How to keep your financial foibles from costing you big bucks.
Small mistake: You overlook old library fines or parking tickets.
Big complication: To raise revenue, many U.S. libraries and municipalities are turning unpaid debts over to collection agencies. Once an agency takes over your debt, even if it is only $20, you can count on a big dent in your credit score―100 points or more, according to Craig Watts, a spokesperson for Fair Isaac Corp., the financial-management company that developed the FICO credit score, a number that determines a borrower’s credit history.
Cut your losses: Take care of fines and tickets as soon as you’re aware of them, and make sure the payments clear your bank account. If they aren’t received and processed by the library or the city agency, your account will be marked delinquent. Also, check your credit report (it’s free) at least once a year (annualcreditreport.com). If you find a debt there that isn’t yours, follow the credit-reporting agency’s steps to dispute the charge.
Small mistake: You carry even a small credit-card balance.
Big complication: If you pay only the minimum monthly payment on a $2,200 balance (the amount the average consumer carries), it could take you 12 years to clear the card. In that time, you will have paid an additional $1,968 in interest (calculated at a modest 14 percent.)
Cut your losses: If you’re already carrying a balance, look for ways to step up payments. If that’s not possible, take out a personal bank or credit-union loan to pay off the card, suggests Kathryn Nusbaum, managing director of Middle America Planning, a financial-advisory firm in Pittsburgh. Some personal loans are not secured by an asset (so if you default, you don’t lose your car, say), and their rates tend to be lower than those for credit cards.
Small mistake: You miss a mortgage payment or send it in late.
Big complication: “One late mortgage payment can knock 100 points off your credit score overnight, affecting your ability to get the best interest rates on car loans, credit cards, and the like,” says Watts.
Cut your losses: “If you’re unable to make your payment, call your lender right away,” says April Lewis-Parks, director of education for Consolidated Credit Counseling Services, a nonprofit company based in Fort Lauderdale that offers debt-management programs throughout the United States. “They have loss-mitigation and hardship departments that may work out another payment arrangement for you for six months.”
Small mistake: You wait too long to submit (or check on) an out-of-network health-insurance claim.
Big complication: You and your doctor could both be stiffed by the insurance company, and your doctor could demand the whole fee from you.
Cut your losses: Know your insurance company’s “timely filing limit,” says Nora Johnson, vice president of Medical Billing Advocates of America, a consumer-advocate group in Salem, Virginia. If you filed the claim late and owe the entire fee, consult a billing advocate (go to billadvocates.com to find one in your area), who may be able to negotiate what you owe. If the doctor’s office was late filing but tries to collect the entire fee from you, pay your coinsurance and dispute the rest of the bill with the doctor’s office. They filed late; they should absorb the difference, says Johnson.
Small mistake: You make an insignificant claim on your home owner’s insurance.
Big complication: It can increase your monthly premiums, and you could be dropped as a customer. If dropped, it could be hard to find other coverage, as most companies share claim information.
Cut your losses: Before filing a claim, talk to your agent to help you decide whether to make the claim, advises Lamont Robinson II, a Chicago-based insurance agent for Allstate. You should pay small repairs (those less than $1,000 or less than your deductible) out of pocket. Also, raising your deductible to around $2,500 may lower your premium and deter you from making small claims.
Small mistake: You cash out your 401(k) when you leave your job.
Big complication: The loss of substantial future earnings. In 20 years, $2,500, the average 401(k) cash-out, can grow to $11,652 (with an average annual return of 8 percent).
Cut your losses: “Roll over funds into a personal IRA so your money continues to grow, tax-deferred,” says Dean Schmitz of the Principal Group, in Des Moines, one of the largest U.S. providers of employer-sponsored 401(k) plans. In most cases, job hoppers can roll over multiple 401(k)s into a single account if the types of investments are the same.
Small mistake: You don’t pay a student loan while you’re out of work.
Big complication: If you stop paying a $20,000 loan with a 6.8 percent interest rate for 12 months, you’ll pay an extra $1,360 in interest and fees, in addition to your original loan and accruing fees.
Cut your losses: Let your loan provider know that you’re out of work. By law, every lender must offer programs for customers experiencing economic hardship, says Martha Holler, a spokesperson for Sallie Mae, the country’s largest student-loan provider. One option: “Deferment, which is a set period of time when you don’t have to make payments and the government may pay the interest,” says Holler. If you don’t qualify for a deferment, ask about forbearance, which lets you temporarily stop making payments and be considered current on your account. But interest continues to accrue, so you’ll owe extra money at the end of your loan period.