How a card switch affects your credit score
Dear Liz: I have one American Express card and two Visa cards, all of which I have held for many years. I received notice that my American Express card was being converted to a Visa card. I do not want a third Visa card but have no choice. For credit score purposes, will this conversion appear to be a closing of my old card and an application for a new one? Obviously, closing a long-held credit card and applying for a new one will affect my excellent credit score, which is 830. If I decided to apply for a new American Express card, how would that impact my score?
Answer: Conversions from one issuer to another can have a temporary negative impact on your credit scores as one account is closed and another opened. The effect should be minor as long as you have other open, active accounts.
Within a month or two, the new account should show the same history as the old one, and your scores should recover. (You have more than one credit score, by the way, and your scores change all the time. As long as they’re generally above 760 or so, you should get lenders’ best rates and terms.)
The type of card usually matters less than the benefits associated with the card. If those benefits are useful to you and are enough to offset any annual fee, consider keeping the card. Its long history and credit limit are likely helping your scores.
That doesn’t mean you have to keep a card you really don’t want. The fewer cards you have, though, the more careful you probably need to be about closing one.
You can still add an American Express or other card to your portfolio. Adding a new card typically dings your scores less than five points. The effect is temporary, and the new account could contribute positively to your scores over time.
A South L.A. woman was told the limit on a credit card she’s held for 36 years was reduced because she didn’t use it enough during the pandemic.
Social Security and the tax torpedo
Dear Liz: People are typically advised to wait as long as possible (full retirement age or later) to take Social Security to maximize the benefit. If a couple has low expenses and substantial pensions, wouldn’t it make sense to take Social Security earlier, to preserve retirement funds to pass on to their heirs? Social Security payments stop upon death, whereas retirement accounts are passed on to heirs.
Answer: If your primary concern is preserving an inheritance, maximizing your Social Security payments could help you reduce how much you have to withdraw from retirement funds in the long run.
Starting early also could make you more susceptible to what’s known as the tax torpedo, which is a sharp increase in marginal tax rates due to how Social Security is taxed when someone receives other income. People who only receive Social Security don’t face the torpedo, and higher-income people probably can’t avoid it, but middle-income people may be able to lessen the hit by delaying Social Security and drawing from their retirement funds instead.
One way to preserve assets for heirs is to convert traditional retirement accounts to Roth IRAs. This requires paying taxes on the conversions, but then you wouldn’t face required minimum distributions on the Roth accounts.
Calculating the best course can be difficult. You can pay $20 to $40 to use sophisticated claiming software such as Social Security Solutions or Maximize My Social Security to model various options, or consider consulting with a fee-only advisor.
The 8% annual growth is difficult get elsewhere, so planners often urge clients to tap other money first when they retire.
Long-term-care insurance
Dear Liz: I’d appreciate your thoughts about long-term-care insurance programs. Ours has just announced a 52% rate increase with a possible 25% increase next year. Although I realize that none of us can predict the future, are there any guidelines you can suggest for deciding whether, for example, an 80-year-old in good health needs the maximum 10-year coverage or can get by with a three-year coverage period?
Answer: Most people over 65 will need some kind of long-term care, but most need it for less than three years. You may want to err on the side of caution and opt for a longer coverage period if you have a family history of dementia.
Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
