CREDIT & MONEY MANAGEMENT


Free Credit Score Catch

I’ve been reading about various consumer-friendly rules that are scheduled to take effect as a result of last year’s financial-services-reform law. One of them requires lenders to give people their credit score free. When does that rule take effect, and what do I have to do to qualify for a free copy of my score? -- P.L., Ann Arbor, Mich.

According to a rule that took effect on July 21, lenders must reveal your credit score free if you are denied credit or charged a higher interest rate because of your score. Otherwise, you must still pay to receive your score. You can get a free copy of your credit report from each of the three major credit bureaus once a year at www.annualcreditreport.com. You can obtain your score at that time for $7 to $9. Or you can order your FICO score and a credit report at www.myfico.com for $19.95.

The new rule may cause some confusion. The law requires lenders to provide the version of the score they used to set the terms and rates for the specific loan -- which can be different from the more familiar FICO score. Lenders don’t have to offer details on the calculations they used to determine the score, but they must let you know the score scale -- the highest and lowest score -- and include up to four factors that adversely affected your score, such as high credit card balances or late payments. “Consumers may be confused by the many different credit scores, but it’s important for them to focus on what factors in their credit history caused them to be considered a higher risk,” says Maxine Sweet, of credit bureau Experian.

Invest in zero-coupon bonds?

Would I benefit from owning zero-coupon bonds? I am 64 years old and semi-retired. I will start collecting a pension and Social Security benefits next year, and I plan on having a home-based business. -- A.M., via e-mail

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In light of today’s ultralow interest rates, zero-coupon bonds are probably not a good idea. Zeros are bonds that are sold at a big discount to their face value. They pay no current income. The payoff for investors comes when the bonds reach face value at maturity.

And the payoff nowadays is nothing to get excited about. If you buy a $1,000 zero-coupon Treasury maturing in November 2016, you’ll pay $942. That would give you an annualized return of 1.1%. If you go out ten years, you’ll pay $776 and get back $1,000 in November 2021, for a yield to maturity of 2.6%. You can get higher yields from the handful of corporate zeros that are available, but then you’d assume the risk that the issuer could go under.

One of the major shortcomings of zeros is that you have to pay income tax every year on “phantom” interest if you hold them in a taxable account. So if despite today’s low yields you still want to own zeros, make sure you tuck them inside an IRA or other tax-deferred account.

Tapping an inherited IRA

My brother passed away, and I am the beneficiary of his traditional IRA. What are my options for withdrawing the money, and how will the money be taxed? -- W.B., via e-mail

Your distribution choices depend on whether your brother had begun taking required minimum distributions from the account. If he was older than 70½, the age that triggers mandatory distributions, you have two choices: You can continue to take annual withdrawals based on your brother’s withdrawal schedule, or you can take withdrawals based on your own life expectancy. If he died this year, you have until the end of 2012 to decide.

If you are younger than your brother, take the distributions over your longer life expectancy to minimize your annual distributions, which are taxable, and allow the balance to continue to grow in the tax-deferred account. (You can always withdraw more than the minimum required amount.) See IRS Publication 590, Individual Retirement Arrangements for details.

If your brother had not yet started to take required minimum distributions, you can either take annual withdrawals based on your own life expectancy or withdraw all funds in the account by the end of the fifth calendar year after his death. The entire amount (except for any nondeductible contributions) will be taxable at the time of withdrawal.

Finding Medicare providers

My parents are moving from Florida to Wisconsin and are having a difficult time finding doctors who accept Medicare. Are there any good resources that can help with their search? -- M.K.S., Washington, D.C.

Start with the “Physician Compare” tool at Medicare.gov. Enter their new zip code and the type of doctor they’re looking for, and specify that they want to see providers who accept the Medicare-approved amount as payment in full. You can leave the doctor’s gender and last name blank. The search will result in a list of physicians in the area who accept Medicare.

But this resource isn’t foolproof -- sometimes the list includes doctors who have retired. Start with four or five doctors on the list, or ask friends or relatives in the area for recommendations. Then contact those doctors to see whether they are accepting new Medicare patients.

Your parents may want to consider switching to a Medicare Advantage plan for 2012. The open-enrollment season runs from October 15 to December 7, 2011. These private plans, which offer medical and prescription-drug coverage and provide networks of doctors, may have more doctors available in certain areas than traditional Medicare does. But they also have rules limiting which doctors and hospitals may be used.

Home-buyer tax credit

I claimed the $7,500 tax credit for a house that I purchased in 2008. I have since sold the house at a loss. Do I still have to repay the IRS for the $7,500 credit? -- G.R., Topeka, Kan.

Maybe not. The 2008 first-time home-buyer tax credit was actually an interest-free loan that had to be repaid in $500 increments over 15 years, starting with your 2010 return. If you sell your house within 15 years (before you finish repaying the tax credit), then you generally must repay the balance of the credit in a lump sum when you file your taxes for the year you sell the house.

But there is an exception for home-sale losses. That’s because you have to repay the credit only up to the amount of gain, if any, on the sale. The worksheet with the instructions for IRS Form 5405 can help you calculate your gain or loss.

Special thanks to my colleague Manny Schiffres for his help this month.

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