Credit score, report, history are different

This was originally published on Monday, January 22, 2018, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My New Year’s personal finance resolution is to start repairing my credit score. I have had some missed payments and other serious financial troubles. I know that there are certain areas that the credit institutions look at but I find it all a bit confusing. Could you help simplify how it works and what I can do to improve my score?

Answer: That is a great resolution. Your credit is important because it affects your ability to get low interest loans, your employment, your purchasing power and many other areas. Your credit is basically your reputation as a borrower. Credit agencies use information about your borrowing patterns and repayment history.

Your credit history is the foundation on how you are scored. Paying bills on time is the key to good credit. Paying late or defaulting on payments can severely damage your score and rebounding from it can take a while. Employers, utility agencies, and landlords often look at your credit history to see how financially responsible you are.

When looking at your credit, many use credit score, credit report and credit history interchangeably. These are three separate terms that are related to each other.

Credit score. This is a calculated value that specifies your creditworthiness. FICO, or Fair Isaac Corporation, has created a formula that’s the model most financial institutions use to determine your credit score. Your credit score can range from 300 to 850. There are 28 different FICO scores that are industry specific. The three credit bureaus often use these different scores and this is the reason you get a different score from each.

According to the myfico.com website here is what your FICO scores indicate:

  • 800 and up is an exceptional score and is well above the average U.S. consumers. It exhibits that you are an exceptional borrower and that you are not too far in debt and pay your bills in a timely manner.
  • 740-799 is very good. It is still above the average of most United States consumers and indicates that you are a dependable borrower.
  • 670-739 is good. In this category you are near or slightly above the average credit score which the FICO website states as 695. Most lenders consider this a score still trustworthy.
  • 580-669 is fair. If your score falls in this range you are below the average consumer score. Lenders still see some credit worthiness in you but will offer a higher interest rate.
  • 580 and below is poor. This range is far below the average consumer score and indicates to lenders that you are a very risky borrower. Many who fall in this category are often denied loans.

Credit report. This is the official record of your credit history that you receive from the three credit bureaus — Equifax, Trans Union and Experian. Lenders, utility companies, landlords and collection agencies send the credit bureaus information about your status with them.

You are entitled to a free credit report from each of the three credit reporting agencies once every 12 months. You can request all three reports at once, or space them out throughout the year, which is my recommendation. That way you can monitor your scores throughout the year. You can order your free credit reports at https://www.annualcreditreport.com.

Credit history. This is the unofficial record of your debt and repayments. Your credit history describes how you use money. It contains how many credit cards you have, how many loans do you have and if you pay your bills on time.

You have a credit history if you have a credit card or a loan from a financial institution. Without a credit history, it can be harder to get a job, an apartment, or even a credit card.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Advertisements

After death, who pays for student loans?

This was originally published on Monday, July 31 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

When a loved one passes, it is a very emotional and trying time. Having to deal with your loved one’s affairs after they pass can be a long and drawn out process.

If they have a student loan that isn’t fully paid off, the loan can be passed on to someone else, depending on the type of loan.

  • Federal loan. If your loved one had a federal student loan, it won’t be passed on to anyone; the loan ceases. The survivors will have to present an official death certificate to the loan provider.
  • Parent PLUS loan. A federal Direct Parent PLUS Loan is a credit-based loan that the parent or parents of a dependent, undergraduate student may borrow to help pay for educational expenses. Since it is a federal loan, it can be discharged when either the parent or the student dies. The estate and the heirs won’t be responsible to pay the loan.  Unfortunately, there are tax consequences associated with the death discharge of a Parent PLUS loan due to the student’s death. Parents will receive a 1099-C form from the Internal Revenue Service after the debt is canceled. The remaining debt canceled is treated as taxable income. Parents in this situation could be hit with a large tax bill.
  • Private student loan. Some private student loan lenders do offer a death discharge, but not all of them. This loan is more like a traditional personal loan. Private lenders may request the estate to pay off the loan. However, if the deceased is the sole signer the heirs or other relatives aren’t generally considered liable.  If there is a co-signer, the co-signer is legally responsible for the debt. In some cases, the death can cause the loan to go into default and accelerate the debt repayment. In other words, the lender can demand the entire loan is due immediately.  The co-signer may request a co-signer release. To obtain the release, the lender will require the co-signer to make on-time payments for a specified period of time, to illustrate they are financially capable of handling payments on their own.  If the deceased is married, depending on local laws, the spouse may be liable for the loan. If the loan was obtained before the marriage, the loan may be forgiven.

Be prepared

To ensure your loved ones are not responsible for your debts, the best thing you can do is to make sure you and your family are protected by understanding your lender’s policy regarding death discharge and reviewing it in depth. A life insurance policy can help with any outstanding debts and protect your family from aggressive loan providers.

Preparing now can save your family from financial trouble in the future.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

A deceased loved one’s debt: Who pays what?

This was originally published on Monday, July 24, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My sister passed away unexpectedly. She left behind a few loans, including a mortgage, a new car loan and a student loan. Some of the loans she took out were done by her, but a few were co-signed by family members. She passed with good credit and was up to date on her loan payments. Our family would like to get a better understanding of what we are responsible for and what happens to the loans she had acquired by herself.

Answer: Condolences to you and your family. Losing a family member is certainly emotional. Once the ceremony of the funeral and burial are done, the stress of finalizing your loved one’s estate can be overwhelming.

Generally, creditors get paid first from the estate and assets left behind; the beneficiaries receive whatever remains. The person who is legally appointed to be the executor will use the assets to pay off the debt. This can be done by using money left in a bank account or even selling off property or stocks.

If there are not enough assets to pay off the debt, creditors may get part of what is left and the family members may not be responsible to pay off the debt.

Sometimes it is not that straightforward. The type of debt may also play a factor as to who is responsible for paying off the debt.

  • Mortgage. If the mortgage has a joint homeowner, he or she will inherit the house and the mortgage. Federal law prohibits lenders from forcing a joint homeowner to pay off the mortgage immediately after the death of the co-owner. If the mortgage doesn’t have a joint homeowner the executor can continue to pay the mortgage from the estate. If the estate doesn’t have enough money, the person(s) who inherit the house can take over the mortgage payments.
  • Home equity loan. If someone inherits the house, they will also inherit the loan. A lender can request the inheritor to repay the home equity loan immediately. If the inheritor doesn’t have the money, the lender may require selling the house. Lenders do have the option to work with the inheritor to take over payments.
  • Credit cards. If the credit card has a joint account holder, he or she will be responsible for the unpaid bills. Authorized users listed on the account are not responsible to pay off the remaining balance. If the estate doesn’t have enough to pay off the credit card balance, the credit card companies absorb the debt. Credit card debt, unlike a car loan or mortgage, is considered an unsecured loan because the loan is issued on the borrower’s creditworthiness.
  • Car loan. If the car loan has a co-signer, the co-signer is responsible for continuing the payments or paying off the loan. If the deceased is the sole owner of the loan, the executor can pay the loan from the estate. If the payments stop, the lender can repossess the car. If the estate can’t pay off the loan, the inheritor of the car can continue making payments.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Avoid common financial mistakes

This was originally published on Monday, December 12 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Many of us are guilty of one or more financial habits that can be improved. The start of a new year is the perfect time to contemplate of your financial goals and revise how you spend and live.

Not having a spending plan. I once read a quote that stated: “A goal without a plan is just a wish.” Many people feel that having a spending plan isn’t necessary. We all have life goals and most of the time these goals require that our finances be in order. Whether it is going on vacation, back to school or buying a house, a plan is necessary.

Without a spending plan, you cannot prioritize your financial decisions or be aware of where your money is going. A plan needs to be in writing and often referenced to ensure that you are in line with your plan. Not having a personal spending plan can delay your life goals and create a financial peril.

Sit down and take the time to create a spending plan. There are many resources online that can assist you in creating one. Once you have one in place, there are many great apps for your phone that can make staying on track easier.

Living paycheck-to-paycheck. According to an article on investopedia.com, in January 2016 the average U.S. household saving was 6.20 percent. Other comparable countries during the same time period such as Germany, France and Italy saved around 10 percent. Of course there are some differences between the countries, but it shows that living with a high standard of living does not necessarily mean living with large financial debt.

Regrettably, many people are in a perilous position, where one missed paycheck can cause some serious financial repercussions. Put away some money into a savings account each month. If you make $3,000 a month, try to put away at least 10 percent, or $300. If that is not possible, even 1 percent of your monthly income that goes into a savings account is better than nothing. Make a conscious effort in 2017 to put aside a set percentage of your paycheck into a savings account.

Not taking advantage of your employer’s match. Everyone wants free money, so why not take it? According to money.usnews.com “an estimated $24 billion dollars in unclaimed 401(k) match funds are left unused in the United States every year.” That is a lot of lost opportunities to double investment dollars.

If your employer offers a match on your 401(k), take advantage of it and contribute at least up to the match percentage. If you can afford to take the full match, do so. It is one of the least expensive and fastest ways to increase your retirement fund.

Good debt vs bad debt. Good debt has been defined as borrowing money to purchase items of value, such as house, or fund a college degree that will improve your future earnings. Bad debt has been defined as using borrowed money to pay for items that are consumed quickly such as clothing or a vacation.

Many will say that it is OK to have good debt, but the truth is debt is debt. You still owe money to someone else. The difference between the two is that bad debt can destroy your financial health much quicker.

Avoid debt as much as possible. The faster you are debt free, the better.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com

Debt from the deceased can be complex

This was originally published on Monday, May 9 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: My father is terminally ill and I am in the process of getting his affairs in order. He has an updated will and I have confirmed that my mother is named as his beneficiary for his life insurance and retirement plan. My main concern is his debt. He took out a large loan several years to help with his medical treatments. He is not behind on his payments but I am curious to what happens to the debt once he passes. Could you help me understand how debt is paid off once the lean holder is deceased?

A: I am so sorry to hear about your father’s illness. As a child it is hard having to switch roles and become the caretaker for our parents. Unfortunately, when someone dies, their debt does not disappear. The rules to creditors recouping their money is complex and often vary from state to state. Of course, it also depends on the type of loan and if there are others who share the responsibility.

Family members typically are not obligated to pay off the debt of a deceased family member directly from their assets. The Fair Debt Collection Practices Act (FDCPA) protects family members from unfair, deceptive, or abusive practices used to collect a debt.

Who is responsible? Take a look at who signed for the debt. If it is a joint debt, then two or more people are responsible for the full debt. The names of those responsible will appear on the promissory note, loan or credit agreement.

Usually there is a clause in the contract that if something should happen to one of the responsible parties and they are unable to pay their portion then the surviving debtor(s) are responsible to pay off the full amount.

If only one person owns the debt, then that person is responsible for that debt. If the estate, the total net worth of an individual that includes land, possessions, cash, and other assets, of the deceased doesn’t have enough money to cover the debt, the debt may go unpaid. If the estate has money, then the assets from the estate will be used to pay off the debt.

Type of debt

Depending on what type of debt the deceased leaves behind will also determine if the debt will be repaid.

  • Credit card. If the credit card is joint with someone else or has a cosigner(s) then the cosigner(s) are responsible for paying off the debt. Otherwise depending on the amount left the credit card company may pursue collecting what is due.
  • Mortgage. If you are inheriting a house with a mortgage you will inherit the debt as well. If you cannot make the payments, you may have to sell the home. If you are having trouble paying the mortgage, it could affect your credit score if your name is on the note secured by the mortgage.
  • Medical. Medical expenses are usually on top of the priority list to of debts to pay.
  • Taxes. If your loved one passed and left unpaid property or income taxes, the estate will be responsible to pay them. They too can put a lien on assets till the debt is paid off. The deceased will be responsible to pay any income tax on income earned during the year of their death.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo .com and read past columns at the Money Matters blog at www.moneymattersguam .wordpress.com.

Be smart about staying out of debt

This was originally published on Monday, March 28 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Financial trouble can happen to the best of us. Small mistakes or an emergency can cause our finances to get out of control. Once you pull yourself out of trouble the important thing is to remember how difficult it was to get out of it. Mistakes happen but if you don’t learn from them you’ll find yourself back in that same situation.

Understand what started your troubles: Did you lose a job? Was it due to unforeseen circumstances? Or maybe it was a combination of several catalysts. Whatever the cause, be aware and stay clear from making the same mistakes again. Go back and think what could have reduced the impact? A larger emergency fund? Better budgeting? Or possibly understanding how credit works?

Budget: If you’ve been reading my past articles, you’ll realize I’m a believer in a budget. Think of a budget as the blueprint to your financial health. You build your wealth and security based on these blueprints. Be aware of what comes into the household and where it goes. The goal is to have a little left over every month and put a little away in savings. Prioritize your spending with your necessities first and then work your way through your bills saving the “luxury” items for last. These are the items that bring you joy such as the movies or dining out.

Tailor your lifestyle to your budget: In other words, live within your means. Don’t try to keep up with the neighbors or friends. Be creative and find ways to stay comfortable. If your income is reduced your spending should be too.

Charge no more than what you can pay: Bad credit habits are one of the major reasons people find themselves in financial trouble. If you do not have the money in your pocket or in your bank account, don’t use your credit card. There are some circumstances where you may need it to purchase a vacation or large item. In that case, before you purchase, reevaluate your budget. How will you pay off the balance and how long will it take? What are you willing to sacrifice to pay it off?

Spending is emotional: Whether it’s to ease the troubles of a long, hard day at the bar with friends or purchasing a video console for the perfect birthday gift, our money is usually connected to our emotions. Find out what triggers you to spend impulsively and find a way to stay away from it or ways to cope with the emotion.

Expect the unexpected: Create an emergency fund. Everyone has an optimal amount they want to set aside. The bigger the emergency fund, the better you’re prepared. This fund should be able to cover car repairs, busted pipes, or even the loss of a job for a few months. Whatever your amount is, the important thing is to start.

Get money smart: You don’t have to hire a financial counselor or pay for a lesson. There are many free resources online, in the library or from nonprofit organizations that you can turn to. If you become familiar with money, you will not be intimidated by it.

Enjoy your financial freedom. You worked hard to get out of your financial troubles. Enjoy your new-found freedom. With good planning, you can realize your dreams.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

Healthier spending habits begin with honesty

This was originally published on Monday, March 14 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Some people choose to ignore when they are in financial trouble until they can no longer ignore it. There are some signs to look out for when considering if you are starting to get into financial troubles.

Here are several questions to consider:

Are you using your credit card for everyday basics? Does going to the grocery store make you anxious because you may not have enough money? Do you go to the gas station without enough money in your checking account? If you find yourself constantly short of money for the basic necessities, you are living paycheck to paycheck. This is a stressful place to be and is not good for you financially, mentally or physically. Unfortunately, many people find themselves here. Review your spending habits. Is there any place you can cut back? You may realize that you might have to re-evaluate your living situation. This may mean finding a new job, taking on a second job or even relocating.

Do you pay only the minimum or less than the minimum amount on your credit cards? Although it may keep the creditors from contacting you to pay your bills, it really does hurt you in the long run. This habit will never pay down your debt. Instead it prolongs the time you have to pay which in turn adds interest to your balance inflating the amount you must pay back.

Do you use your credit card for cash advances? Read your credit card statement. You will be surprised how much more interest is charged for cash advances than for using your card for a purchase transaction.

Are your credit card balances near the maximum limit? Do you max out your credit card, make a payment then use it again? This is a cycle that can become hard to exit.

Do you hide your purchases from your spouse or significant other? This is usually associated with the guilt of purchasing an item knowing that you are struggling to make ends meet.

Be honest about your spending and credit habits. Occasionally, we may get by doing this a few times. If you catch yourself in several of these instances, you should consider making some changes. If you see the warning signs, take a serious look at your budget and spending patterns. Search for the reasons you are where you are. It could be because you are between jobs or it could be that you need help managing money. Don’t feel that all is lost and just give up. There are steps you can take to start repairing your finances.

The most important thing is, don’t wait until there is a huge problem. Start trying to change how you are managing your money. Let the people around you know that you are making the change. They can be your biggest support system. If you really feel you need some help, talk to a professional financial counselor. A finance counselor can help you plot a course that will get you back on the right track.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.