Money Management Q&A

September 21, 2007

Credit counseling; check writing; term insurance

How credit counseling affects your score

I mishandled my credit card debt while in medical school and may need help from a credit counselor to get it straightened out. Would consulting one help or hurt my credit score?

That information isn't factored into your FICO score, so consulting a counselor for advice will neither help nor hurt you. But don't confuse counseling with more hands-on assistance, such as a debt management plan or debt negotiation. With a debt management plan, a credit counseling agency works out a payment schedule with you and your creditors and makes the payments for you from cash that you deposit with the agency monthly. As their name implies, debt negotiation firms try to reduce the balance you owe to creditors. But both strategies, particularly debt negotiation, involve risks and can have a negative impact on your credit record. For more details see "Fiscal Fitness: Choosing a Credit Counselor," available at http://www.ftc.gov/bcp/conline/pubs/credit/fiscal.shtm .

Don't count on float when writing checks

I paid for groceries by check on a Saturday, then realized on Sunday that I didn't have enough cash in the account to cover it. I immediately transferred money from savings to the checking account by phone, but the supermarket check had already bounced. How did it clear so fast?

Rather than depositing your check in the bank on Monday morning, the supermarket processed it on-site as an electronic fund transfer. Your supermarket receipt probably includes a notice telling you that by presenting a check you're agreeing to that form of payment. The merchant also should have a sign posted in the store to alert you that it handles checks this way. If you normally get your canceled checks (or images of them) back from your bank with your monthly statement, this check won't be among them. The same thing can now happen with checks you mail, so don't count on having a few days' float when you write a check.

"Free" insurance with a hefty price tag

I'm shopping for a 20-year level-premium term insurance policy. An insurance agent suggested one with a return-of-premium feature. That way, he says, I'll get back all my premiums tax free when the policy runs out. Since I'm 45 and in excellent health, and my wife probably will never collect the death benefit, the policy sounds like a good deal. What isn't the agent telling me?

First, you'd pay a pretty penny for the right to collect that future refund. Say you need a $500,000 policy and fall into an insurer's preferred health class. A regular 20-year level-premium policy could cost you as little as $635 annually, based on rate quotes from LifeInsure.com. But add the refund feature and your yearly bill would jump to $1,558 or more, an increase of at least $923. If you instead invest $923 in a mutual fund that earns an average of 8 percent annually, in 20 years you'll have $45,617, which is $14,457 more than the $31,160 in premiums that would have been refunded tax free. True, you'd owe tax on that mutual fund money, but your combined federal and state tax rate would have to top 40 percent annually before the return-of-premium policy would prove the better deal. Moreover, canceling the return-of-premium policy before the end of the 20-year term would cost you most or all of your promised refund, and if you were to die before 20 years pass, your wife still would collect only the $500,000 face value.

Send your money management questions to: MMQA Editor, Medical Economics, 123 Tice Blvd., Woodcliff Lake, NJ 07677-7664, or send an e-mail to memoney@advanstar.com (please include your regular postal address).