JoeTaxpayer

A Guest post by Darin Sewell

Today’s world is full of people that at one time or another had great credit but for various reasons now find themselves with bad credit. These people now find it hard to get approved for mortgages, car loans, and credit cards with good interest rates and many of them feel helpless and do not know what to do. If you are one of these people then the article below is going to give you an outline of how to fix bad credit and get back on your feet!

Figuring Out the Cause of the Problem

The first step to reversing your credit situation is to figure out why it dropped in the first place and address that problem head on. There are few common reasons for credit scores to fall and 99% of people with credit issues fall into one or more of these categories.

• Too Much Debt
• Missing Payments or Defaulting
• Not Enough Credit History

Too Much Debt – Sadly this is very common today, people were able to run up debt easily then the financial crisis hit and banks slashed credit limits and a lot of people suddenly had credit cards that were maxed out. In many cases payments also doubled making it all around bad situation.
The best way to address too much debt is to figure out what debt you can pay off the fastest; this is generally the account with the lowest balance. Do all you can to pay that account off then when it is paid off take the money that you used to pay towards it and add it on the next account in the list. You will be amazed that after you start paying off accounts and applying more to the next one your debt begins to shrink rather quickly.
I know this is easier said than done but if you are serious about getting to a better score you need to do whatever it takes. This means getting a part time job, eliminate some luxuries like cell phones, cable TV and other money absorbing expenses. Think about how much you could save and how fast your debt would come down if you were not paying those bills and putting the money into debt reduction!

Missing Payments and Defaulting – This one goes hand in hand with having too much debt. Generally, as your debt increases the payments do as well, eventually the payments can be more than your income and you start to fall farther and farther behind. Then the late fees and over limit fees start to pile on and before you know it you are in massive debt.
Honestly, the only way to remedy this problem is to either increase your income or reduce the payment amounts of your debts. Increasing your income is pretty easy; just grab a part time job. But that might not be enough because you are over your limit; the credit card companies can increase your rates and keep charging over limit fees, basically keeping you in this trap.
To counter this problem you need to get in touch with your lenders and explain to them what is going on. Let them know you want to pay them off but are unable to due to the amount of money you owe. Most lenders have some sort of program to help troubled customers; they will more than likely put you on a payment plan. You will lose the ability to use your account but that is probably a good thing!
Keep in mind that you may have to call many times in order to get in touch with the right person. Always be polite and never give up. In the end the lender will want to work with you because they need the money you owe them.

Not Enough Credit History – Many people today have bad credit scores or no credit scores simply because they never had any accounts that reported to their credit report. Commonly these are the people who pay cash for everything and make substantial use of their debit cards. It is only when they need some sort of financing that they realize the situation they are in. While it may seem like a tough spot to be in it is actually very easy to get out of.
To get out of the no credit history mess and start establishing yourself; you will need to work with secured credit cards, personal bank ones and department store cards. Generally the best place to begin is with a secured credit card. These cards work like a normal card and most report to the credit reporting companies.
The only catch is that you have to let the issuing lender hold money that you deposit in escrow; this deposit is equal to the limit on the credit card. Generally, this is about $250-$1000 and if you default the lender has a safety net, if you close the account you get your money back. Because of this safety net approval is almost guaranteed.
After you have a good secured credit card reporting for a few months, apply for a department store card, but make sure it reports to the credit reporting companies before you get it. Make a purchase here and there with it and always pay it off in full each month. After 6 months you will see a positive credit history being reported about you that will improve your credit score ratings. You can then move on to regular unsecured credit cards, just do not let yourself fall into the trap of running up to much debt.
As you can see there are no real magical ways to fix your credit in a few days or weeks, it will take time and effort on your part. But if you can stay dedicated to the process and stick to your plan you can start to make good progress in a 3-6 months and major progress after that. Just learn from your past mistakes, stay focused and keep moving forward!

Some comments are worth highlighting as they make a great Q&A. A question I received on my article Inheriting or Bequeathing an IRA follows:

Dear Joe,
My Mom passed away in December 2011. Her wishes in her Will were for her assets to be divided equally between myself and my 2 sisters. At some point my Mom listed me as beneficiary of her traditional IRA. The custodian has refused to abide by the instructions in the Will as the beneficiary form supersedes the Will. This is in the state of Tennessee. Is there a way to get the balance of the IRA divided 3 ways without cashing it in for a lump sum payout. We all would like to stretch out the payout. If I choose to disclaim a portion of the balance would it go to my Mom’s estate and enable my other 2 sisters to receive their portion? The tax attorney says to talk to the CPA, and the CPA says to talk to the tax attorney….The amount is around $170,000, so the taxes would be substantial on a payout. Any guidance would be appreciated.
Anne

Dear Anne,
If you are the listed beneficiary, and there is no other, by disclaiming the money, it would revert to her estate. The five year rule then applies, all funds must be depleted within 5 years after the owner’s passing. I can’t say whether the custodian will permit a partial disclaiming.
If it were me – I’d take the RMDs each year, pay the tax, and gift the siblings their “share.” You can view Pub 590 to see your RMD, but for example, at 50, the divisor to use is 34.2, so 170,000/34.2 is $4971. You can withdraw more if you wish, but be mindful of where you are in your marginal rate.

Right after I posted the response, The Wall Street Journal published Inherited IRAs: a Sweet Deal / A Generous Benefit for Families Survives a Senate Challenge. This is a great article that discusses the benefit of inheriting an IRA along with some of the pitfalls. But the key thing was that the article introduced me to M.D. Anderson, a tax preparer in Chandler, Ariz who has his own site InheritedIRAHell.com was kind enough to support my advice. M.D.’s response to my request for help follows:

On your reader’s question –

I will generally assume the parent or relative we lost here was older, 70.5 + older is what I will assume in this answer. If THAT is true, there is no 5 year rule but instead, the account can continue to pay out based on the life expectancy of the decedent. Disclaiming with no Contingent beneficiary other than the estate (controlled with or without a Will or Trust) has to be timely done no later than 9 months after the year of death. And, the disclaiming benificiary may not control what happens to the money as well or it would be possibly disqualified under IRS rules.
Of course if the decedent is older than 89 under the newest mortality tables, less than 5 years could apply for year left to pay out while tax deferring and if really old — well the mortality table collapses down to 1 year or less to pay tax on death benefits received.
However, if the person wasn’t yet 70.5 at death, then yes, 5 years is the longest the estate can take to pay out the funds to estate beneficiaries which I assume, are all 3 siblings. Agree, this would equalize minus fees and estate expenses, and help fund the desired result.
But adding in those Executor/trix and statutory percentage of the legal fees, you increase the loss of good money here trying to go that route along with the higher risk a disclaimer action can be questioned by later tax authorities.
So, you got it 100% right in your advice. The gifting idea may be “as good as it gets”, hoping the one designated beneficiary asking these questions isn’t in too high of a tax bracket. The net $ received defeats the stretch potential we have with properly set up inherited/beneficial IRA accounts.
M.D Anderson, InheritedIRAHell.com

Thanks, M.D. ! There are a few things to learn from all of this. If the mom truly meant to have her three children as beneficiaries of all of her assets, her retirement accounts should have reflected this before her passing. The sibling trying “to make it right” has her work cut out for her given the rules surrounding IRAs and their inheritance. The concept of the IRA and Roth IRA is pretty simple. It’s when the owner passes that things get really messy, and as Anne states above, CPAs and Tax Attorneys even have issues understanding the rules. If you have any questions or concerns regarding your IRA or Roth IRA, why not post a question at my RothMania site and I’ll answer it for you.

A Guest Post –

There has been little good news for homeowners in the past few years. Where home prices once climbed steadily, they have since plunged; throwing millions of American homeowners into foreclosure and leaving millions more owing more than their houses are worth. So far, there have been few signs of recovery. A housing market rebound will depend on a number of factors.

Dropping Unemployment Rate

A drop in the unemployment rate is essential to a housing recovery. Consumers understandably hesitate to purchase a home when there is a good chance they will lose the income needed to pay the mortgage. Unemployment has hit young people particularly hard. When the unemployment rate drops substantially among Americans aged 25 to 34, these young people will buy homes. Until now, they have been staying in school, moving in with parents or living with friends, which has contributed to a lower demand for housing. These young people represent a pent-up demand that will emerge as the job market improves.

Falling unemployment rates also improve consumer confidence, which fell significantly after the 2008 housing market crash. As jobs are added and the broader economy grows, people will feel better about spending. Confident consumers are more likely to buy a house, spend money on renovations and pay for home services. Increased demand will also spur an increase in home prices.

Reduction in Inventory

The massive inventory of homes on the market is bad news for homeowners. A number of lenders, under pressure from lawsuits claiming improper foreclosure processes, have put the brakes on foreclosures, adding to the huge backlog. Until this inventory of stalled foreclosures has been cleared, the housing market cannot recover.

Speeding up the foreclosure process is vital to clearing the shadow inventory that exerts a negative pressure on housing prices. Selling foreclosed homes will help stabilize prices and improve the health of neighborhoods. If current low rates of new construction continue, buyers will choose their new homes from among the pool of existing homes, helping to clear the market.

Higher Rents

With the large number of foreclosures in recent years and millions of potential buyers shying away from a home purchase because of financial uncertainty, demand for rental units has skyrocketed. With increased demand, rents have begun to rise. When renters realize their monthly rent costs as much as a mortgage payment, many will turn to home ownership, depleting inventory and increasing demand for houses.

Increasing Home Mortgage Rates and Prices

As potential buyers sense that the housing market has bottomed out and prices begin to increase, more will jump into the market to take advantage of record low prices. While the significant yearly price increases of the housing bubble are unlikely to occur again, a return to the steady appreciation of the ’80s and ’90s is a distinct possibility.

Potential homeowners currently do not feel pressure to buy a house, and many are afraid to invest in a deteriorating market. Mortgage rates remain low. As soon as home prices begin to appreciate and home mortgage rates nudge upward, potential buyers will move quickly to take advantage of bargains. The increased demand for mortgages and houses will boost the cost of both. As prices rise, lenders will become more confident and ease their lending standards, making it easier for consumers to buy homes.

This article was contributed by Jonah Trenton, an Editor at RefinanceMortgageRates.org

When Paula at Afford Anything wrote Tax Refund: Heck Yea! or No Way, Jose? I thought she was talking to me, as Jose is Spanish for Joe. I’m still not sure. Either way, my vote was for “No Way.” I am in the camp that says a tax refund means I’ve lent out money at zero interest for a time. I am at the other swing of the pendulum. I prefer to owe money with my return, my goal is to owe just enough to not pay a penalty. Even in this low interest rate environment, I’d rather have the money in my hands or brokerage account that with Uncle Sam.

At Personal Finance By The Book, Joe Plemon wrote How a CPA Saved Me $4310 in Taxes. To be fair, this was by amending the prior three years returns as well, but a savings of over $1000 a year is nothing to sneeze at. I am a big fan of TurboTax, and doing it myself. I also hear stories about the tax guys who don’t offer suggestions or strategize to find way to help you save. Joe plans to use a CPA every year but doesn’t mention the cost. Now that he knows what he did wrong these past few years, I’m eager to see how his CPA does for him in the years to come.

Why Baby Boomers Aren’t Prepared For Retirement is asked and answered at boomer and echo. A warning, when Boomer says RRSP, think IRA or 401(k). He’s Canadian, not that there’s anything wrong with that. Their tax code is striking similar to ours, so in the world of PF bloggers we are a tight group, they just measure their temperature in Celsius. By the way, Canadians undersave as badly as we USians.

Mr. Money Mustache addresses the age old question – What if Everyone Became Frugal? Why is this even a question? Because there’s quite a list of stuff that is not on the frugal buyer’s shopping list. If we all flip the switch and become frugal, Starbuck’s goes under for starters. Mr Money Mustache talks about why this won’t happen and in fact, over the long run we would be a better society if we slowly moved toward being more frugal.

Last, I’d like to share Smart Money’s 10 Things the IRS Won’t Tell You. I like this magazine and am a subscriber. I especially enjoy the 10 things series. What makes it particularly good reading this month is that they quote my favorite Tax Tweep, Kay Bell, author of Don’t Mess With Taxes. Two of the ten list quote Kay, which is pretty cool to us tax geeks. Congrats, Kay!

With today being a Sunday and a Washington Holiday tomorrow, tax day is officially Tuesday April 17th this year. File your taxes or file an extension. But file, either way.