Now that you’ve invested in a home, how do you increase its value?
That’s called “building equity.” Equity is the market value of your home or property, minus your outstanding mortgage debt. So, for example, if you can sell your home for $450,000 and you still owe $100,000, you have $350,000 in equity. Building equity is one the biggest financial benefits of ownership.
If you live in a market where home values are rising, yours may float up with the rising tide and your equity will increase without doing a thing.
Or you can work on growing your home’s value by decreasing the amount you owe and/or increasing the value of your property. Here are some ways to do both.
Part of every mortgage payment goes towards paying off your loan’s principal and interest, with most of the payment going to interest in the loan’s early years. You can use Zillow’s amortization calculator to estimate how much money will be paid over the life of your loan for principal and interest. If you pay down the principal faster, your equity should increase faster. This can be done a few different ways.
Paying more: If you have a 30-year mortgage, adding more to your payment either monthly or when you have extra cash can help you gain equity. If you pay more, make sure your lender applies it to your principal. This is a great way to use your tax refund, a bonus from work or an inheritance.
Paying faster: You could divide your monthly mortgage payment into two bi-weekly payments, for a total of 26. So instead of 12 payments a year, you make the equivalent of 13, paying down your mortgage faster and gaining more equity. But make sure to check with your lender first to make sure they accept bi-weekly payments. And make sure all the extra money goes immediately to the principal instead of waiting for the second half-payment. Reputable lenders will not charge a fee for bi-weekly payments.
Refinancing: If you have a 30-year mortgage, you might want to consider refinancing to a 15-year loan, which has a lower rate. Most consider this worthwhile only if you can drop your interest rate by at least 1.5%. Factor in any closing costs before making this move. Also make sure your mortgage doesn’t have a penalty for pre-payment. It’s not common, but it’s better to check.
Before you decide on any of these options, consider if it’s really the best use of your money. If you’re not maxed out on employer-matched saving accounts, perhaps you should be putting extra money into your 401(k) rather than paying off a low-interest mortgage. It’s smart to talk with a financial advisor to determine the best investment strategy for you.
Also make sure you have an emergency fund, typically 6 months of savings in case you fall ill or lose a job.
Making smart improvements and adding the right amenities to your home can also increase its market value, which means more equity for you.
How do you know which projects will bring the best return on your investment? Even though you’ve just moved into your new place, there are home improvements buyers typically love: bathrooms, attics, entrances, kitchen updates, garage doors and siding. Popular features can vary by area and home type, so consider what’s in demand in your market.
Also, be mindful of your market as you’re thinking about how much to invest in improving your home. The realities of a buyers or sellers market will have an impact on how much return you’ll get when you sell.
You can find more inspiration, ideas and guidance in Zillow Porchlight home improvement articles.
For new homeowners, Zillow’s design and home improvement videos show you how to tackle your first project.
If you’re looking for the financial security owning your home can provide, it doesn’t have to be a distant fantasy. In fact, it may be closer than you think. Here are nine ways you can pay off your mortgage faster.
1. Consider a larger down payment
Your down payment plays a big role in your mortgage payment calculations. The more you put down, the less you need to borrow. But your down payment affects more than that. Most conventional loans require one of two things — 20% down or private mortgage insurance (PMI). If you put less than 20% down, your lender requires PMI as a form of insurance in case you default on your loan.
If you increase the size of your down payment, you could avoid the extra cost of PMI and reduce your loan amount or term. The money you would be spending on PMI could be used to make extra payments on your loan, helping pay your mortgage off sooner.
2. Shop around before you buy
Mortgage rates and terms vary by lender. Compare your options before you sign on the dotted line. While one lender may offer a much shorter loan, the monthly payments could be very high. Paying off your mortgage quickly may be a priority, but make sure you can afford it before you select the shortest term.
In addition to mortgage rates, you also need to consider closing costs. In some cases, you may be able to get the seller to pay your costs. Talk to your lender about closing costs, and don’t be afraid to move on if you don’t feel like you’re getting the best deal.
3. Don’t overextend yourself
We all have a picture of what our dream home looks like. Maybe it includes a gourmet kitchen or, perhaps, a sprawling backyard. Often, we can become so consumed with our wish list that we push our budget further than we should.
If you want to pay off your mortgage earlier and don’t want to be overburdened with debt, take a close look at your finances. Use a mortgage affordability calculator to find out how much you can comfortably afford and stay close to that amount.
If you keep your payments within your budget, you’re more likely to have additional money at the end of the month. If you want to pay down your mortgage faster, using this extra money to put towards your balance is a good place to start.
4. Choose a shorter-term loan
When you purchase a home, you have several options. One of the biggest decisions you’ll make is what type of loan term you choose. Many homebuyers choose a 30-year loan. If you’re looking to pay off your mortgage faster, you may want to look at a 15-year loan. Ask your lender if they offer other terms such as a 20 or 25 year which may not have as much of a higher payment impact.
15-year loans result in higher payments because you’re paying off the loan in half the time. But these loans often offer more competitive rates. Because you’re paying a lower interest rate and paying that rate over a shorter period, you could end up paying less interest and spending less on your home overall.
Think a 15-year loan isn’t an option? What would happen if you made a larger down payment and chose a more affordable home? An online mortgage calculator can help you review your options and choose the right loan term.
5. Make bi-weekly payments
The average homeowner makes their mortgage payment once a month. That’s 12 payments per year. With bi-weekly payments, you pay half your monthly payment every two weeks. This way you end up paying 26 payments, or the equivalent of 13 months. In other words, one extra payment every year.
The extra annual payment can help you reduce the interest you pay, earn equity faster and, ultimately, allow you to repay your mortgage faster. Check with your lender to see if they offer a bi-weekly payment option. If not, see if you can still make payments every two weeks and make sure any extra payments are applied correctly.
6. Use an unexpected windfall to pay down your loan
Did you get a surprise bonus from work or receive a large inheritance? While the instinct may be to spend this money or put it in the bank, another option is to pay down your mortgage balance.
Before you write a check and put it in the mail or press send on your online payment, talk to your bank first. Different banks have different rules, and, in some cases, your lender may charge a fee if you pay off your loan early. You’ll also want to confirm the full amount goes to the loan principal. A quick phone call can help you determine whether you need to do anything to make sure your money goes to the right place.
7. Ask your lender about a mortgage recast
Putting extra funds towards your mortgage is great. Unfortunately, it doesn’t matter how much extra you pay, your monthly payments still stay the same. That is, unless, you request a mortgage recast.
With a mortgage recast, the bank looks at how much you owe on your loan and recalculates a new monthly payment spread out over your remaining loan term. Though this may not seem like it helps you pay off your mortgage faster, when you have extra money available at the end of the month, you can put that money right back into the loan.
8. Make paying off your mortgage early a priority
How much extra money could you find if you took a hard look at your budget? What if you made a few strategic cuts? Chances are, you can do without a few unnecessary costs or find ways to reduce monthly bills. When you shift your priorities, you might be surprised by how much money you’re spending on things you don’t need.
If there’s nowhere to cut, or you just don’t want to reduce your costs, consider how you can increase your monthly income. This could be achieved by working a few extra hours, asking your boss for a raise or bringing in some cash through a second job.
9. Refinance your home loan
Refinancing your mortgage can be a great way to reduce the length of your loan and pay off your home faster. If you’ve never refinanced a property, it’s important to understand the options available:
- Interest rate reduction: Interest rates fluctuate throughout the life of your loan. As a homeowner, it’s always a good idea to watch current mortgage rates. Little changes might not make a big impact to your mortgage payment, but a rate drop of 1-2% could. If you’re not sure whether you should refinance, talk to your lender.
- Shorter term loan: Maybe you couldn’t qualify for a 15-year loan when you first purchased your home, but now you can. Refinancing involves reevaluating your financial health. With a higher income, more savings and a better credit score, you could qualify for a much shorter term.
Paying off your mortgage early is a great way to free up extra money and gain financial freedom, but keep in mind that there are usually costs associated with refinancing your loan. There are many options available and your lender can help you determine the right ones for you based on your financial circumstances. If you’re thinking about buying a home, refinancing your loan or are looking for ways to pay off your loan early, talk to a Home Lending Advisor to discuss your options.
- Raise Credit Score
What’s a good credit score? Those four seemingly innocuous words can send a chill down anyone’s spine. It’s a number that many Americans know by heart, a number they check regularly, and one that brings them more jubilation and misery than the one they see in their bank account every day.
But your credit score means nothing if you don’t have anything to compare it against. Is it good, is it bad; are you below average, above average; do you need to make drastic improvements or are you on the right course? These are the questions we’ll help you answer in this guide, as we look at what constitutes a good credit score and discover what the average is for your location and age.
The FICO Scoring System
The FICO score was created by Fair, Isaac, and Company. It gathers user data relating to payment histories, credit accounts, late payments, credit card balances and more, and uses this to calculate a score. This is then shown to lenders, from credit card issuers checking to see whether you’re capable of meeting your monthly payment, to landlords, and employers.
There have been many versions of the FICO Score as the creators seek to improve it and account for the latest credit trends. However, there are really only two versions that you need to concern yourself with as a borrower:
- Base FICO
- Industry-Specific FICO
The Base FICO is what many people mean when they refer to your credit score and it’s calculated based on your credit report, accounting for credit card information, loan data, and everything else. The second is tailored forwards specific industries and may be used by credit card companies, home loan providers, and auto loan companies.
In any case, both these scores relate to your credit report, which in turn is based on your credit history. If you focus on meeting payments, not opening too many accounts, keeping limits high and debt low, then you’ll improve both these scores simultaneously.
For more advice, check with our guide to improving your credit score fast.
Credit Score Range
There are two ranges to consider here. The first concerns the score and determines whether it is Poor, Fair, Good, Very Good, or Exceptional, the second concerns how this score is calculated:
- Under 579 = Poor
- 580 to 669 = Fair
- 670 to 739 – Good
- 740 to 799 = Very Good
- 800 or More = Exceptional
- Payment History = 35% – Whether you meet monthly payments and stay up to date with bills.
- Credit Utilization = 30% – How much debt you have accumulated compared with how much credit you have available.
- Account Age = 15% – The age of your accounts, with older accounts generating a higher score.
- Variety of Credit = 10% – How varied is your credit? Do you have an auto loan and home loan mixed in with all those cards, or do you just have stacks of credit card debt?
- New Accounts = 10% – Hard inquiries and newly opened accounts.
Average Credit Score in the United States
Although the US debt problem is growing, passing $14 trillion in 2019 and amassing more credit card, personal loan, and student loan debt than ever before, the average credit score is improving. It’s a contradiction, but a happy one nonetheless and it suggests that consumers are becoming better informed and more capable.
In the final quarter of 2019, the average credit score was between 703 and 706, which is considered “Good” and is only 54 to 57 points from “Excellent”.
However, this doesn’t paint a complete picture. The average credit score changes depending on who you ask, how they’re getting their information and which scoring system they are using. The average credit scores also change from state to state and from age to age, both of which we’ll cover in this guide.
The Average Credit Score by State
Minnesota, the Gopher State, has the highest average score across the US, coming in at 733 based on 2019 figures. This is a very slight improvement from the previous year and when you look at additional data, it’s not much of a surprise.
Minnesota has the third-lowest poverty rate in the country and the 11th highest household income. One of the few surprises is that Minnesota is a relatively young state, and we know that individuals above 75 are the least likely to have large amounts of debt. However, if that statistic had any significance then the oldest state, Florida, wouldn’t have one of the worst average scores (694).
Washington is often said to be one of the richest states by average household income and this is reflected in an average credit score of 724. Other high average states include:
- North Dakota (727)
- South Dakota (727)
- Vermont (726)
- Wisconsin (725)
- New Hampshire (724)
- Hawaii (723)
- Nebraska (723)
- Iowa (720)
On the flip side, the states with the lowest average credit score include:
- Mississippi (667)
- Louisiana (677)
- Alabama (680)
- Texas (680)
- South Carolina (681)
- Georgia (682)
- Oklahoma (682)
- Arkansas (683)
- Nevada (686)
- New Mexico (686)
This information was provided by Experian, one of the three major credit bureaus tasked with recording America’s debt.
What are Good Credit Scores for People in Their Twenties and Thirties?
The average credit score for someone in their 20s is 662, which you’ll recognize as being just short of “Good”. It’s not a bad credit score but combined with the individual’s age and the fact their payment history, debt-to-income ratio, and credit utilization ratio are likely to be low, it can become a problem.
So, what’s the issue here? Well, many young adults are burdened with student loan debt before they have a chance to build good credit. This student loan debt can hit their credit report hard, and if they follow it with a credit card, an auto loan, and even a personal loan, their score begins to suffer.
It doesn’t get much better for individuals in their thirties, as the average credit score for this age range is 673. Generally speaking, debt is quite low for people below 35, coming in at just $67,400 when compared to $133,100 for those aged 35-44.
But this accounts for the fact that someone in their thirties and forties is more likely to have a home loan and an auto loan, increasing the average quite significantly.
What are Good Credit Scores for People Over 40?
The older you get, the better your credit score becomes. The average score increases to 684 for individuals in their forties, 706 for those in their 50s, and an impressive 749 for those aged 60+.
- Aged 20 to 29: 662
- Aged 30 to 39: 673
- Aged 40 to 49: 684
- Aged 50 to 59: 706
- Aged 60+: 749
That may not sound like enough to increase the average across the whole country, especially when you consider that the average doesn’t even climb above 700 until aged 50. However, the US has an aging population, as do many developed nations, and there are currently close to 70 million people aged 60 or more.
Americans in their forties and fifties have the highest debt, with those aged 45 to 54 suffering more than any other age bracket. However, they also have better credit scores than anyone younger than them, suggesting this debt is more likely to be tied-up in home loans and other secured debts as opposed to credit cards and student loans.
Why Does Debt Decrease with Age?
Debt decreases with age for several reasons. Firstly, individuals aged 60 or over have lived through easier times, when unemployment was lower, opportunities were greater, and wages were higher. They bought their homes sooner and were less reliant on credit.
The main reason is that they are retiring now, their mortgages have been cleared or are close to clearing, and they have the experience of age and all the perks that come with it (more likely to have collected an inheritance or receive a windfall; more likely to have accumulated savings or investments).
It’s worth noting, however, that three-quarters of citizens die with some form of debt, so this is an issue that hangs over most Americans, albeit one that lessens with age.
What’s Considered a Good Credit Score for Getting Credit Cards?
A good score will make it easier to acquire a new credit card and will also allow you to improve your credit limit with relative ease. Many credit card companies will only look at borrowers with scores of 700 or higher, others will drop to the mid-600s.
If you are sub-650, or even sub-700, spend some time trying to improve your credit score as it could make a massive difference with regards to the rates you’re offered. If that’s out of the question, look into acquiring a secured credit card, whereby you only spend the cash that you add to the card.
What’s Considered a Good Credit Score for Buying or Renting?
You should be able to buy a house with a credit score of 600 or above. However, anything less than 660 is likely to have a significant impact on the rate you’re offered, while anything above 700 will greatly improve your interest rate.
Landlords maybe a little more receptive to low scores, but it depends on the total monthly cost, the type of house you’re renting, and your payment history. In either case, you won’t need a perfect score to get a great deal and can generally get the best rates with anything in or above the Very Good range.
How Can a Good Credit Score Save you Money?
If you improve your credit score from Poor to Very good, you will see a massive difference. Lenders that would otherwise reject you will now offer you premium rates and many more doors will be opened for you. You’ll also receive more credit card offers in the mail and may receive an automatic credit limit boost on your existing cards.
The biggest changes occur when you improve your credit score from the lowest ranks and edge towards those middling and high scores. This far down the scale, even an increase of 30 points can make a massive difference in terms of what you’re accepted for. Many lenders use automated systems to quickly vet applicants. If you fall below the range they consider acceptable, you’ll be rejected, even if you’re making great improvements and have a solid payment history.
You’re unlikely to see much of a difference when you go from Very Good to Excellent, but it can still provide you with more opportunities and will ensure that no one turns you away.
How Can a Bad Credit Score Affect Your Life and Finances?
A bad credit score can take away your safety net and reduce your opportunities. If you have a good score and very little debt, you know that if things turn ugly, you’ll always have loans, credit cards, and installment plans to fall back on. You also know that once you can afford the down payment, you can buy a house or a brand-new car.
These options are simply not available to you if you have bad credit. It can feel like your life is on pause because you’re not able to do the things that your peers might be doing.
There is no easy or quick fix for this but if you focus on changing your spending habits and taking a few of our hints on board (we have countless articles on debt management and budgeting) then it will improve in time.
I Have a Good Credit Report, why is my Score Bad?
All the information used to calculate your score is listed on your credit report, but if you’re seeing things that don’t necessarily synchronize, such as a low score that is connected to a clean account, then it may be the result of one of the following:
- Low credit limits
- Limited payment history
- Existing accounts are new
Summary: The Average Credit Score
To summarize, the average credit score falls between 703 and 706, but it differs greatly depending on age and location. What doesn’t change, however, is how lenders judge what constitutes a Good or Bad credit score. This is what you need to focus on. Stop comparing yourself to your peers and concentrate on increasing your score until you get to a range that is comfortable, secure, and provides you with the opportunities you need.
- Get Out of Debt
Debt has a way of following you around. A lender can chase you wherever you go in the United States; they can sue you, take assets, garnish wages. It’s a lengthy and chaotic process that can cause endless stress and it doesn’t end when you die.
Outstanding debts can follow you to the grave and become the responsibility of your beneficiaries. But this process isn’t cut-and-dry and different debts have different rules concerning what happens in the event of your demise.
What Happens to Debts When you Die?
Unpaid debts may pass onto your estate when you die, which means they become the responsibility of your beneficiaries and heirs. Your executor, if you have one, will be tasked with liquidating your assets and ensuring all outstanding debts are paid off. Any remaining money can then be paid to the heirs mentioned in the will.
As a spouse, executor or heir, you are will not become responsible for the debt providing you don’t live in a community property state (see below). Your inheritance might not be as big, but unless you co-signed on the debts in question and therefore became responsible for them, you’re in the clear.
This isn’t true for all debts, however, and there are specific rules for each, as discussed below:
Credit Card Debt
Credit card companies will chase the debt in the event of your demise. They can be pretty ruthless about this, but if the estate can’t cover credit card balances then there’s little creditors can do. It’s not secured, so they can’t repossess assets, nor can they chase the spouse.
If you are a joint account holder, it is a different story and you will be responsible, but the same doesn’t apply for authorized users.
Personal loans fall into the same category as credit card debt as they are classified as unsecured. They will follow a similar process as well, which means the lender will seek repayment from the estate. The only exceptions are for loans that have co-signers and loans that are secured against collateral.
Medical bills are unsecured, but debts accrued within 6 months of death are given priority after funeral costs have been covered, which essentially means they will be first in line for the deceased’s estate.
Medical debt has less of an impact on an individual’s credit score and will only show on their credit report when debt collectors are called and credit bureaus are informed. However, a large percentage of Americans die with some form of medical debt and there are situations in which this can be transferred to a surviving spouse or beneficiary, as in community property states.
Student Loan Debt
Student loan debt is often discharged upon your death and this applies to co-signed loans as well. However, there are exceptions to the rule and in most cases, it depends on the type of student loans you have:
- Private Student Loans: They may insist that the debt is cleared, but there is no recourse if the estate can’t cover the debt and some lenders (Sallie Mae, Wells Fargo) will discharge completely.
- Federal Student Loans: These debts are always discharged upon death and this also applies to a co-signer if they or the student dies.
The executor can pay the loan using the estate. If they fail to do so, the lender will simply repossess the vehicle. If the vehicle is passed onto a beneficiary, they can choose to clear the debt or continue making monthly payments.
If there is a joint owner or the house is passed to a beneficiary, the mortgage will switch to them and they can continue making payments. There are laws in place to prevent the lender from insisting that the mortgage is paid in full on death.
The lender may work with the new owner and allow them to make payments and keep the house. However, they may also insist that they pay the balance in full, in which case they will be forced to sell the house.
Rules in Community Property States
Community property states appear a lot when talking about debt and death, as they seem to be behind every exception.
In community property states (see below for list) you’re responsible for your spouse’s debt providing that debt was acquired while you were married, known as “community property debt”. It may not matter if you were aware of the debt or not—if it was acquired during the marriage then your spouse’s creditors will come after you.
The community property states are as follows:
- New Mexico
What Happens if you Have a Negative Net Worth?
It’s rare for someone to die with no assets at all. Assets are not limited to houses, cars, and other expensive items. They include everything, comprising all the cash in their bank account, as well as stocks, savings, investments, retirement accounts, and belongings. All of this will be liquidated upon death and used to clear the debt.
If the deceased has more debts than assets, those repayments will be prioritized, beginning with administration costs determined by the Inland Revenue Service and followed by funeral costs. Medical bills incurred within 6 months of death will come next and then tax debt.
This is followed by secured debts, which is any type of debt that is secured against an asset. If the borrower paid 75% of their mortgage then they own 75% of the house, but the rest needs to be paid before the debt is settled. A beneficiary in receipt of the house will need to negotiate with the mortgage company to keep it, essentially assuming control of the mortgage.
Credit card debt is at the bottom of the pile. If all assets have been liquidated and all the money spent, that credit card debt will be discharged without payment.
Probate and How to Avoid it
If there is no will, a court-appointed administrative procedure will initiate the probate process, after which a probate court will validate the will and ensure that unpaid debts are cleared. The deceased’s remaining assets can then be passed to their beneficiaries.
Probate can also be initiated on estates where there is a will. In such cases, the probate court will validate the will and give the executor authorization to fulfill the deceased’s requests. This changes depending on location and some states will simply dispense assets based on estate distribution hierarchies, beginning with a surviving spouse.
Probate can be avoided, however, making life easier for your executor, heirs, and benefices. To avoid this process, you can:
Check Estate Size
Probate is not necessary for smaller estates. The laws governing estate size change from location to location. Look at local laws to understand whether this rule applies to you and prepare your heirs and executor if it does.
Establish a Trust
Property held within a trust is not part of your estate, which means it’s not subject to the same laws. A trustee is responsible for distributing the money as per your wishes and this can be given to a beneficiary.
Give Your Money Away
One of the easiest ways to avoid the probate process is to reduce the size of your estate while you’re alive. Give money and assets to your heirs before you die, ensuring they get what you want them to have without a lengthy legal process.
If your assets are jointly-owed by your spouse, they will assume control upon your death. Of course, joint estate ownership means joint debts, bills, and responsibility, and any secured or unsecured debt will be passed onto them when you die.
Will Life Insurance be Used to Clear Debt?
Will my life insurance enter my estate and be used to clear my debts? It’s a question that many debtors have and after discussing the many things that can happen to your assets after death, it’s a valid concern. The simple answer is a resounding and happy “no”, but as is so often the case with money and debt issues, it’s not quite that straightforward.
If there is at least 1 beneficiary on a life insurance policy then the money will pass to them, bypassing probate and all the issues that go with it. If there is no living or assigned beneficiary, the money will either pass into the estate or be given to a spouse or heir. It all depends on individual state laws, but you can avoid this issue by remembering to name a beneficiary on your life insurance policy and to ensure it is updated regularly.
If the life insurance money passes into the estate, it may be used to pay off debts, leaving more money for all that credit card debt sitting at the back of the line and waiting to collect its share.
How Long do Creditors Have to Make a Claim?
Upon death, it is the duty of a personal representative to inform all creditors, after which they are given a fixed period of time to make a claim. If no claim is made within that period, they are barred from future claims.
In California, for instance, a creditor has either 60 days from receipt of a mailed notice or 4 months from the date the estate was opened, depending on which is longer. In Florida, creditors have 2 years from the date the estate is opened, but a representative can take steps to shorten this period.
Why Won’t Debt Die With you?
It’s a question that many heirs and debtors ask and one that is steeped in frustration, but if you take a step back and think about it logically, it makes sense. Imagine that you lend a distant relative $10,000 to start a business with an agreement that they will repay $500 a month until the debt has been cleared and an additional $3,000 in interest has been paid. That money means a lot to you and you only loaned it because you were expecting to get it back, so what happens if they die moments later and the cash is just sitting on their bedside table?
Do you have a right to take it back? You loaned it to them after all, and you did so on the understanding that they would repay it, so don’t you have the right?
As far as lenders are concerned, if you owe them money then you have to pay them back regardless, dead or alive. It’s heartless, it’s morbid, but it’s also the way that a credit-hungry and debt-heavy society works, because without that rule, lenders might not be so willing to lend.
Why am I Being Hassled by Debt Collectors?
If your husband or wife recently passed then you may be contacted by their creditors, including debt collectors. This is true even if you don’t reside in a community property state. They are entitled to contact you to discuss the estate and to get their share. However, they may also try to trick you into assuming control of your spouse’s debt, even though you have no legal responsibility to do so.
This issue is not reserved for debt collectors, either. Credit card providers have been known to contact next of kin to offer their condolences and then kindly ask them to clear their deceased relative’s debt. They have been known to harass relatives with endless phone calls, letters, and even threats, doing all they can to chase the money owed to them by the recently departed.
They’re hoping relatives will be too grief-stricken to bother with the debtors and will simply assume responsibility without asking any questions. They’re relying on ignorance and have been known to use manipulation and deceit to get their way.
The Fair Debt Collection Practices Act was established to prevent this racket, but it’s still commonplace. Many spouses initiate this process themselves, calling banks and lenders directly to inform them of their loved one’s demise, believing they are doing the right thing, only to be tricked into paying a debt that they don’t have to pay.
This is true for all debts, but it’s more common with credit card debt and collection accounts, because, as discussed already, they are at the very back of the line when it comes to collecting from an estate.
It’s important to understand your local laws so you can be prepared to meet these creditors and their deceit head-on. Don’t let them push you around. If you feel like you’re being harassed unnecessarily, take a step back, ignore their calls, and spend some time brushing-up on your rights.
What Happens to Your Money After Debt?
We’ve established what happens to your debt after death and have looked at the ways in which credit card companies, collection agencies, and even the courts can make life very difficult for you and your descendants. But what happens to your money in general, how is it dispersed, and how can you know for sure that it will go to your heirs or spouse?
Here is a rundown of the things that can happen to different aspects of your finances:
Single bank accounts are closed as soon as the necessary documents (including a death certificate) are received. Joint bank accounts will remain open and become the sole responsibility of the remaining account holder.
If you don’t have a will, all your assets, including everyday items such as televisions and clothes, will become part of your estate and may be sold to pay debts or provide additional money to your heirs. You can also specify who will receive these possessions in your will or state that you wish for them all to be sold.
Cash and Collectibles
Any cash or high-value items, such as precious metals, art, and other collectibles, will be added to the estate or given to your heirs as per the instructions in your will. However, if you have a lot of debt, then simply assigning these items to a beneficiary will not prevent them from being liquidated and used to clear your debts.
If you run a business and have multiple heirs, the process of succession can be quite complicated. They may decide to run the business together, or one or more of them may agree to buy the others out. In any case, this is something that you should plan for in advance to ensure that your business doesn’t fail due to the complications of succession.
The average American spends over $230 a month on subscription services. If no one is there to monitor or cancel them, they can do some serious damage to an individual’s finances. Fortunately, you don’t need to cancel these individually as it’ll happen automatically when their bank account and credit cards are canceled.
It’s very important that you send away the necessary documents as soon as possible, canceling their bank account and quickly reducing the damage that unnecessary subscriptions have on their estate. You can contact utility companies separately to switch payments to your account.
If you have a joint-account and your partner paid for services that you no longer need, you can either contact those service providers individually or simply place a block on payments via your bank or card provider.
It’s fair to say that death and debt is pretty complicated. As soon as you die, creditors, heirs, debt collectors, and attorneys swarm around your estate like vultures, each seeking their pound of flesh. It’s messy, it’s arduous, and while you won’t be there to experience it, your heirs will and it’s important to make life as easy for them as possible.
It’s a morbid business and no one wants to think about what will happen when they die. But by making preparations you can ensure that your family doesn’t have to worry about your debt and legal issues when grieving for you. The onus is on you, therefore, to make this process as easy for them as you can while you’re still alive, which means getting insurance, writing a will, creating a trust, and preparing them for what’s around the corner.
Death is inevitable, as is the chaos that follows it, but by preparing properly you can make this process considerably more manageable.
Molly Ward is a Texas mother, wife and certified financial planner. With nearly three decades of financial planning experience, she focuses her practice on helping women achieve financial independence and live up to their financial potential.
An advisor with Equitable Advisors in Houston, Texas, Ward’s been helping her clients navigate their way through the COVID-19 crisis. She’s got some solid advice for how to lower your financial stress level.
Here are six questions that we’ve gotten from women who read The Penny Hoarder — and Molly Ward’s answers.
1. How Can I Prepare for Life’s Difficulties?
Q: Life has its inevitable derailments and obstacles: We take care of our aging parents; we have health concerns; deaths in the family; experience disabilities and often, women live longer than men. How can we prepare, financially?
A: “I have seen so many brilliant businesswomen and hardworking moms unnecessarily suffer when they experience life’s inevitable difficult seasons,” Ward says. “If a woman is proactive and thoughtfully and thoroughly prepared, she can change the course of her life and her family’s.”
Ward notes that women typically take more time out of careers to take care of loved ones — kids, husbands, aging parents. Also, women tend to live longer than men. Due to longevity and fewer earning years, a woman must:
- Save more.
- Acquire insurance on herself and possibly her spouse, and perhaps long-term care insurance on her parents.
Here at The Penny Hoarder, we recommend a life insurance company called Bestow. You could leave your family up to $1 million, and we hear people are paying as little as $16 a month for insurance policies. (But every year you wait, this gets more expensive.)
It takes just minutes to get a free quote and see how much life insurance you can leave your loved ones.
2. How Do I Invest?
Q: My husband recently passed away, and he took care of all the investing. What do I do?
A: “Start with a realization that investing comes after planning,” Ward says. “Investing without a plan is like driving on a trip without a map.”
She recommends talking to a financial planner. When it comes to investing, Ward stresses long-term planning and logic versus focusing on the hot stock of the day or the political climate. Those will pass.
If you’re new to investing, you can start small. Investing doesn’t require you throwing thousands of dollars at full shares of stocks. In fact, you can get started with as little as $1.*
The Penny Hoarder likes Stash, because it lets you choose from hundreds of stocks and funds to build your own investment portfolio. But it makes it simple by breaking them down into categories based on your personal goals. Want to invest conservatively right now? Totally get it! Want to dip in with moderate or aggressive risk? Do what’s best for you.
If you sign up now (it takes two minutes), Stash will give you $5 after you add $5 to your investment account. Subscription plans start at $1 a month.**
3. Why Do I Feel Out of Control?
Q: Why do I feel out of control with my money?
A: “Taking control of your finances should be a priority,” Ward says. “You wouldn’t knowingly leave your child’s college decision, or even your next summer vacation to chance. So why would you leave your financial future up in the air?
“Managing your own personal finances and investments requires a completely different emotional muscle, one that is often paralyzed by any number of experiences that can cause you to make easily avoidable mistakes — including the biggest mistake: Doing nothing at all.”
To assess your finances, Ward recommends making a list of all your assets and investments, along with any recurring payments or debts.
Take it from The Penny Hoarder: Credit card debt is the worst! Your credit card company is just getting rich by ripping you off with high interest rates. Take control with a website called AmOne, which will match you with a low-interest loan you can use to pay off your balances.
The benefit? You’ll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.99% APR), you’ll get out of debt that much faster.
It takes two minutes to see if you qualify for up to $50,000 online.
4. How Else Can I Take Control?
Q: What else can I do to take control of my finances?
A: “Goal-setting may sound trite, but it’s an excellent starting point toward gaining control of your finances and your future,” Ward says. “Discussing and stating your short- or long-term plans for your life help you understand what financial goals you should set.”
“Financial assessment, goal setting and budgeting should become something you do out of habit — like brushing your teeth, giving your dog his flea medicine, scrolling through Instagram. Making these steps part of your monthly routine will bring a sense of control and order to your life.”
Here at The Penny Hoarder, we recommend taking control of your credit score. It’s important because the higher your score, the better deal you’ll get on a mortgage, a car loan, a credit card, or even a deposit on a car rental or an apartment.
Try using a free website called Credit Sesame. Within two minutes, you’ll get access to your credit score, any debt-carrying accounts and a handful of personalized tips to improve your score. You’ll even be able to spot any errors holding you back (one in five reports have one).
5. How Should I Leave an Inheritance?
Q: I’m going to be leaving an inheritance to my children. How do I make sure there is peace amongst them after I die?
A: “When it comes to passing down wealth and last wishes, I’ve witnessed success and sadly, on the other hand, I’ve seen feuds and litigation,” Ward says. “The negative outcomes tend to happen when there is either too much complication or at the other extreme, complete lack of planning. An internet legal document is not sufficient!
“Sometimes there is a ‘problem asset’ — for example, a piece of property that has emotional attachment. Along with poor planning, such as an unclear title or problems with a deed, emotions are high following the death of the guiding force of a parent. Feelings can get hurt, which can create a hotbed of controversy and fighting among the children.
“Thoughtful communication, in which the parent’s important values are discussed is key. Estate planning should be completed and regularly reviewed. Sometimes, hiring a trust company to be named executor or trustee of the estate can help keep the peace. When given to a family member, the executor or trustee role can often be a thankless job that comes with liability and creates unnecessary turmoil in the family.”
6. Why Do My Spouse and I Disagree About Money?
Q: My spouse and I disagree about money. Why?
A: “It might have something to do with your embedded money scripts,” Ward says. “Your money memories — those embedded in you by parents and or grandparents — highly influence your financial success or struggles.”
“In fact, many experts believe our habits and views surrounding money were formed as children watching our parents and other adults with it. After you learn what yours are, have a peaceful discussion with him/her about money scripts to see where each other are coming from.”
“Also, planning when you are in love and things are going well is a great time to talk about your incomes, assets and debts. Truthful conversations about money at the beginning will serve you well later!”
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder.
full disclaimer and complete list of partners.