Dear Penny: Should I Take Out Life Insurance on My 47-Year-Old Mom?

Dear Penny,

My mother is 47 and has been increasingly paranoid about her death. She’s not sickly or in bad shape. She’s been getting better about managing her sudden diagnosis of diabetes. 

I think she’s doing well for her age. She works a full-time job and has little to no complaints. Personally, I think she’s just paranoid, but she’s been asking me serious questions about life insurance policies for herself. She wants me to buy a policy on her, but I’m not keen on purchasing a life insurance policy on my living mother whose death I’m not looking forward to. 

Nonetheless, she continues to ask me questions about her finances and what I (her 28-year-old daughter) think she should do about her bad credit, old debt from decades ago, and a past repossession. She asks me if her policies will go to that debt? Will her 401(k) go toward those debts? Or will it be safe for my sister and me? 

From what I know, she has purchased two life insurance policies and has listed me as her 401(k) beneficiary. I don’t know what I would do if she passed away suddenly, as I have a very small family that consists of just my sister and mother. (Her ex-husband/my father is estranged). I thought her accounts, 401(k), life insurance policies and debts would go into probate after she dies. 

She has many years ahead of her. I feel as though she is worried about debt collectors going after money she intends to leave my sister and me when she passes. What could she do to avoid that? What is good advice for her at someone her age? I want her to live a good life now with her grandchildren and not be so worried about the future when she’s gone.

-Concerned Daughter

Dear Concerned,

It’s normal that your mom is feeling more aware of her own mortality after a sudden diagnosis. It’s also normal that you, her loving daughter, don’t want to contemplate life without your mom.

Maybe your mom is going a bit overboard. Or perhaps it just appears that way to you if she’s avoided talking death and money until now. But estate planning is essential even for young and healthy people.


Your mom needn’t worry that debt collectors will come after you or your sister. Children generally aren’t responsible for their parents’ debts as long as they aren’t co-signers. Generally, their assets and liabilities become part of their estate, and creditor claims get sorted out in probate court. It sounds like these debts may be old enough that they’re past the statute of limitations, though. In that case, collectors couldn’t sue your mom over them or file a probate claim.

But not all assets go through probate. Assets like life insurance policies and retirement accounts, including 401(k)s, go directly to the beneficiary. If your mother has you and your sister listed as beneficiaries, the money goes directly to you both. Even if your mother died deeply indebted, creditors couldn’t touch that money.

My best advice for you, your mom and your sister is to have a deeply difficult conversation. Talk about what the impact would be in the awful scenario that your mother died tomorrow.

Clearly, her death would leave a huge void in your lives. But I’m assuming you and your sister are both self-supporting adults. If that’s correct, it sounds like this void wouldn’t be financial. As part of this conversation, you need to discuss what life insurance policies and other assets your mom has, along with any debts. You should also ask her whether she has a will and urge her to create one if she doesn’t.

If your mom already has two life insurance policies, she probably doesn’t need more life insurance. Instead, she needs to prepare for the likelihood that she’ll live for another four or five decades.

That means maintaining solid health insurance now. Though it’s quite expensive, she may also want to consider long-term care insurance when she’s in her late 50s or early 60s.

Your mom should also focus on saving as much as possible for retirement so she isn’t depending on you and your sister for support. Though she worries about her premature death, the risk is much greater that she’ll outlive whatever savings she does have.

Now would also be a good time for her to focus on improving her credit. If she can’t get a credit card due to a poor history, she could open a secured credit card by putting down a deposit and start rebuilding. Bad credit doesn’t matter much when you die, but it sure makes your living years harder.

Discussing your mom’s death will be scary for both of you. But I think addressing the worst-case scenarios will set your minds at ease. So talk through all the what-ifs, no matter how uncomfortable. Doing so will free you both up to enjoy what I hope are many years ahead.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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Dear Penny: Can I Get My Ex-Husband’s Social Security Before He’s Eligible?

Dear Penny,

I was married to a man for almost 19 years when he decided (unbeknownst to me) that he wanted a divorce. I felt that we had a happy marriage the majority of those years. We only had the occasional disagreement, as most marriages do. 

In fact, he didn’t tell me until after the divorce was finalized his reasons for leaving me. He is the father of our two children. It was very devastating for me as well as our children when he left, although he has tried to be a good dad since the divorce and is very involved in their lives. I am 10 years 8 months older than him and am now 60 years old. He has remarried twice in the nine years since our divorce.

I have known for a long time that I can collect Social Security benefits based on his employment, since it will be much higher than my own benefit. However, I didn’t realize until recently (and wasn’t told by my financial planner) that I can’t start collecting Social Security benefits until HE is at full retirement age and not when I am at full retirement age. That would mean I will be in my 70s.

Please tell me exactly when I can start collecting my Social Security benefits based off his income. And is it based off his income when he retires, or his income when we got divorced? Also, is it possible for me to collect Social Security from my own work record when I am at full retirement age and then switch to his benefits when he is at full retirement age?

-S.

Dear S.,

Let’s get the bad news out of the way first: You have to wait until your ex-husband is eligible for Social Security benefits to collect on his record, but you don’t have to wait until he’s reached full retirement age. For anyone born in 1960 or later, full retirement age is 67. That means you’d be eligible for spousal benefits when your ex is 62, not 67.

Of course, that doesn’t do you much good. You’d still be at least 72 by the time you could start spousal benefits.


You can’t take your own benefits and switch to your ex-husband’s benefit later on. That’s an option that’s only available if you were born before Jan. 2, 1954. (The same rule applies for people who want to start with a spousal benefit and then switch to their own benefit later.)

Social Security allows divorced spouse benefits because both spouses contribute economically to a marriage, even if one person earns a lot more. But unfortunately, the rules leave the lower-earning spouse in a bind if they’re significantly older.

I get that all of this is difficult to accept, especially given that you were blindsided by the end of your marriage. But you need to focus on how to maximize your own retirement benefits. Claiming your ex’s benefits simply isn’t viable.

Even though your ex-husband outearned you, don’t assume that you’d collect more if spousal benefits were a possibility. The maximum spousal benefit is 50% of the spouse’s full retirement age benefit — and that’s only for spouses and ex-spouses who wait until their own full retirement age. Spouses who start at age 62 only receive 32.5%.

When you take your own retirement benefits, you can earn 8% delayed retirement credits for each year you hold off past full retirement age until you’re 70. But you can’t earn delayed retirement credits with spousal benefits. You’d collect your maximum benefit at 67, your full retirement age.

Many people will actually get more money taking their own benefit instead of spousal benefits, even when the spouse was the much higher earner. As of April 2022, the average monthly spousal benefit was just $837, compared to $1,666 for retired workers.

Social Security bases benefits on 35 years’ worth of earnings. If you work less than 35 years, your income for the non-working years is entered as zero. The more years you can work, obviously, the bigger your benefit will be.

You’ll probably want to delay benefits for as long as possible, especially if you’re in good health. Starting Social Security at age 70 results in a benefit that’s about 77% higher compared to starting as soon as you’re eligible at 62.

In the meantime, focus on saving as much as possible for retirement. Since you’re over 50, you can contribute $7,000 to a Roth IRA in 2022. The limits for most workplace plans, like 401(k)s and 403(b)s are even higher. You can contribute up to $20,500 plus an extra $6,500 catch-up that’s allowed for people 50 and older.

I’m sorry that you’ve been dealt this most difficult hand. But focus on what you can control.

There’s still a lot you can do to secure the comfortable retirement you deserve.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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%%title%% · %%sitename%% Dear Penny: Am I Responsible for My Husband’s $60K Car Loan if He Dies?

Dear Penny,

I’m happily married (25 years) and retired for medical reasons (I’m 58). My husband makes good money. We are meeting all of our basic needs, but his retirement is severely underfunded.

We had to dig out of debt recently and are down to one zero-interest credit card we still owe about $18,000 on. Our home will be paid off in about four years, and I send $300 extra each month. 

My husband is very set on getting an expensive new car that costs about $60,000. I can’t talk him out of it, though I’ve tried! He’s OK with working until he’s 70 and would use his old car as the down payment and put down no additional cash. 

I’m worried if something happens to him before the new car is paid off. If he passes away and I’m not a co-signer, will that protect me? I don’t want the car, nor do I want the hassle of trying to sell it should he pass. I’m also worried about if he doesn’t pass but needs a long-term facility or nursing home. 

How do I protect myself for my future? He has several health concerns, but so do I.

-Mrs. M.

Dear Mrs. M.,

Your husband may be approaching retirement age, but he needs to grow up already. A $60,000 car is something you buy when your retirement accounts are plush and you have little if any debt. But I know I’m preaching to the choir.

To answer your question: The impact on you depends largely on what state you live in. If you live in one of the 41 states that follow common-law property rules, you wouldn’t be responsible for the debt as long as your name isn’t on the loan. But in the other nine states that follow community property rules — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — each spouse is equally liable for any debt incurred during the marriage.


In a common-law state, if your husband died owing money on the car, both the car and the loan would become part of his estate. The estate — specifically, whoever is the estate’s executor — would be responsible for making payments out of your husband’s assets during probate. 

Should you inherit the car along with your husband’s other property, you could simply contact the lender and surrender it. The lender could still file a claim against the estate. But since your name won’t be on the loan, you wouldn’t be sued over the debt. Your credit score wouldn’t be affected. You may be able to do the same thing if your husband becomes disabled. Doing so would hurt his credit, but it wouldn’t affect yours.

But if you live in a community property state, the lender could sue you for the debt even if you don’t co-sign. If your husband doesn’t have adequate life insurance and disability insurance that would allow you to cover car payments, there’s a real risk to your credit and finances. 

Regardless of where you live, this purchase is a terrible idea. Your husband may think his plan to work until 70 fixes everything. But the reality is, a lot of people are forced to retire earlier than they planned because of medical issues or a job loss. That prospect is daunting, especially given that you say his retirement plan is severely underfunded. The money that your husband would be spending on a car payment needs to go toward catching up on retirement savings.

I know you’ve tried to persuade your husband not to make this purchase. But I wonder if he may be more willing to listen to a neutral third party. It might be worth hiring a fee-only financial planner to assess your retirement planning and setting a specific savings goal. Perhaps your husband will see how much harder reaching that target would be with substantial car payments.

If that doesn’t work, maybe the two of you could reach a compromise. At the very least, could he hold off on buying this car until you’ve paid off the credit card? That 0% interest rate isn’t going to last forever. Paying off the balance before it starts accruing interest is a must in this case. Given that new car prices continue to soar, your husband may also save money if he can be a little patient.

I’m afraid there’s nothing you can do if your husband is truly determined to make this ridiculous purchase. But hopefully, he’ll come around and see that no car is worth putting your retirements at risk.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected]

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How to Get 8 More Free At-Home COVID Tests From the Government

If you already got your first two rounds of free at-home COVID tests from the federal government, you can now order eight more free tests for your household. Tests are free regardless of whether you have health insurance.

On May 16, the government reopened its website covidtests.gov to allow households to order another eight free COVID tests. When it first launched in January, the website allowed each household to order four tests. In March, the website allowed households to order another four tests.

The Biden administration first made free home tests available in early 2022, when COVID cases were surging due to the Omicron variant. As cases waned, demand for home tests plummeted. But as of May 19, COVID-19 cases have risen 57% nationwide over the past 14 days, according to U.S. Health and Human Services data reported by The New York Times.

How to Get 8 More Free COVID Tests

The free rapid antigen tests the government is offering deliver results in 30 minutes. PCR tests aren’t available. Tests ship within seven to 12 days, according to the website.

Signing up for your free tests is incredibly simple. All you need to do is go to covidtests.gov and provide your name and address, plus an email address if you want shipping notifications. And that’s it.

The U.S. Postal Service will deliver the tests. You can currently order eight free tests for each residential address, no matter how many household members you have.

A health worker grabs two at-home COVID tests
Youngstown City Health Department worker Faith Terreri grabs two at-home COVID-19 test kits to be handed out during a distribution event, Dec. 30, 2021, in Youngstown, Ohio. David Dermer/AP

What About the 8 Free Tests Insurers Have to Provide?

Health insurance companies are required to pay for eight home tests per month for each person covered by the plan. Depending on your health insurance, you may need to pay out of pocket for the tests and submit a receipt for reimbursement.

You can access free tests for your household using the federal government’s website regardless of whether you have health insurance. The website doesn’t ask for insurance information, and no upfront payment is required.

What if I Can’t Wait for My Test?

If you can’t wait a week or two for your free tests and you have private insurance, you can pay for a home test and then get reimbursed for any upfront payment. Tests are now widely available at drug stores and pharmacies.

You can also access free and low-cost tests through a community testing center. To find a site, use HHS.gov’s testing center locator.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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Dear Penny: Can My Deadbeat Son Fight My Decision to Disinherit Him?

Dear Penny,

I am 73 and have one son who is unmarried and lives in the same town. I also have five siblings. I am very close to my youngest sister who is on disability. I paid my home off two years ago, and I have some 401(k) savings. 

I am planning on leaving my home and all of my 401(k) and savings accounts to my sister. I owe no money to anyone. I have a $10,000 life insurance policy I put in my son’s name. 

I know he will be upset, but he has been stealing from me for years as he did with his dad when he was living. He has a set of master keys and gets in even after I’ve changed my locks and also stole my extra car key! Can he fight my decision in court to get the money and house after I pass on?

-L.

Dear L.,

I can’t promise you that your son won’t fight your decisions in court. But it’s actually quite difficult to win such a challenge. Still, there are a few things you can do to make it even harder for your son to successfully contest your final wishes.

Your son probably has standing to contest your will and beneficiary designations. That doesn’t mean he’d actually win — it just means he’d have the right to make the case. In many states, any close relatives who would automatically stand to inherit assets from someone if they died with no will can mount a challenge, as can anyone named in a previous version of the will.


Winning is much more difficult. Your son would probably have to prove that you lacked mental capacity or were under improper influence when you made your estate plan. Or he’d have to prove that the relevant documents weren’t signed in accordance with your state law. He doesn’t have a right to an inheritance just because he feels entitled to one.

One way to avoid a court dispute is to keep as many assets out of probate as possible. Retirement accounts, like your 401(k), pass directly to whomever you name as your beneficiary. So as long as your sister is listed, that money will avoid probate and go directly to her.

You can also make your bank accounts payable on death to your sister so they can bypass probate as well. It’s a little more complex when you’re dealing with your home. One option to explore is putting your home in a revocable trust and making your sister the beneficiary. You could also use a revocable trust to pass personal property, like your car, furniture and any valuables, to your sister.

It’s still possible for your son to contest your beneficiary designations, but it’s harder to do. Unlike probated property, assets that pass through beneficiary designation won’t become part of the public record. Your son obviously knows you have a home and would be able to see that it was transferred to your sister through property records. But he wouldn’t know what retirement and bank accounts exist since the details would be private.

Assuming you have a will, you may want to revise it to explicitly state that you don’t want your son to receive anything beyond the life insurance money. Attorneys often recommend taking this step in case the disinherited person tries to claim they were accidentally left out of the will.

It’s essential to name a contingent beneficiary, who will receive your property if your sister dies before you do. Assets that typically avoid probate will be distributed by a court if there’s no living beneficiary. In that event, it’s quite possible your son would inherit your home or money. If you aren’t close with your other siblings or family members, you could name a close friend or charity.

Hiring an attorney to review your estate plan is worthwhile here, given your concerns that your son may try to fight. But since your sister is on disability, you should also discuss how an inheritance will affect her finances. An inheritance wouldn’t jeopardize her disability payments, but it could put certain other benefits, like Medicaid, at risk.

I’d also suggest investing money in a home security professional who can help you equip your house and car against your son’s future break-ins. The fact that he has such easy access makes me worry for your safety.

The odds of your son clawing money out of your estate are pretty slim. If your estate is relatively small, it may not even be worth it for him to fight, given the substantial costs involved. But for peace of mind, consult with an attorney to be sure your estate plan is as airtight as possible.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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Get 8 Extra At-Home COVID Tests for Free From the Government

If you already got your first two rounds of free at-home COVID tests from the federal government, you can now order eight more free tests for your household. Tests are free regardless of whether you have health insurance.

On May 16, the government reopened its website covidtests.gov to allow households to order another eight free COVID tests. When it first launched in January, the website allowed each household to order four tests. In March, the website allowed households to order another four tests.

The Biden administration first made free home tests available in early 2022, when COVID cases were surging due to the Omicron variant. As cases waned, demand for home tests plummeted. But as of May 19, COVID-19 cases have risen 57% nationwide over the past 14 days, according to U.S. Health and Human Services data reported by The New York Times.

How to Get 8 More Free COVID Tests

The free rapid antigen tests the government is offering deliver results in 30 minutes. PCR tests aren’t available. Tests ship within seven to 12 days, according to the website.

Signing up for your free tests is incredibly simple. All you need to do is go to covidtests.gov and provide your name and address, plus an email address if you want shipping notifications. And that’s it.

The U.S. Postal Service will deliver the tests. You can currently order eight free tests for each residential address, no matter how many household members you have.

A health worker grabs two at-home COVID tests
Youngstown City Health Department worker Faith Terreri grabs two at-home COVID-19 test kits to be handed out during a distribution event, Dec. 30, 2021, in Youngstown, Ohio. David Dermer/AP

What About the 8 Free Tests Insurers Have to Provide?

Health insurance companies are required to pay for eight home tests per month for each person covered by the plan. Depending on your health insurance, you may need to pay out of pocket for the tests and submit a receipt for reimbursement.

You can access free tests for your household using the federal government’s website regardless of whether you have health insurance. The website doesn’t ask for insurance information, and no upfront payment is required.

What if I Can’t Wait for My Test?

If you can’t wait a week or two for your free tests and you have private insurance, you can pay for a home test and then get reimbursed for any upfront payment. Tests are now widely available at drug stores and pharmacies.

You can also access free and low-cost tests through a community testing center. To find a site, use HHS.gov’s testing center locator.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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7 Things to Know Before You Start Biking to Work

When I learned that the cost of my monthly parking garage pass was more than doubling to $75 a month, I balked. Seventy-five dollars a month just to babysit my car while I’m at work?

So one muggy morning, I decided to give bike commuting a shot. I didn’t plan my route. Or my outfit. Or take my bike for a test ride, even though I hadn’t ridden it in months. Hey, what could go wrong in 2 miles?

I took my usual route to work — a busy street with no bike lanes and a rickety sidewalk where cyclists aren’t exactly welcome in the traffic lanes. Funny what you don’t notice from your car.

My dark jeans and black tunic were drenched in sweat less than a mile into my ride. Not a great choice of biking attire for mid-90s temperatures.

But it wasn’t just the end-of-summer heat that was making me sweat. I felt like I was biking uphill — and I live in Florida. I asked myself: Was biking always this hard? Have my leg muscles atrophied?

Then a guy standing at a bus stop pointed out the obvious: My tires needed air.

7 Tips for Anyone Who Wants to Start Biking to Work

I survived the 2-mile ride to work. Then I Ubered home that afternoon.

A few days later, temperatures dropped slightly, and a helpful co-worker put air in my tires. I decided to give bike commuting another try — if only to get my bike home. This time, I planned my route and took a street with bike lanes.

Since then, I’ve become an avid bike commuter. I love that I get to exercise during my commute, and I’m also saving money. Since I live close to work, my savings on gas are minimal, but I have been able to ditch the $75-a-month parking pass. Plus, I’m less prone to after-work impulse buys. If I stop at the grocery store after work, I’m limited to what I can fit in my bike basket.

Want to try biking to work? Here are a few tips I wish I had known before I tried bike commuting.

1. Do a Weekend Test Run

It’s great when you can figure out things — like that your route of choice doesn’t have bike lanes or your tires need air — when you’re not pedaling furiously to a meeting at rush hour.

Test out your commute by doing a practice run during the weekend. You may be surprised by just how bike-unfriendly your normal route is.

Make sure to wear your work attire if you plan to ride in the same clothing you wear during the day. Seeing just how much you sweat could change your mind.

2. Dry Shampoo Is Your Friend

Wearing a helmet is nonnegotiable whenever you ride your bike, OK? So that means helmet hair is something you’re going to have to deal with.

Dry shampoo comes in handy when you need to freshen up to make yourself presentable for the office.

A woman waits to ride a cross a busy road while bike commuting.
Robin waits her turn to cross a busy road on her way to work. Chris Zuppa/The Penny Hoarder

3. Plan Your Outfit Around Your Commute

Riding your bike to work is a lot easier when you don’t have to do a complete change of costume when you get to the office. Opt for lightweight, breathable fabrics like cotton or linen to minimize sweat during your ride. If you wear skirts or dresses, throw on a pair of bicycle shorts or leggings underneath. (Long skirts and dresses are best avoided, though.)

Keep a spare shirt handy in your backpack in case you sweat more than usual or you ride through dirt or dust. (It happens.)

Pro Tip

If you need to pack your clothes and change at the office, a travel-size bottle of wrinkle spray comes in handy. No, your outfit won’t look freshly pressed, but it will smooth things out a bit.

4. Lighten Your Load Already

You’re saving money by bike commuting. But unless you want to fork over that money and then some to your chiropractor, keep your backpack as light as possible. Investing in saddlebags or a bike crate will be well worth it if you have lots of stuff to cart to and from work.

5. Ask Your Employer for Storage Space

Bikes are best stored indoors, where they’re less likely to get stolen. Plus, they’re more likely to rust when exposed to rain or snow.

Here at The Penny Hoarder’s headquarters in St. Petersburg, Florida, we’re lucky to have a passcode-protected bike closet. If your workplace doesn’t have a designated space for bikes, ask your employer to create one — or at least if there’s an acceptable place that you can stash your bike.

If that’s not possible, keep your bike locked up in a busy area with two different types of locks.

Pro Tip

Your car isn’t the only thing that needs a tune-up: Your bike should get a tune-up anywhere from every few months to once a year, depending on how much you ride. Expect to pay $30 to $80.

6. Be Prepared for Bad Weather

Here in Florida, storms are a bit unpredictable. I keep a kid-size poncho in my backpack that I can pop out if it starts to drizzle. The kid-size part is key because it’s short enough that it doesn’t get in the way of pedaling.

Obviously, when there’s lightning or extreme weather, you shouldn’t be biking. So have a backup plan for the days that you aren’t able to bike to work.

Make sure you know of a parking option that doesn’t require a monthly pass, a bus route that’s close to your office or a co-worker who can give you a ride. Otherwise, you’ll need to work the occasional Uber or Lyft into your budget.

7. Don’t Give up Your Parking Pass… Yet

So you’ve had your first successful bike commute? Congrats!

Still, hang onto your parking pass for at least a couple weeks. It’s great when bike commuting happens without a hitch. But what happens when you’re running late, you have a doctor’s appointment before work or you need to run home at lunchtime?

Once you’ve experienced a few disruptions to your regular routine, you can better assess whether giving up parking is feasible.

Is Bike Commuting for You?

This isn’t really an if-I-can-do-it-anyone-can type of thing. There are a lot of reasons bicycle commuting has worked for me:

I have a flexible schedule. I only work daylight hours. My workplace is casual. I live and work in a bike-friendly pocket of St. Petersburg, Florida, which means I don’t have to deal with snowstorms and subzero temperatures. I don’t have kids to shuttle to and from school or day care. Most importantly, I feel safe bike commuting.

If you want to try it, commit to doing it three or four times over the next months. Take it from me: Your first try may not go perfectly. But after three or four times, you’ll get the hang of it.

What if you hate it? Then it’s probably not worth whatever money you save. Your ideal commute is one that doesn’t leave you frazzled before you’ve even gotten to work.

But don’t be surprised if you get hooked. I find my workdays a lot more enjoyable when they start and end with a bike ride instead of circling a dusty parking garage. And the $75 I’m saving is a pretty sweet bonus.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.  She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community

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Dear Penny: We Have Bad Credit. Is There Any Hope for a Debt Consolidation Loan?

Dear Penny,

We have credit scores in the 500s, and we are being declined for loans to consolidate our debt to improve our credit.

We understand the importance of improving our credit scores and are frustrated that the debt consolidation we have been advised to apply for is not working out — no approvals. Who can we turn to for a loan?

-D.

Dear D.,

When you have a smorgasbord of debts, life feels like a juggling act. So many due dates, so many interest rates, so many terms and conditions to keep track of.

Then you see the claims in the ads for debt collection loans. Get rid of high-interest credit card debt today! One low monthly payment!

It sounds like a magic little pill that will cure all your financial ailments, right? If only it were that simple.


Unfortunately — as you’ve learned — the people who could benefit most from a debt consolidation loan often don’t qualify. Most lenders require a credit score of at least 620.

You could try applying through a credit union, though membership is required. Unlike big banks, credit unions tend to look beyond your credit score at your overall financial health when you’re seeking a loan.

You can also use websites like Credible, Even Financial or Fiona to shop around for loans. (No, none of them paid me to say that.) But keep in mind that many of the lenders these sites partner with will also require a credit score in the 600s.

While you might be able to consolidate with a lower credit score, you’ll often pay astronomical interest rates — sometimes as much as 30% — which kind of makes the cure as bad as the disease.

But here’s the thing about debt consolidation: Often the benefit is more psychological than mathematical. Sure, life would be a lot simpler with a single monthly payment, but if you can’t lock in a lower interest rate, debt consolidation won’t save you money.

You say you want to consolidate to improve your credit score. If you have enough money to make at least your minimum payments, you’ll gradually see your score increase as you make on-time payments and lower the percentage of your credit you’re using.

Consider speaking with a credit counselor, especially if you can’t afford your minimum payments. The world of debt relief is rife with scammers, so make sure any counselor or organization you work with is a nonprofit that’s accredited by the National Foundation for Credit Counseling.

A credit counselor will help you figure out how to manage your money and debts. The counselor may work out a debt management plan where you make a single payment each month to the counseling organization, which will pay your debts on your behalf. They might be able to lower your monthly payments by negotiating lower interest rates or a longer repayment period, though they generally won’t be able to reduce what you owe.

Avoid companies that offer to work out a debt settlement plan, in which you’ll stop making payments so the company can negotiate to reduce your debt. Not only will these plans kill your credit, but you’ll also owe taxes on the amount that’s forgiven.

It’s easy to get discouraged when you’re deep in debt and low on options for rebuilding your credit. But keep in mind that while a debt consolidation loan might improve your credit somewhat in the short term, it won’t fix the underlying causes of your debt.

Building good credit doesn’t happen quickly. You have to figure out a way not to rely on credit, and to spend less than you make. It requires discipline and a commitment to financial health. And there’s no magic pill for that.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.

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Source: thepennyhoarder.com