Dear Liz: I have always carried more debt on credit cards than I should have. However, I have always been responsible in making payments. Before the economic crisis, my credit scores were around 780 and I had all the access to credit I needed. But my lenders have slashed my credit lines and closed accounts. Suddenly I find myself using 90% of my available credit, not because I'm spending more but because my credit lines have been reduced. Last I checked, my scores were around 690, and I haven't had a late payment in more than seven years. Now with interest rates so low, I would like to refinance my house (that I am underwater with), but that seems impossible with this new "credit reality" for me. What is my best course of action? And no, I can't just pay off all my credit card debt without a significant lifestyle change such as putting the kids back in public schools, eliminating vacations, etc., which I am not willing to do at this time.
Answer: If you can't pay off your credit card debt, you can't afford your current lifestyle.
You never could, really, but that fact was obscured by loose lending practices that didn't punish you for carrying big credit card debts. Times have changed, and you need to change with them.
Carrying credit card debt has always been foolish, of course. It's expensive and a signal that you're living well beyond your means. Furthermore, as you've learned, you're vulnerable to the changing whims of credit card companies, and those whims can have serious effects on your perceived creditworthiness.
Paying down your balances may not boost your credit scores right away if your lenders continue to slash your available credit — an industry practice known as "chasing down the balance." But you need to do so anyway to free yourself of this toxic debt.
Your problems refinancing aren't just due to your scores, in any case. Your current scores won't necessarily prevent you from refinancing (although you would get a higher interest rate than if they were 740 or above). Your bigger problem is the fact that you owe more on your loan than the house is worth. You could explore the federal government's Home Affordable Refinance Program at http://www.makinghomeaffordable.gov to see whether you qualify for an underwater refinance; otherwise, you're probably out of luck.
Estate planning is too complicated for do-it-yourself solutions
Dear Liz: I wanted to thank you for urging people not to be cheap when doing their estate planning. I am an estate planning and elder-law attorney in Los Angeles, and every do-it-yourself trust or will I've seen makes it compulsory to leave income and assets to the spouse. This is a huge mistake in many cases. That's because such a transfer will disqualify the spouse from receiving government aid from Medicaid (which is called Medi-Cal in California). The result could literally mean hundreds of thousands of dollars are lost. This area of law is extremely complicated and only a knowledgeable elder-law and estate planning attorney should be advising people about it.
Answer: Medicaid planning is a controversial topic, since the federal program is designed to help the indigent, not those trying to preserve assets. That's why the programs have look-back periods (typically five years, although it's 30 months in California) to discourage people from transferring assets just to qualify.
But your point is well taken that estate planning and elder-law issues are too complicated for do-it-yourself solutions.
Talk to a financial planner, not a broker, about retirement
Dear Liz: We're in our mid-60s and have $1.4 million in a brokerage account totally invested in stocks. Our broker maintains that we have plenty of money for retirement. Is he right?
Answer: Unless your broker is a comprehensive financial planner — which is highly unlikely, given that you're 100% invested in stocks when you almost certainly should be taking less risk — he shouldn't be offering advice. You need to consult a fee-only financial planner who can review your entire situation, including how much you spend, your risk tolerance, your health, your expected longevity, any upcoming purchases or lifestyle changes and any legacies you may want to leave behind. Only then can the planner give you personalized, knowledgeable advice about this crucial area of planning.
You can get referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org, the Garrett Planning Network at http://www.garrettplanningnetwork.com and the Alliance of Cambridge Advisors at http://www.acaplanners.org. Each site offers advice about how to evaluate and choose a planner.
Liz Weston is the author of "The 10 Commandments of Money: Survive and Thrive in the New Economy." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via asklizweston.com. Distributed by No More Red Inc.