury Department announced IBonds issued from May to October will get 0 percemt return in the first six months they're held. The drop in the Consumer Price Index, which the inflation part of the IBond is based on, has dropped so sharply in recent months that even the interest on older IBonds will be negatively effected.
Treasury Inflation Protected Securities, or TIPS, are a better bet to protect yourself against inflation. TIPS principal and interest payments are also adjusted for inflation as the Consumer Price Index rises and falls. They're are issued in 5, 10, 20 year terms, but the real — after inflation — return on TIPS is significantly higher than IBonds, historically around 2 percent (maybe closer to 1.5 percent now). You can buy TIPS through the Treasury department as well at www.treasurydirect.gov or through a mutual fund, such as Vanguard Inflation Protected Securities, or and exchange-traded fund, like iShares Barclays US Treasury Inflation Protected Securities. (Another tip: Hold TIPS in a tax-deferred account as interest on TIPS is taxed every year.)
Now for the big picture, the first step for you to start saving is just to do it. If you can, follow the "60 percent Solution" that I talk about in my book, THE BIG PAYOFF. Make sure no more than 60% of your gross household income goes to committed expenses (all taxes as well as housing, utilities, food, car loan, student loan, credit card debt etc.). Stash away at least 20 percent of your gross income toward retirement and long term savings and 10 percent for short-term savings for emergenies. The other 10 percent is your "fun money" — split evenly between you and your husband. But if you have overwhelming debt, use some of that "fun money" to pay it down. The key is developing a savings strategy now, which will make it easier to stick to a savings and spending plan, it in the future.
Q: I have an AES private student loan that has a variable interest rate (currently at 2.75 percent, it is usually 6.5 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
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
Jean Chatzky: Unfortunately, the best answer to this is simply to check and recheck. Paying your bills online is convenient and fast, but that also means you can whip through it and make little mistakes like these that can add up. Whenever you don't pay off your full balance, your credit card company is going to charge you interest on the amount leftover. It's unavoidable unless you have a 0 percent interest rate card — and even those offers only last for a few months — because that's a large part of how they make their money. $9 seems like a lot for a $.90 balance, but I'm guessing you charged something else between the time the bill went out and the charge was assessed.
So, you learned your lesson. It sounds like you've been a top-notch customer in the past, so I'd try to give your credit card company a call and see if they'll let you off the hook this time. Explain that you made a mistake. If that doesn't work, take the loss, and the lesson, and move on.
As far as the credit card reform bill, that is intended to curb things like wild interest rate hikes, deceptive card offers, and universal default, which is when a card issuer increases your interest rate based on a late payment you made on an unrelated bill or a change in your credit score. It will also make fees and penalties more reasonable.
Q: Are there any programs to help people who have good credit and are not behind in paying their bills? We are trying to sell our home in Florida because my husband took a job in Atlanta. Even if we can find someone to buy our house, we will have to take a check to closing. We don't have money in the bank to pay off the negative equity. What can we do? Do we get an unsecured loan? would we be able to get an unsecured loan without the house as collateral? Do we take a loan against our 401(k)? What can a responsible person who doesn't want to ruin their credit do to get out of this housing mess? — Ashley and Jeff, Jacksonville, Fla.
Sharon Epperson: Ashley, You did what many Americans have done over the past few years. You extended yourself to buy a great house in a great neighborhood during the housing boom. Now you've left that dream behind and you're paying the consequences. You've kept up with your bills and have good credit, but now that track record is in jeopardy. You extended yourself again when you used a home equity line to make some home improvements. Yes those improvements should add to the value of the home, how much did you spend? It often takes more than two years to recover the expense of those kinds of improvements. And you're right, the government's homeownership programs don't really help folks like you who have been paying bills on time. So what do you do now?
- Talk to your husband's employer. He should speak to his new boss about relocation assistance. This is something that should have been worked out before he took the job, but you still may be able to get some help in selling your house. Some compensation consultants say that assistance could be $5,000 to $10,000 for a mid-level professional.
- Rent the old Florida home. If you have renters for your Florida home, you should probably continue to rent for a few months and see if housing prices stabilize. Unfortunately, you may not be able to get the rent to cover the entire housing cost, but try to make it enough so that you break even.
- Rent, don't buy in Atlanta. Continue to rent in Atlanta until you are able to sell your Florida home. You'll likely have to be in a smaller place than you had before, but you want to keep your housing costs down as much as possible.
- Last resort, talk to your lender about a short sale, where the lender accepts less than the loan's outstanding balance. But that will be a huge blemish on your credit history and will impact your ability to get a new loan for a house in Atlanta. So before you do this, talk to a credit counselor or certified financial planner.
I don't think you'll get an unsecured loan in this environment and don't advise taking 401(k) loan. It might be the only asset that's protected from creditors if your situation worsens.
Q: Two of my husband's credit card companies raised their rates dramatically. They will let him "opt out" of the raised rates by closing the accounts and paying off the balances at the previous rate. Will this adversely affect his credit rating? — Laura, Westbrook, Maine
David Bach: The short answer to your question is yes, closing the accounts will have a negative effect on your credit score.
So many of us are finding ourselves in the same exact situation right now, where credit card companies are taking advantage of consumers by jacking up interest rates "at any time, for any reason."
If you opt out by paying off your balances and closing the accounts, you're increasing what's called your "credit utilization ratio," which compares your total credit used against your total credit available. And when your credit utilization ratio goes up — which it will — your credit score goes down. My recommendation is you pay the card off in full and keep the card open, don't opt out. Then the higher interest rate won't matter, and if you continue to use the card the rate issue won't affect you.
If you can't pay the bill off in full, I still would not opt out, but rather work hard and fast to pay the bill down as fast as you can by adding extra each month to the minimum payment until the bill is paid off. Don't use the card anymore and work to find a better card with a lower rate.
Go to bankrate.com, lowermybills.com or lowcards.com to compare rates and find a card that works for you.
Q: I am married, mother of two and getting ready to go back to school to get a teaching license. At some point in the very near I will have to do some student teaching (which of course is unpaid) so I would like to stick to a budget with this new income adjustment. Do you have a format, tool, software, etc. that you would recommend to use? — Holly, Parker City, Ind.
Jean Chatzky: One tactic I like to use to prepare for the loss of an income is to start practicing by banking one income while you have two. That way, when you start student teaching, you'll have a hefty amount in the bank to fall back on if you need it.
Then, my recommendation for budgeting always starts with pen and paper. You need to write every penny you spend down so you know where your money is going. Once you have a snapshot — either over a few weeks or a month — you can figure out what you can eliminate to adjust to your new income level. That may mean small cutbacks like cooking Saturday night dinners at home instead of going out, or it may mean big like dumping the cable during your student teaching. But you won't know until you have it all laid out in front of you.
In terms of software, a whole crop of new online budgeting tools have popped up over the last several years, and many of them are very good. They aggregate all of your account information — bank and credit cards — so you can see what you're spending where. You can also set budgets for certain areas, like groceries and entertainment, and most sites will notify you if you're close to going over. Two sites that I'm familiar with are Wesebe.com and Geezeo.com.