Questions About Credit Reports, Parenting, Surgery Payments, and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Credit report and mortgage payoff
2. Surgery payment options
3. Selling a car with lien
4. Selling pet insurance from home?
5. Basics of investing
6. Why emergency fund?
7. Other investment options
8. Consolidating debt
9. Social Security estimate
10. Changing financial advisors
11. Electric versus gas mowers
12. Parenting book

The weather this past weekend was glorious and, as a result, I spent a lot of the weekend outside. I went to my oldest son’s soccer game. I played a ton of games with our children in the backyard. We got our fire pit out of storage and had a campfire. We spent a significant part of a day at a nearby state park (Big Creek State Park just north of Des Moines, Iowa, to be specific). Sarah and I spent some time dethatching our yard, too, in order to try to make it look a little better as we fertilize it ourselves and don’t hire any services to take care of it.

What I always notice is that, after that first weekend of spending a ton of time outside in the spring, I sleep like a corpse that Sunday night. The combination of physical exertion and fresh air didn’t leave me feeling tired, but it did leave me in such a deep state of sleep that I actually slept right through my alarm. I didn’t even hear it for a long time.

The thing is, I usually don’t even need to set an alarm. I wake up like clockwork at around 5:30 AM each day. However, I knew from past years that after getting tons of fresh air and exercise, I’m going to sleep like a brick so I actually set my alarm. I ended up sleeping through roughly an hour of the noise. (I assume I hit the “snooze” button a few times, but I honestly don’t recall it.)

I feel refreshed. I feel alive. I actually want to go back to that park and explore the trails some more (that’s what this upcoming weekend is for).

Today is a beautiful day as well. Part of me just wants to drop everything and go outside and wander around doing something. I have a bad, bad case of the spring “stir crazies.”

Let’s do this.

Q1: Credit report and mortgage payoff

My husband and I are considering paying off our mortgage. What would be the effect on our credit rating? Would it actually decrease because we’d no longer be making regular loan payments?
– Anna

Assuming that you have a credit card that’s at least a couple of years old, your credit report won’t take much of a hit at all. The impact should be pretty small and your credit score will continue to be fine.

Now, I can’t say down to the exact point on your credit score what will happen, because the exact formula for calculating your credit score is actually a trade secret held by the Fair Isaac Corporation (FICO). All I know is that paying off your mortgage really only affects a few components of what makes up your credit score, and if you have a credit card with a decent history, your credit score won’t be impacted very much.

So, assuming you do have a long-lasting card, pay off your mortgage without worry. Your credit score won’t tank.

Q2: Surgery payment options

I’d like to know your thoughts on how you would pay for this: I have minor knee surgery coming up. I have a high deductible health plan with a $2500 deductible and an HSA that I fund to the max annually, but this is only my second year having the HSA. I do not have a 401k provided by my employer, so my HSA is my only tax sheltered account and I try to keep a high balance and I invest the funds within the HSA. I do not have the exact amount I will owe for my surgery, but for this purpose I’ll estimate that I may pay ~$3000 total between deductible, prescriptions, co pays. Would you pay this from the HSA and take a significant amount of that balance out? Or would you put it on a credit card to redeem a 1% cash back and them pay that balance off in full with cash from a money market account? I’m not sure which would payoff more in the long run.
– Mary

You’re actually talking about several issues at once, so let’s break them down.

Essentially, you’re trying to decide if it’s “worth it” to use the money from your HSA versus paying off the medical bill out of pocket. I’m assuming from the way you wrote your question that you have enough cash outside of the HSA to easily pay off the bill. Right now, you have a $2,500 deductible, which means either way you’re going to be spending $2,500, whether it comes from the HSA or out of your pocket. That’s going to happen in the case of future medical concerns, too.

So what you’re really trying to figure out is whether it’s better to have a bigger return on your money (but with the restrictions that come with money in a HSA) by leaving money in the HSA and paying with your savings, or whether it’s better to have the flexibility of leaving money in your savings account and paying with the HSA instead.

My reaction would be to look at how tight your financial situation becomes if you pay out of pocket. If this just makes a small dent in your emergency fund, then I’d probably pay out of pocket and keep the HSA around for a big crisis. If it eats all of your emergency fund and leaves you walking a tightrope for a while, I’d pay out of the HSA.

Now, assuming you pay out of pocket, should you use your credit card as a “middleman” to get the rewards bonus from that card? My answer is absolutely. Assuming you get a 1% bonus from doing this, that’s $25 for what adds up to a handful of online banking mouse clicks, so you should definitely take advantage of doing this.

Q3: Selling a car with lien

My friend bought a used Honda Civic. They had a car loan while living in Texas. They owe $24,000 on that loan. The price for the used car is $7,000. Neither one has a great credit score. Now they want to get rid of the more expensive car. How can they do this?
– Max

So, here’s the deal with owning a car with a car loan still on it. That car is considered to have a lien on it, and that means you can’t sell it until that lien is cleared. You can clear that lien on the day of sale with the aid of a bank or you can use some kind of escrow situation, but the sale can’t be completed until that lien is cleared.

In 2009, we did this when purchasing our Honda Pilot privately. We met the buyers at their bank and made the payment directly to the bank. Their notary then handled all of the paperwork and we left with the vehicle’s title and the vehicle itself.

Given that the loan might not be with a local bank, you will want to directly contact the lending institution. They’ll be able to help you step by step through what needs to happen to sell the car. What will likely happen is that you’ll generate a bill of sale, you’ll take that to the DMV and get a temporary operating permit for the buyer, and then once the lien is paid off you can send the signed title to the new owner. This is usually handled through an escrow service to make sure everyone fulfills their ends of the bargain – they’ll tell each side what they need to provide to make this work and handle all of it, for a fee.

If you’re selling to a dealer, they’ll walk you through all of this and make it pretty easy.

Q4: Selling pet insurance from home?

Hello, I am in New York State and am interested in selling pet insurance from my home as a business. I don’t know where to begin to find out the info I need.
– Diana

Your biggest step will be to figure out which insurance company you’re going to be an agent for. There are a lot of companies out there, so you need to figure out which one you’re going to do business with.

Once you figure that out, you then contact that company and they’ll walk you through what needs to be done to become a pet insurance salesperson. They’ll make it nice and easy for you.

So, your starting step should be to simply figure out which pet insurance companies you’re interested in and select one that you wish to represent. I’ll leave that part to you!

Q5: Basics of investing

I’ve been following your website for a couple of years, you’ve been a great help to getting me out of debt. I’ll be 26 years old in June but I know absolutely nothing about investing money. Math was never my best subject. Any tips on what to read to help me understand?
– Monica

A few years ago, I wrote an article addressing your very question. Here’s my collection of useful resources for learning about the basics of investing. A few key quotes:

If you’re a complete beginner, Investing for Dummies by Eric Tyson is a strong choice.

and

The single best all-around book I’ve found is The Boglehead’s Guide to Investing by Taylor Larimore, Michael LeBoeuf, and Mel Lindauer.

and

The best online resource for learning about investing that I’ve found thus far is Investopedia’s Investing 101. It does a great job of briefly and clearly walking you through the basics of investing. If you wish, you can also download the whole thing in PDF format.

Those things will help a ton. Most libraries will have the two books I’ve mentioned, so start there.

Monica has another question.

Q6: Why emergency fund?

I’ve been following Dave Ramsey’s debt snowball but I skipped the step of saving $1000 first. I just felt like if I have a $1000 sitting around, it could be a payment on a debt. Should I stop my snowball and work on saving that $1000 first?
– Monica

Yes, absolutely. Having that emergency fund can be a lifesaver in a real pinch.

Many people in your situation rely on their credit cards if they ever face a serious emergency like a job loss or a car breakdown. Their credit card functions as their emergency fund.

However, a credit card is not a failsafe emergency fund. It won’t help in the event of identity theft. It won’t help if your credit card is stolen. It won’t help if you’re having a credit problem and your credit card is cancelled or has a reduced credit limit.

It also has the problem of actually increasing your debt again and working against your debt snowball. It slows down your progress.

What I actually suggest is rather than saving rapidly to $1,000 and then stopping and going back to the snowball is to start what I call a perpetual emergency fund. Basically, what you do is start an online savings account or another savings account you can’t easily touch (maybe at another local bank) and then set up an automatic transfer each week from your checking account to this new savings account – maybe $20 a week or $40 a week or whatever. Then walk away and forget about it. Let that savings account balance build up and don’t touch it unless you have an emergency. Provided the emergency doesn’t happen in the first few months, it’s likely that your emergency fund will take care of the problem for you.

Monica actually has a third question as well.

Q7: Other investment options

My credit union has money market accounts, CDs and such. They all sound interesting. What exactly are they?
– Monica

A money market account is a lot like a savings account. In fact, for you as the user of the account, it’s basically identical to a savings account. Both accounts have FDIC insurance. Both are accounts where you can easily deposit and withdraw money. The difference comes when you look at what the bank can do with your money when they’re holding it for you. With a normal savings account, they’re very restricted and can mostly only lend that money out in the form of mortgages and car loans (this is really, really, really safe and your money is insured anyway), while a money market account has looser restrictions and allows the bank to invest that money in United States treasury notes (basically taking on a piece of the national debt), CDs, and other things. Your reward for this is usually a slightly higher interest rate, but that interest rate tends to vary more than normal savings account interest.

A CD is basically a restricted savings account. You basically agree not to touch the money for a certain amount of time and in exchange for that the bank pays you a better interest rate. So, your bank might offer a 0.25% interest rate on savings accounts but offers a 0.75% rate on a one year CD. Basically, if you agree to not touch the balance on that amount for a year, you get 0.75% instead of 0.25%. Now, you can still get the money in an emergency, but you usually lose most or all of the interest and pay a fee.

Honestly, if you see a bank’s offering and find yourself interest, ask about it. Ask the teller to explain it in simple terms and if you’re still not sure, ask for a brochure and take it home and study it on your own time.

Q8: Consolidating debt

I would like to ask what is your opinion On the best way to consolidate debt. I would like to get everything I owe besides my house and vehicle on one loan and payment. Is there a way to get around 75,000 unsecured. I have a good income and credit is around 700.
– Daniel

With that credit score and that desired amount in an unsecured fashion, if you’re even able to get a loan like that, the interest rate is going to be painful. That’s because unsecured loans are pretty risky; if you decide not to pay it back, the lender doesn’t really have any collateral to reclaim.

If you want to try, you can go to local credit unions and talk to them about personal loans, but I would expect to see either high interest rates or outright refusals.

Now, if you’re willing to consolidate with collateral, you can always refinance your mortgage to consolidate some of that debt into your mortgage. This can end up saving you a ton of money over time due to lower interest rates, but it will probably mean a higher mortgage payment for a while.

Q9: Social Security estimate

I am trying to find out how much my Social Security would be at retirement. I have 40 quarters of employment, but most of my life I have been self employed and earned “unearned” income through royalties. This means I have not paid a lot in (but I did work part time at Starbucks for ten years) I would also like to know what my husband’s estimate would be. He has never worked outside of our ‘unearned income’ royalties work except for a few ‘for hire’ jobs where he did pay social security taxes. Before we retire I would like to know if its worth trying to ‘catch him up’ to the 40 quarters of work, or if he can earn Social Security because I am his spouse.
– Naomi

Well, every five years, the Social Security Administration mails out a summary statement to each person outlining what their benefits will look like upon retirement.

The SSA also offers an online portal, called my Social Security, where you can go and check what your benefits will look like. As with many federal services like this, it’s a bit of a challenge to gain access as they’re rightfully worried about identity theft issues, but once you’re in, it’ll answer your questions.

Once you both have access to such benefit statements, you’ll be able to figure out what the best path forward is for the two of you.

Q10: Changing financial advisors

We have a financial advisor that we have been using for ~10 years who works for a large financial advisor firm. We didn’t originally choose her but she took over her father’s clients after he passed away. We are not thrilled with the service, and recently she has been requesting more information about our other accounts that we don’t have with the firm (bank accounts, other investments not associated with the firm) and we are not comfortable with sharing this. Also her fee is based on a percentage, not a fixed fee, so we think that this could be costing us a lot especially in terms of retirement plans. Currently with this firm we have multiple accounts (529s, retirement accounts, life insurance, mutual funds). What’s the best way to “let go” of your financial advisor? We are kind of apprehensive about having a potentially very awkward conversation. Also, if we decide not to stick with this firm, what happens to all of the accounts? Is it possible to still have the accounts but not a financial advisor associated with them?
– Mindy

You don’t need to have that awkward conversation. All you have to do is start shopping around with a new firm to work with and when you find one that you’re happy with, transfer your accounts. Since I don’t know exactly what all you have here, you’ll have to rely on the new company to help you figure out any tax implications or other materials, but it shouldn’t be a problem. They’ll be able to handle all of the transfers for you.

As you do this, your old advisor may call you, but you don’t have any reason to say anything to this pushy person. You can politely inform them of exactly what made you uncomfortable, but you don’t have to listen to their pleas to retain your business.

As for not having an advisor, you can always manage investments yourself. It might be tricky to pull yourself out of this company, however, as they’re going to want to retain your business and have a firm grip on your investments. It will take time, lots of phone calls, and you’ll probably end up with an uncomfortable call or two with the advisor you have.

Q11: Electric versus gas mowers

I saw your post (http://www.csmonitor.com/Business/The-Simple-Dollar/2011/0929/Electric-vs.-gas-lawnmowers-Which-is-cheaper) & I was wondering if the math was off on that? I was speaking with someone today who said it cost .04 to charge an electric mower battery and given your number was .38 cents I’m wondering if the decimal is off? I guess where did you get that it takes 3.5 kilowatts to charge the battery?
– Anastasia

The charging of a mower battery varies widely depending on the type of mower and the type of battery that you’re charging.

My estimate of a charge like that is from a larger battery that you would need to mow most of or an entire acre off of a single charge. We have a large yard and to mow the whole thing without stopping in the middle for multiple charges, we need a large battery. We also need a large mower or else we’d multiply the time needed to mow the yard.

I’d estimate, on the back of the envelope, that your charging cost would be somewhere around a cent and a half on average to charge a mower battery enough to mow 1,000 square feet. This varies a lot depending on battery type. My guess is that the mower you looked at would charge enough to mow 3,000 square feet or so, which might be enough for your yard. That’s enough to mow a very modest yard in a city, after all.

Q12: Parenting book

I’m sure other people have brought this up… but would consider writing a parenting book? I really enjoy your philosophy on parenting and would love to read a consolidated version especially now that my husband and I are about to become new parents.
– Carmen

I’m not sure I would qualify as a “parenting expert” in any way. All I really have is my own experience, built on top of reading piles of parenting books. I haven’t studied child psychology or anything like that.

If I were to write a book about parenting, it would definitely be more in the “memoir” style than in the “advice” style. I would definitely write it in a way where you can clearly see the “skeleton” of what works and what doesn’t.

It would be much more likely for me to discuss parenting on a long one-off post here on The Simple Dollar. I tend to sometimes stray away from strictly financial topics with some of my Saturday posts, so that might be a slot where I would write an “advice for new parents” guide.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

Loading Disqus Comments ...
Loading Facebook Comments ...