My Dog’s Name is FIDO, not FICO

With all of this new house buying and car replacement action going on, I’ve been getting some questions about credit scores, so, as the phrase goes, let’s talk….
 
Right off the bat, let’s clarify some terminology, which means we are back to the whole daffodil/narcissus adage—a FICO score is a credit score but not all credit scores are FICO scores. A FICO score is only one of several available scores. There’s the VantageScore, the Beacon, and Empirica, as well as a more tailored “mortgage FICO.” There are also some regional organizations that provide scores for more tailored uses. These days, some form of this score is a main factor in how we secure mortgages, credit cards, car loans, car insurance, life insurance, even job opportunities. This is an interesting state of affairs given that the flaws in the calculation are vast and prejudicial.
 
What goes into these scores? Let’s look at the factors FICO uses: 

Your payment history (35% of your score): Are you paying your accounts as agreed, do you have any delinquent accounts or accounts in collections, is there a bankruptcy on public record?

The balances on the credit you have available (30% of your score): How do your balances relate to your available credit? Note, this isn’t as it relates to your income, rather it’s as it relates to the total amount of your available credit. This category also includes installment loans and mortgage loans.

The length of your credit (15% of your score): How long have you had the account(s) open and what is the average account age? This factor is one of the reasons we close cards slowly.

New credit you’ve put in place, (10% of your score): Have there been recent inquiries or new accounts opened, changes to public records, or has something gone to collections? 

The types of credit you have in your name (10% of your score): What types of debt are you carrying? Credit cards, auto loans, student loans, mortgages, lines of credit, etc….  

Now, if you are reading between the lines, I’m sure you can see a few flaws with this process….

The most obvious flaw is that to have a strong FICO score, you have to be carrying some debt. If they are rating you based on your payment history and you don’t carry any debt then you don’t have a payment history to rate. How can that happen, you ask? Let’s say you are recently divorced and renting an apartment until you decide on your next steps, you are using your debit card so that you are spending your cash wisely, and drive a paid for car (or don’t have a car and are using Uber/Lyft to get around as many of our big city brethren now do). These are all very fiscally responsible things to do, right? Zing….none of that is helping your credit score and it could be hurting it.

If your payment history experiences one late payment, even though all of your other factors are stellar, that single bad payment can take six months (or more) to cycle through for your score to improve. 

Curiously, unlike the theory our judicial system aspires to, with a credit score, you are guilty until proven innocent and you better plan on setting aside a decent chunk of time to sort out an error. This is why we check our credit reports on a regular basis.

Something larger than a late payment, like bankruptcy, stays on your credit for seven years or longer. Many criminal felons spend less time than that in jail (with no ding on their score…).  Also, considering that one of the main reasons for bankruptcy in the US is due to medical debt, you can start to see how this scoring system has a flaw or two.

Finally, let’s talk about monopolies and conflicts of interest. We’re hearing all about how “Big Tech” is creating monopolies and that they should be broken up but no one (except perhaps Senator Warren) has spent much news time talking about how one single company now influences more than 10 billion credit/underwriting decisions every year or that to obtain and secure a high score inherently means maintaining multiple credit cards (which, if not handled efficiently means annual fees and additional risks of fraud and theft).
 
I know, I know…what the heck got in Kitty’s organically grown, responsibly harvested, and processed shredded wheat this morning caused this she’s on a tear? The gist of the situation is this: It drives me nuts that we have very little overall control over the situation. That being said, if we [grudgingly] accept that this score is going to impact our lives and no one else is going to sort out the inherent flaws, it’s up to us to put a strategy in place to make the most of the situation just to spite the powers that be (one of my favourite activities!). If your score, or the score of a loved one, isn’t strong, let’s talk about a strategy to get it back.

Settling Mom’s Estate: What do I pay?

Here at LindenFinancial Consultants, we often have to deal with topics that most people would rather not, and death is one of them. A particularly common question we hear from people settling an estate is: which of these bills do I really have to pay? Let’s talk about after-death cash flow.

There are always going to be some bills after someone dies that come every month like utilities, phone, mortgages, home equity loans, etc… and few people have any questions about covering those. It’s dealing with the less obvious ones that I often hear the “do we really have to pay this?” question.  As I’m sure you can guess, I usually respond with my favourite reply of “it depends.” 

In an ideal world, if you are agreeing to be the executor of an estate, pulling that person’s credit report would be part of the process so you know what the estate has for obligations. Unfortunately, while not impossible, pulling the credit report for someone who is either on their way out the door or well on through it, isn’t particularly easy. That being said, it can be well worth the effort so that you are making educated decisions about the estate. Here are some, but not all, of the liabilities you might be faced with:

Secured debt – This is going to cover primarily mortgages, home equity lines of credit, and vehicle loans. If the debt is secured then the estate or heir has to keep making the payments or sell the property to clear the debt. This one’s pretty cut and dry so let’s move on to unsecured liabilities.

Credit cards – I’ve lost count of the number of people surprised by the balances being carried on credit cards once they start sorting out the estate details. If the deceased was an “owner” of the card then, technically that debt is owed. If the deceased was an “authorized signer” on a card, then their estate isn’t liable for the debt (the “owner” is). What’s the difference you ask? The “owner” is the person (or persons) who applied for the card and signed the application whereas the “authorized signer” is someone who has a card that is associated with the “owner’s” account but didn’t actually participate in the application. This is an important distinction when getting divorced as well. In the event of the “owner’s” death, the credit card company can come after the estate for payment but if there isn’t anything left in the estate and there isn’t a “co-owner” of the card to hold liable, they are pretty much out of luck.

Medical bills – Final medical bills are often considered either the responsibility of the surviving spouse or the estate and this is usually buried in the paperwork being signed when someone is admitted to a hospital or senior facility. If there is no money in the estate and the survivor has relatively little for assets and income, these bills might be waived otherwise they should be paid or a payment structure arranged.

Student loans – While I’d love to say that everyone dies of old age, unfortunately, that isn’t always the case (the average age of a widow in the U.S. is down to the mid-50s) and that can mean passing away with liabilities we wouldn’t see with our older population. If the student loan is a Federal loan, it is usually forgiven. If it is with a non-Federal entity it may or may not be forgiven which means the estate might be required to clear that loan from the estate’s assets. As with credit card debt, a hard-nosed negotiation can often get this lowered or removed from the balance sheet.

Now, let’s say there are some unsecured liabilities and the main assets are life insurance benefits and/or retirement account dollars. If those assets are settled straight out to the beneficiaries then those dollars are protected from having to clear the unsecured liabilities. If the beneficiary designation says “estate” or there isn’t a designation then those dollars head on over to the estate account where they are used to clear the liabilities, and the remainder, if there is any, gets settled by way of the will. Even if you aren’t carrying any debt, one of the best gifts you can give your heirs is making sure your beneficiary designations are all in place and this extends to the estates of all your loved ones.

When/If we head into a more challenging economic situation and you are the one cleaning up someone’s estate, remember that you don’t have to make any payments on unsecured debt until you are ready to (OK, you can’t take forever, but you can certainly take a month or two to figure things out). Don’t let someone coax, cajole, or threaten you into making even one payment—doing that can be the equivalent of acknowledging liability for the whole debt and be a real pain if that isn’t in the estate’s best interest.


Planning for Our Fur Babies

Whether your family includes loved ones you birthed, adopted, or who birthed you, it’s important to remember that our pets need as much financial and estate planning as our babies who lack the benefit of genetic-based clothing. Now, I know that there are some of you out there who are going, “Seriously?!,” but for people for whom biological/adopted kids weren’t an option (by choice or by biology), or whose kids are long gone grown and flown, often pets are a very real substitute. 
 
Right out of the gate, our pets should have their own line item in our cash flow plans (yes, those budgets I’m always banging on about—will she ever stop…no, she won’t.) When we are calculating the level of Cash Reserve we should be maintaining, our baseline is often those non-discretionary items that have to be paid like the mortgage/rent, car payment, utilities, and basic food. In that food category, make sure you have food for your pets, particularly if they require special (= more expensive) food. If you have a pet that is on meds then there better be a little extra in your Cash Reserve to cover those costs (and no, despite many of our efforts, medical plans won’t cover the cost of pet prescriptions (and don’t think I haven’t tried). 

This all leads me to pet insurance. A wise choice or another “insurance” program just this side of a scam? The answer is “it depends.” As with any insurance, you really have to run the numbers to see if carrying this type of coverage makes sense overall. Like your homeowner’s policy, there is usually a deductible (which should be built into your cash reserve, just like your car and home deductible) and most are reimbursement based which means you pay the vet, submit the bill, and receive some level of reimbursement for the expense. Unlike health insurance, wellness visits aren’t usually covered (although this is starting to change) and very often policies cover only a portion of treatment similar to the co-insurance you find with some health insurance programs. If your fur baby has a pre-existing condition, you’re probably out of luck unless you put the insurance in place when they very young and you didn’t know about the issue. There could also be coverage limits such as lifetime limits, per condition limits, and/or per year limits and you can sometimes add riders for boarding, travel in the event of urgent treatment, or pet retrieval in the event pets are lost (or stolen, which is becoming a surprisingly frequent occurrence). As I said – “it depends.”
 
All that covers if something happens to our non-human kids so what about if something happens to us?  With a show of hands, how many of you have instructions in your wills that cover how your pets will be taken care of if something happens to you? I’m guessing that there aren’t too many hands in the air. You put beneficiary designations on your retirement accounts, you build trusts for your errant children/grandchildren, you leave bequests to various schools and charities but what happens to those pets who have loved you unconditionally all those years (yes, even those cat owners out there…deep down, they love you, too). Make sure there are some instructions that outline who is going to take your pets, make sure your executor is very clear of your intentions, and make sure those people/organizations who are taking on this responsibility are on board with the idea. This leads me to funding that care…
 
Circle back to that earlier paragraph about budgeting and use that line item to build some funding into your estate plans to reimburse those kind people who are willing to take Fluffy until the end of his/her days. Taking on the cost of the family’s beloved gerbil is one thing given it’s ~3 yr. life span, it’s a whole other thing to house the family’s parakeet with its potential 20-year life span or even a cat, dog, or horse which can live 5, 10, or 15+ years (one of our cats crossed the 19-year mark). You could instruct your executor to set aside some funds for this cost, you could set up an immediate annuity to cover the costs if you have a number of animals with longer life spans, or you could even set up a small trust that would provide the new parent with an annual stipend and the balance (once your beloved pet joined you) could go to a charity. The key point is, just as house guests should be conscious of their impact on their hosts, you should be conscious of the sacrifice your pet’s new parent is making.

Image credit: Photo by Krista Mangulsone on Unsplash