Dear Liz: My husband has a lower credit score than mine. He gives me a monthly check from his personal checking account, which I deposit into our family account so we can pay our credit cards. He thinks he has to pay some of the cards directly in order to improve his score. He likes to send checks by mail, the old fashioned way (which drives me crazy!). Do you think this practice will improve his score?
Responnse: The short answer is no. Credit scoring formulas don’t care who pays the bills, as long as the bills are paid on time.
It might be helpful to explain some basics of credit scoring.
People don’t have just one credit score. They have a lot of them, because many different scoring formulas are used.
The most commonly used credit score currently is the FICO 8. There are many other versions of the FICO scoring formula, some of which are tailored to different industries such as credit cards and auto loans. Additionally, there is VantageScores, a competing formula created by the three major credit bureaus: Equifax, Experian, and TransUnion.
Credit scores are based on information from your credit reports with these bureaus, which are private companies that generally do not share information. Since the information may vary from bureau to bureau, your credit scores from each bureau may also differ.
There is no joint credit report or joint credit score, so couples will generally have different scores even if they have joint accounts. A person’s length of credit, number of credit accounts they have, and combination of credit types can be different, resulting in different scores.
Your husband may have lower scores than you currently do, but that in itself is not a problem that needs to be fixed. If his scores are generally above 760 on the typical 300-850 scale, he will get the best rate and terms when applying for credit.
If his ratings need to be improved, he should start by checking his credit reports with each of the three bureaus at www.annualcreditreport.com. (Previously, these reports were only free once a year, but now you can get them for free every week until April 2022.) He should dispute any inaccurate information, such as accounts he doesn’t own or accounts indicating missed payments if all payments were made on time.
He may be able to improve his scores by reducing the amount of his available credit he uses or by adding an account or two. Opening accounts may temporarily affect one’s scores, but generally the new account will add points over time if used responsibly.
And try to persuade him to stop mailing checks. A stray check can result in a missed payment that can cause credit scores to drop 100 points or more. Electronic payments are much more secure and efficient.
Why You Might Want a Roth IRA
Dear Liz: I never understood the Roth IRAs. They don’t offer tax relief for contributions, so they make you pay taxes on your money when you’re working and in a higher tax bracket. With a regular IRA, you get initial tax relief when you’re in the higher tax bracket, then pay taxes on withdrawals when you’re retired and in a lower tax bracket. What am I missing?
Responnse: Not everyone will be in a lower tax bracket in retirement. Some will be in the same bracket or in a higher bracket when withdrawing the money. People in their twenties, for example, may be in the lowest tax bracket they will ever see. People who expect tax rates in general to rise may also want to hedge their bets by having at least some cash in a Roth.
A Roth may also make more sense if you don’t get tax relief for your IRA contributions. This could be the case if you have access to a workplace plan and your income exceeds certain limits, or if your income is so low that you owe little or no income tax.
Roth IRAs have a few other advantages. Having a tax-free retirement pool can give you some flexibility in managing your tax bill. If a big bill comes along, for example, a withdrawal from your IRA might push you into a higher tax bracket while a withdrawal from your Roth might not.
Roths also doesn’t require you to make retirement withdrawals, unlike regular IRAs. You can keep the money until you need it, perhaps to pay for end-of-life costs such as long-term care, or you can pass it on to your heirs.
Roths are more flexible in another way: you can always withdraw the amount you contributed to a Roth without tax consequences. Withdrawals from IRAs before retirement typically result in both taxes and penalties.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, #238, Studio City, CA 91604, or by using the “Contact” form on asklizweston.com.