Inheritance advice: Pay down debt, then cut spending
Dear Liz: In about three months, my wife and I will receive close to $20,000 thanks to an inheritance. We have six credit card accounts with balances totaling about $10,000, plus two car loans with $10,000 and $11,000 balances, respectively. The smaller of the two car loans carries a 19% interest rate, so we know we’re going to pay that off. The other vehicle is financed at about 4% and has about three years’ worth of payments remaining, so we’re likely to leave it as is. With the remaining $10,000 we would like to pay off our credit card debt and close some of the accounts so as to improve our credit scores. I have heard of banks cutting credit limits when people make large payments on their credit accounts. Because of our very high balance-to-limit ratios, our credit scores are around average — in the mid-600s. Should I be concerned about this, and is it possible to avoid?
Answer: Your scores are actually below average. The median FICO credit score in the U.S. is between 700 and 720.
You’re not going to improve your scores by closing accounts (that can’t help scores, and may hurt them). And your credit card issuers may well cut your limits when you pay down your debt.
But that should be the least of your concerns. Your credit card balances indicate you’re living beyond your means. Fewer than 1 in 10 U.S. households has credit card debt of $10,000 or more, and carrying credit card balances not only erodes your financial well-being through expensive interest payments but also puts you at greater risk of bankruptcy.
So use your windfall to pay off your high-rate debt and then create a budget that ensures you spend less than you make so you don’t run up future debts.
By the way, it’s a bit unlikely that both of you are receiving an inheritance. Typically the money comes to one half of a couple and can be kept as separate property if he or she so chooses.
High-deductable insurance is better than none
Dear Liz: Is affordable healthcare insurance an oxymoron? I am nearing the end of my 18 months of COBRA continuation coverage for health insurance. I benefited from the federal government’s 65% premium subsidy but that has ended, so I’m faced with paying $991 a month, which I can’t afford. The individual policies that I have looked at will insure me, but not my wife, who has a pre-existing condition, or my daughter, who is a full-time student but over the age limit. I’m not too worried about my daughter, who is eligible for a health plan through her college. It is my understanding that I will receive a “certificate of creditable coverage” upon canceling the COBRA policy and I have only 63 days to purchase either an individual policy and/or HIPAA coverage. I know I’m not the only one with this dilemma. I’m honestly considering running with no coverage. Not too smart? Opinions? Suggestions?
Answer: Going bare really isn’t smart, since a single accident or illness can bankrupt you. And you typically have to exhaust your COBRA coverage before you (or your wife) can be eligible for continuing coverage under HIPAA, the Health Insurance Portability and Accountability Act, which requires insurers to cover people even if they have pre-existing conditions. Canceling your COBRA coverage prematurely could make it tough or impossible to find replacement coverage.
Your best option (other than finding a job with health insurance benefits) may be to choose a high-deductible policy. You’ll have to pay for most healthcare out of pocket, but you’re protected from catastrophically high expenses should you or your wife become injured or sick. You might want to seek out an experienced insurance agent who is familiar with plans in your state for more advice.
Settling card debt will ding credit
Dear Liz: I need to settle my credit card debt for less than I owe because of a disability and being able to find only part-time work. I am frozen on taking this step because I want to know how many points my credit rating will drop if I do this. There has to be a way to find this out.
Answer: You can’t find out in advance exactly how much your score will drop, but the company that created the FICO score says settling a single credit card debt can drop a 650 score by 45 to 65 points and a 780 score by 105 to 125 points.
Settling a debt can have another consequence: The forgiven debt may be reported as income to the IRS, increasing your tax bill.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at https://www.asklizweston.com. Distributed by No More Red Inc.
