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Question for Ray: I have a department store credit card that I rarely use. I have no balance, so if I close the account will it affect my credit score in a negative way?
Ray's Answer: This is a particularly good time to answer this question and the use of department store credit cards in general. It's the holiday shopping season, and many folks are going to be shopping in stores that will offer you an opportunity to save an extra, say 30 percent if you open a credit card with that store. So you get this brand new card, and use it for your holiday purchases right there on the spot.
Generally, I don't advise the use of department store cards for every day purchases, but when special discounts are offered, it's hard to pass up, so you can do this as long as you follow these simple rules:
1. Pay off the account soon after the holidays.
When you pay off a dept store card in January or February, make sure you take the next important step:
2. Close the account immediately after paying it off.
When you do this make sure to contact the card issuer and tell them to note on your credit report that the account was "closed due to request by the account owner."
How will closing a department store credit card affect your credit score?
The good news is that paying off your department store credit card should have no effect, and doing so could actually improve your credit score. The reason for this is that department store cards typically have very low available credit limits. Typical limits are $1,500 to $2,000. When you open a department store card with a $1,500 limit and charge $1,000 on it, you're using over half of the available credit, and this can hurt your credit score. So when you pay it off and close them down it might actually help your credit score. At best it helps your score. At worst, it most likely will not impact your score at all.
Question for Ray: I recently bought stock, and then sold for a loss, believe it or not. Do I have to claim this on taxes?
Ray's Answer: I'm really glad you're asking this question now, because we're in end-of-year tax season, and now's the perfect time to go back and look at your losses and gains from investments over the course of this year.
Now is the time to figure out what you should do before Dec 31st.
Here is the simple reason: Because of the market turmoil this year, a lot of folks own mutual funds or stocks that are still worth less then what they paid for them, and if you still own these you have an unrealized loss.
If you own investments that are worth less than you paid for -- in a taxable account -- (not IRAs, a retirement account, etc.) you might want to sell that stock or fund now because you will take an unrealized loss and turn it into a realized loss.
You can use realized losses on stocks or funds to offset realized gains on other stocks and funds, and if you have no gains to offset (or your losses are more than your gains), then you can use up to $3,000 of investment losses to offset any other income on your tax return.
But here is the important part: you need to sell money losing investments in taxable accounts before year-end in order to claim any losses on this year's tax return, so review your investments and act quickly before time runs out.
Question for Ray: I am a woman who will turn 62 in January, and who is currently receiving approximately $25,000 in pension payments per year. I just got laid off from a job that was paying approximately a $50,000 annual salary, which leaves me in a situation whereby my monthly money outflow is going to be greater than my income. I have been bouncing the following three options around, and I need to quickly decide if i should:
1) Sell my house to pay off other debts,
2). Pull money out of 401K to pay off/refinance debt, or
3). Begin receiving Social Security benefits in January
Ray's Answer: It's great that you are thinking through your options -- that shows level-headed thinking.
This is the way to look at your current situation: Your current income does not cover your current expenses.
Your options are: a). Increase your income, b). Decrease your expenses, or c). A combination of a & b.
Also, keep this in mind - the economy will recover -- it is already showing signs of this -- and you will find a job, so don't throw in the towel, keep looking, gain additional education, skills.
Of the three options you are considering, the one I like the best is No.3 - begin receiving Social Security benefits in January. Here are the benefits of doing this:
• You can begin receiving this income quickly and that, combined with your pension income, should be enough to pay your current expenses.
• Although taking Social Security benefits at a later age, say 66, would mean a larger monthly check at that time, taking Social Security now at age 62 means that you are receiving an extra four years of payments. Believe it or not, assuming you live a typical life expectancy, both options are financially the same.
• Up to half of your Social Security income could be tax-free, which means more net income for you.
Here's why I don't like the other options:
Selling your house: If it's your plan to sell your house for other reasons (you plan to move, it no longer meets your current needs, etc), then by all means proceed. But getting a reasonable price will take longer in this market, and depending on your location (Florida, Nevada, Michigan, California) you may not be able to sell at this time.
Of course, selling your house creates another problem to solve -- where you live? Will you buy or rent? Then there are the costs of selling, moving expense, among others. It's not a quick and easy solution to your current problem.
Pulling Money from your 401(K): While you can do this quickly, doing so will deplete your retirement savings, leaving nothing to fall back on in your later retirement years. Doing this now will leave you no option to do this later when/if you really have no other options. Also, taking money from your 401K does not solve your ongoing problem - you need additional income or you need to reduce your expenses. While you can use money you take from your 401K to pay off debts, you will have to take out more because you will pay income taxes on the money you pull out of your 401K.