June 11, 2020
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In this podcast of Ask Suze Anything, Suze answers questions from Women & Money listeners Elise, Denise, Suzanne, Jerilyn, Jennifer, Laura, and Beth.
June 11, 2020. Welcome to another edition of the Women and Money podcast, as well as the men smart enough to listen. Today's a great day. I don't know why it just feels like a great day. Does it feel like a great day for you? It's like a great day for me. If any of you are interested today, I'm on Access Hollywood, at least on the East Coast it's on NBC at 7:30 PM and you might want to tune in, it was kind of a fun thing. I think they're going to show pictures of me and a few of the fish that I caught if you're interested in that.Today is Ask Suze Anything and as I told you in last Sunday's podcast, that I really want to go back now to what this podcast is all about, which is finances and really making sure that you're doing the best that you can possibly do with your money and that you don't make mistakes. The great thing about Thursday's, which is when this podcast drops, is that this is the podcast where you have the ability to write in a question. And the way that you do that, by the way, is to just simply download my Women and Money app, and you go to Apple App Store or Google Play, search for Suze Orman, and you'll be able to download it. And right there is where you can ask questions, you can search for past questions, you can search all the podcasts and listen to them, be part of the community, so many things that you can do there. But this is where you get to ask questions and if chosen, I'll answer them on the podcast. Also, you never know when I'm going to call you or answer you personally. Even if your question isn't chosen to be answered, for whatever reason, because there's so many of them, you can learn from other people's questions and my answers because, especially in times like this, it's very important that you do not make mistakes with your money. And just simply listening to questions and answers, you can learn so much. You know, I remember years and years and years ago, when I was really just a waitress, for some reason, I got totally hooked in San Francisco on KGO radio. There was a man by the name of Bob Brinker who would answer questions and he was a finance person, I loved this guy. He would answer questions for people who called in, it was a radio talk show, and I just remember sitting in my car driving and listening, even though I didn't have any money at all, listening to the questions that people were asking and his answers. And even back then, for some reason, I found it so fascinating. So, that is what I would like you to use these sessions for. Take advantage of them because you'll listen and you'll hear my answers, and maybe they won't pertain to you right at this moment. But maybe a year or two from now, you'll go, oh, I remember somebody asked that of Suze, and I remember her answer. And if you don't remember my answer, you could come back to the app, search for that topic, and you'll hear my answer because it goes right to the podcast where I answered that question. So it's just something for you to think about, which is why I think it's so important that we do Ask Suze Anything. Let's start today with Elise. Elise says, hi Suze, I'm a 47-year-old single mom planning for my 17-year-old son. I have been considering an indexed universal life insurance plan with the minimum death benefit allowable. I would pay $1k a month for 15 years, for a total of $180k. I'd use federal loans to cover costs while my son is in college for about $130k. And when the federal loans are due, I'd borrow against the indexed universal life policy at 5% to pay the federal government back in 10 years. Should I do this? Thank you. Elise, listen to me. Your son is 17, he's going to be going to college in just one year. One thousand dollars a month over 15 years is $180k. You're only going to need $130k. Why in the world would you pay the universal life insurance policy 5% to borrow money when student loan rates right now, direct loans, are 2.75% starting in July of this year. And for Parent Plus loans, they're 5.3%. Depending on your income and everything, especially for the student, that could even be tax deductible up to $2500 a year. So, it makes absolutely no sense for you to do this investment, just keep your life simple. One thousand dollars a month over 10 years is what the payments are probably going to be for $130k and then it would be paid off. So, rather than taking that money and investing it in a policy that we really don't know what's going to happen with it, I would much rather see you save that $1k a month and in four years, you're going to have at least $48k to put towards the $130k loan. So, all you're going to owe at that point then is $80k, and that's absolutely doable within 10 years. Please don't get tricky with these, OK? If you need insurance, the only type of insurance that I want you to get is term insurance, which is insurance that's good for a specific period of time. Please, everybody, stay away from whole life, universal life, and variable life insurance. And if you want more of a detailed explanation on that, just go to the app, search that topic in podcasts, and all the podcasts that I've given you specific information on why I don't like them will absolutely come up and you can hear it there. The next question is from Denise. She says, hi Suze, I would like your advice on a financial situation. I am a single mom with no financial help from my ex, and I own my house, but I owe $20k on credit cards. I wanted to get a personal loan to pay off my debt and just have one payment. I just refinanced the house because I had to pay out my ex, and I need to know if that will be a good move to do, or just call the credit cards and try to work this out with them? What would you suggest? So, Denise, here's the thing, my love, is that do you want to get a personal loan so you just have one payment? Or, is the interest rate on the personal loan lower than the interest rate on the credit cards and that's why you want to do it? Because, according to your question, it's because you just want to have one payment. No, no, no, no, it's not about if you have one payment, two payments, three payments. It's about where can you get the lowest possible interest rate on your credit cards? And the truth of the matter is if you have a great FICO score, and you probably do given that you just refinanced your home, and many of the lenders now aren't letting you refinance unless you have a great FICO score. Why wouldn't you just look into a balance transfer on a 0% interest rate credit card for like 21 months? They're out there, you can find them on www.nerdwallet.com or www.bankrate.com. And just make sure that you could even do a balance transfer for no balance transfer fee. But that's what I would be telling you. Don't go for ease of just one payment, go for where can you get the lowest possible interest rate, and that probably will be on a balance transfer even more than you calling up your financial institutions and trying to negotiate with them because they're not going to take you down to zero. So that's what I would do if you the key to getting out of credit card debt is getting the lowest possible interest rate you can on your credit cards and always paying more than the minimum payment due. For those of you who may be in credit card debt and you really want to know the best way to get out, my suggestion to all of you would be this. Gather all your credit cards and really see if you can transfer them or get them to the lowest possible interest rate you can. You then line them up from the highest interest rate you're paying to the lowest, and you total up all the minimum payments due. So let's just say you do that, and all the minimum payments due on the credit cards come to $300 a month. Just let's say that's true. You need to add 20% to that $300, or $60 in this case, and you would take that extra $60 per month and you would put it towards the minimum payment due on your highest interest rate card. So if your highest interest rate card, the minimum payment due, was, let's just say, $30 a month, you would pay $90 a month towards that one card, and you continue to pay the minimum payment due on all the other cards. However, listen to me closely. You will lock-in the minimum payment due on all the other cards, meaning, if on all the other cards your minimum payment due that month happens to be $20 on one, $40 on another, $50 on another, that is the amount you will continue to pay from here on. Even though you're paying it your required minimum payment due on your new statements will be less, don't go down. You continue to pay the amount of money that you are locking in this month in your mind. OK, everybody? When the very first card is paid off, then that money, that $30 which was the minimum payment due plus the $60, that $90, rolls down to the second-highest interest rate card, where you're paying, the minimum payment you were paying on the second plus the $90 and you continue to pay to that until that's paid off, and then you keep rolling it down like that. That is how you get out of credit card debt. This next one is, and I don't have a name here, maybe it's Suzanne, I'm not exactly sure but the question is great. Anyway, she says, hi, Suze. In one of your podcasts, you mentioned that credit scores on places like Credit Karma are not necessarily accurate. I noticed that my score here is significantly lower than my FICO from Discover. I did a request that showed, thankfully, the Discover is correct. Why are they different since Credit Karma says it's pulling data from the same places as Discover. How should I, or shouldn't I, use tools like Credit Karma in tracking my credit score? I hope to buy a home and I value your advice. All right, here's what you need to know, girlfriend. FICO stands for Fair Isaac Corporation, and they are the ones that created the FICO credit score years and years ago. Their score was created by using the information that's on three credit reports: Experian, Equifax, and Trans Union. All right? And this is the score that is mainly used by 80-90% of the lenders that are out there. However, the other scores are starting to gain traction, just so you know. Not only do you have one FICO score, but you have three FICO scores based on each credit bureau's report. OK? The vantage score, or the scores used by Credit Karma and other companies, also use the information that's on the credit reports. But unlike FICO, where you have three FICO scores, usually, the vantage scores just take information from one credit report, and that is your score. So, there are slight differences in how they calculate the scores because, remember, FICO takes the credit reports and they have their algorithms as to how they create your scores, vantage, Credit Karma, all of them, they have different algorithms, and they create a different score. Now, both companies because it didn't use to be this way, but now, a credit score runs from 300 to 850. You really want to have a credit score or a FICO score in the 700 area to get a good interest rate. But that's essentially the difference between the two. Depending on which score Credit Karma chose for you, or whatever it is, that might be the difference. But if I were going to be shopping for a loan, if I was going to purchase something where I knew that my FICO score was going to be considered, I would want to know what my true FICO credit score was over Credit Karma or the other ones. There are so many ways now that you can get your FICO score for free. A Discover card, there are different ways, so it's fine to check Credit Karma because it's free and all of that. But, if you're going to get very serious about shopping for a loan, make sure that you check your FICO credit scores over any other ones that are out there. You know, I'm going to take one more about FICO scores, since debt and everything seem to be a topic today, from Jerilyn. And she says, in April, I sold a home in Florida that I owned with my sister and paid off two mortgage loans on that home. I was the sole borrower on both, but my FICO score just went DOWN (in capital letters) 18 points. I thought paying off those mortgages would raise my FICO score, what happened? The loans had been outstanding for almost 15 years. Actually, I wrote Jerilyn back, and I said, don't worry, it will come back. Listen, do not freak out when your credit score goes down five points, 10 points, 18 points. Just don't worry about it if you know you haven't done anything wrong. It depends on your FICO score, how much credit card debt possibly you may have at the time that you are checking your score. Remember, the biggest part of your FICO score is something called your credit utilization ratio. How much debt you owe in comparison to your credit card limits. Let's say you have credit cards that have a limit combined of $10k. And for whatever reason, you charged things this month because maybe you were listening to me and you're putting money on your credit cards and keeping cash during this pandemic. You now have $5k of credit card debt on all your credit cards. That is a 50% credit utilization ratio or debt-to-credit limit. You have a credit limit of $10k, you used $5k of it, that's 50%. FICO does not like when you've used anything above 30%, you start to get dinged. And even though you may intend to pay off that $5k at the end of this month, FICO has no idea that you're actually going to do that. And if you happen to check your FICO score at the time when you have credit card debt on your credit cards, even though you're going to pay it off, you will get dinged. So, if you really want the best interest rate when you are going to finance something, stop using your credit cards for at least two months before you apply for a loan. Take any money that you can and pay off your credit card debt, get your credit utilization ratio down to almost zero. That then will give you a far higher FICO score. The higher your FICO score, the lower the interest rates that you're going to get on your car loans as well as your home loans, as well as additional credit cards. So don't worry if it fluctuates a few points because it all depends, really, on when you are checking your FICO score. You see, we're on this topic today, everybody. Hi, Suze, I'm 21 (this is from Jennifer) and started to build my credit. I do have a few questions regarding credit cards though. If I pay the full amount that I owe, am I still building my credit, or do I have to pay more than the minimum, but not fully? Also, how long do I have to wait before I can check my credit score? I'm excited to start building my credit and any tips you could provide me will greatly be appreciated. Jennifer, I love that you're 21, number one, and listening to the Women and Money podcast, and here's what you need to know. You, as an individual, can check your FICO score, your credit score, as often as you want. It will not ding you. It is when businesses, credit card companies, financial institutions, are checking your credit scores all the time, that starts to make FICO very, very nervous because they think that you're going to be borrowing a lot of money. So, whenever you do apply for let's say a credit card, just get one credit card. Then, six months or eight months from now if you want, you can get another one, but do not apply for like three or four credit cards all at once. If you're ever shopping for a home loan or a car loan, do it all within a two-week period of time so that doesn't hurt your FICO score. In terms of, are you better off paying off your credit card bills in full or paying more than the minimum to contribute to your FICO score? Paying them off in full every single month, they will see that you are using them. You know, it used to be that people did rollovers and did all of these things and, you know, tried to game the system. You do not earn extra points on FICO by showing them that you are just paying for this month in and month out. They are seeing on your credit reports that if you have a loan that you're paying them on time, they're seeing that you're not getting any dings. Paying monthly on a credit card doesn't show them that you're doing great, it shows them that you don't have the money to pay it off in full. So, no, pay it off in full and just keep doing this, and you will be fine. All right, a few more here. Another one, you see, I'm telling you, everybody, we have this theme going today, which is from Laura. Hi, Suze. Longtime fan (Thank you, my dear Laura.), I just paid off all my credit card debts and medical bills, all I have left is my car note. I am trying to recover, build my credit score, and I'm wondering what I can do to help me? I have one credit card that I use regularly and pay on regularly, and that's it. I'm about to get my grandmother's inheritance and want to put some into investments, annuities, and put some of it towards a home. But, I want to improve my credit score before I get pre-approved. Right now, it is 655. Good on you, Laura. Really, I would like to see you have at least a 720-760 FICO score before you apply for a loan because then you will really be able to lock in about 2.75%, 15-year, or 3%, so forth, 3.5% on a 30-year fixed. Otherwise, at 655 you're going to be a whole lot higher than that, and then, time's going to go on and you're going to want to refinance it. Will interest rates still be as low when that comes about? All these money and closing costs, so just be patient when it comes to buying a home. One thing that I just want to say, you want to put some into investments and annuities? Oh, no, you don't. You don't want to put any into annuities, not here. I sense that you're younger rather than older. This is where you want to take some of the money and have a Roth IRA, max that at out every single year, dollar-cost-average into that. Buy the Vanguard Total Stock Market Index ETF, symbol VTI, things like that. That's the type of thing you want to do. When you get this money, pay off your car note, totally. You should be totally out of debt. In order to help yourself raise your FICO score, you might want to get another credit card. Make sure that there's no fee to get that credit card that you also use and that you simply pay that off at the end of every single month. Just keep doing that month in and month out, and you will see that your FICO score will start to go up. When your car note is paid off in full, when they now see that all your credit card debt and medical debts have been paid, that will help you a lot. Hopefully, you weren't in default, you didn't have to make up any payments, you have always been on time. Just give yourself time and you will see that your FICO score will go up. But be smart with the inheritance that you are going to get from Granny. Make sure before you do anything, after you pay off your car loan, that you have at least an eight-month emergency fund. Got that, girlfriend? And I just have to say one more thing, sorry. If you're going to buy a home eventually, you want to make sure that you have at least 20% down, plus that eight-month emergency fund. OK? Don't get yourself into financial trouble by buying a home. All right, for the last one, I'm going to have a little change of topic here and this one's from Beth. She says hi, Suze. If I transfer the money currently in my 403b to my new Roth IRA, will I have to pay a penalty? My employer doesn't currently match and I want to stop contributing to the 403b and concentrate on building up the Roth. Thank you. Well, Beth, this is an interesting question, because there are really two ways to answer this question. One, pre-COVID, and one now while we're in COVID because they're certain laws that are in effect now that have never been in effect prior to this. So, let's just assume everything was normal, that the virus never happened, and none of the laws have been changed. You are now currently working for an employer, you're still working for them, and you want to take money out of your 403b to put it into a Roth IRA. While you are working for an employer, you cannot just simply withdraw money from a 403b, which is for non-profits, by the way, or a 401k. You can't do that. The only way while you are still employed by that employer to get money out of a 401k or a 403b is by taking it out via a loan. That's one way. Once you take it out via a loan, you have about five years to pay it back or 15 years if you're taking it out in order to purchase a home. Or, you can do what's called a hardship withdrawal, where you have to prove that you really are in dire straits and then you can withdraw money. But you're going to owe ordinary income tax on it, you're not going to have to pay the 10% penalty. So, no, if we were in regular times, you would never, ever, do what you're thinking about doing, because if you're not 59 and a half years of age, you are going to pay a 10% penalty to withdraw that money, and you're going to pay ordinary income tax on it. So, why would you do that? However, we're not in normal times. We now have a provision that says, you are allowed to take money out of a retirement account up to $100k and not have to pay it back or pay taxes on it for three years. Or, you can pay the taxes on it over a three year period of time. So, given that your employer doesn't match anymore, given that you're still working for them, and given that you want extra money to fund a Roth IRA, what I would do if I were you is that again, I'm recording this answer on June 11, 2020. So, you have until July 15 in the year 2020 to pay your taxes. Because the tax deadline has been postponed until July 15, that means that funding a Roth IRA has also been postponed until July 15 for the year 2019. Now, I don't know how old you are because you didn't say so, but let's just assume that you're 50 years of age or older. If that's true, you can put $7k into a Roth IRA for last year, and you could still put another $7k right now to fund it for 2020. So, let's just say you have $14k or more in your 403b plan. If I were you, I would withdraw the $14k. You now have three years to pay taxes on that. You even can put it back in three years if you want to, OK? And you take that money and you fund your 2019 Roth IRA with it, as well as your 2020 Roth IRA with it. If you have more than $14k in there, just leave it, just leave it, just leave it. OK? Don't touch it. Just keep investing it, do whatever. But with your new contributions, maybe you stop funding that 403b, and you save that money to make sure that you have an eight-month emergency fund. And then, in the year 2021, you can fund the Roth IRA again for $7k. By the way, for those of you who are under 50, the max you can put in is $6k per year, and that's assuming you all meet the income qualifications to do so. If you don't know what those are, you need to go back and listen to one of my podcasts. Just search it on the app and you'll find out what are the income qualifications to qualify for a Roth IRA. So those are choices for you, my dear Beth, but that last choice that I gave you I have to tell you, I kind of think it's brilliant. Well, it kind of felt good to get back to just answering questions. I hope it felt good just hearing answers to questions without all the up and down and up and down of everything that's been happening as of late. Again, I just want to make a quick note here, which is just to keep being vigilant when it comes to your money. Understand what we've been through, understand that an eight-month emergency fund is key to your security, and do not do something that you don't understand. It's better to do nothing than something you do not understand. Do you hear me? Or at least write in, ask your questions, and hopefully, it will be answered right here. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.