Now in the thick of tax season, many folks are expressing worry over their tax returns, with some in a panic mode because they’re receiving very little if nothing at all — especially for those who intended to pay off some debt with expected funds from the IRS.
For instance, one local resident, who is remaining anonymous to protect her financial privacy, said she will be paying more this year “which is baffling” because she made much less. Her worry is compounded by the fact that she’s caring for a partner who is ill, and also supports her partner’s disabled mother.
“The household is already burdened and our current administration seems to be uncaring for the less financially solvent,” she said. “I guess if I made a lot more I would be getting something back. It’s increasingly more difficult to make ends meet.”
The individual taxpayer spends his or her refund — in other words “found money” — for a variety of reasons, such as going on vacation, bolstering a savings account or purchasing goods, said Hratch J. Karakachian, a CPA and attorney in private practice in Glendale who is also a senior adjunct faculty member in the financial planning program in the School of Management at California Lutheran University in Thousand Oaks.
“Others use it to pay down debt,” said Karakachian. “Of course, for those individuals who have planned to use that money to pay down their debt . . . their expectation is not going to match up with the money they’re getting. If in fact they get a smaller amount, as a result, they’re not going to be able to meet their goal or anticipated goal they had planned on.”
When it comes to paying down debt, from a financial perspective of dollars and cents, “it’s good for individuals and families to have control and make timely payments as much as possible, but things happen . . . and it’s much easier to charge things on a credit card for emergencies or to rely on a credit card to satisfy a need to purchase something . . . without forward thinking of how they’re going to pay for it.”
There are a number of people who do this, Karakachian said, “because credit card debt in the United States is very, very high.”
Depending on a tax return, however, to pay down this debt is not the best plan; rather, “it would be helpful if people are consistently paying their debt and trying to pay more than the minimum, and are disciplined about it and not incurring additional debt, which can help their credit score.”
He noted that it’s better to have the foresight of discipline, and not falling behind; but unfortunately, “circumstances happen because of a job loss or loss of income . . . and their debt becomes very challenging. They’ll start missing payments and that will negatively affect their credit score.”
The word budget is like the word diet, and “people hate those two words,” said Mark Edwards, a lecturer at California Lutheran University who has a Master in Business Administration Degree and is a certified financial planner. “Everybody wants to say that I’m on one but nobody wants to follow the rules.”
As far as paying down debt is concerned, “you should be paying that down on a month-to-month basis,” Edwards said, adding that this challenge doesn’t only affect the lower income. “I know people who make a half a million dollars a year who still have problems budgeting. It’s a behavioral issue.”
Pattie Braga of the Ventura County Credit Union, who has worked in the financial sector for nearly 20 years, said most people that come to her that are in crisis are usually reacting to long-term or systemic issues, such as divorce, loss of a home, or a health issue affecting their ability to work.
“When they are counting on a large amount of money, whether it be a reimbursement, tax refund or inheritance, not getting those funds can be devastating,” Braga said.
Tax returns in themselves aren’t a problem that contributes to a person’s financial wellbeing, she noted. Rather, “the bigger issue is knowing how to live within your means and having an emergency savings for unexpected bills.”
Braga added that when it comes to improving a person’s credit score, “there is always hope. With proper planning and patience, credit scores can improve, thus saving consumer’s money with lower interest rates from lenders.”
Credit rock bottom
Married for 16 years, Mira Reverente thought she hit “the proverbial rock bottom of life” when she was faced with divorce, and had to look for practical and realistic tips for dealing with finances.
“I was confused, overwhelmed, very sad and just fearful of the future,” recalled Reverente, a resident of Newbury Park who has a daughter and son. “I was married for 16 years and just couldn’t imagine myself alone and fending for myself and my kids.”
A journalist by profession, she reached out to friends and family to pick their brains on practical money matters, network and let everyone know she was in need of more projects.
“I was willing to do anything and I did — I drove for Uber and Lyft, and I also delivered flowers on Valentine’s Day and Mother’s Day,” she said. “I also took on a couple of student roommates. I accepted every writing and editing project that came my way.”
Post-divorce in 2015, she co-wrote a book, Suddenly Single Women’s Guide to Finances: From Struggling to Secure Single, at Any Age.
“I was looking for practical and realistic tips for dealing with finances and didn’t find any that suited my needs or that was specifically geared towards women,” recalled Reverente, now 47. “So I thought, why not write one?”
In her book, she tackles common personal economic issues such as getting your financial house in order, managing bills and juggling jobs. These are interspersed with Reverente’s personal experiences as well as accounts from friends and some experts. There are also chapters on making decisions, such as selling versus renting versus getting a roommate versus relocating and opting for a fresh start.
“Finally, I touch on moving forward and reinventing yourself, mostly practical tips on picking up the pieces and healing by working on yourself first,” Reverente said.
While her book doesn’t delve specifically on credit scores that much, “I will say this — it plays a huge part in some of the decisions you’re going to make during and after the divorce process, especially when it comes to your living arrangement.”
For instance, a good score in the 700s and up will make the decision-making on refinancing your current home or purchasing a new one easier.
“When it comes to renting or leasing, I have heard that potential landlords don’t necessarily look at credit scores, but they scrutinize your credit history and look for records of evictions,” Reverente said.
Your credit score also plays a role in the purchase or lease of vehicles.
“Say you only have one vehicle during your split and your ex is going to take it, you might not be eligible for a car loan with a low credit score, or you might get slapped with a really high interest rate, or you might have to pay cash,” Reverente said.
More than a three-digit number
A credit score is more than just a three-digit number — as these digits can have a long-lasting impact on a person’s buying power. A good credit score can result in perks like lower interest rates when it comes to loans, while a bad credit score can raise these rates significantly, costing a person even more money.
A common misconception is that it takes a significant amount of time to rebuild your credit, said Braga.
“The reality is that with proper planning and efforts, a credit score can significantly rebound in 9 to 18 months,” she said. “Unfortunately, most people don’t know how to rebuild their credit.”
As the Senior Community Development Officer for Ventura County Credit Union, Braga is focused on educating members and the community at large of all ages on personal finances, budgeting, identity theft, building good credit and repairing credit.
Another misconception is that minor credit score changes make more of an impact than they actually do, she noted.
“The reality is that credit scores are fluid — they are always changing, based on when activity is reported to the three credit bureaus,” Braga said.
It is best to pull your credit report through each of the credit bureaus at least every 12 months, she advised, and to do so, go to www.annualcreditreport.com.
“Because you are allowed a free report from each bureau, I suggest you pull one every four months, this way you are continuously monitoring your credit information and checking for accuracies,” Braga said.
How do credit scores work?
A credit score is just a number, Braga said, and it is used as a tool for lenders to gauge your “credit worthiness.”
The Fair Isaac Corporation (FICO) is the scoring company used by the three credit bureaus, Transunion, Equifax and Experian. FICO scores vary by each credit bureau based on the information each bureau receives.
“This is why you see changes in your score between Transunion, Equifax and Experian,” Braga said.
A FICO score is determined by five factors: payment history, amounts owed, length of credit history, types of credit cards used and new credit.
“Each of the five factors are weighted differently,” Braga explained. “Information comes in daily about consumers — payments made, balance changes, new credit established or loans paid off/closed. Each of these actions adjust your credit score up and down. Usually these adjustments are minimal and make little to no impact on one’s ability to get credit.”
Good vs. Bad Credit
Excellent credit, or what lenders refer to as “A+” credit, is usually 730 and above, “although each lender sets their own guidelines on that,” Braga said.
The better credit score you have, the lower interest rate you will pay.
“For example, a good credit score can be the difference between paying $1,000 in interest on an auto loan, to paying $4,000 or more on an auto loan,” Braga said.
A myth surrounding credit scores is that you can make a bad credit history go away by paying someone to repair it, said Raymond Freeman, a former lawyer and commercial banker who has a degree in economics.
“You are always stuck with a bad credit history unless you can challenge any mistakes you find, and are prepared to support your position with facts,” Freeman said.
A credit score below 500 is usually considered bad, he said, and 300 is the worst usually.
“A bad score is disastrous,” said Freeman, noting that commercial landlords, for instance, refuse to rent to those with bad credit scores. Additionally, “loans become harder to get and rates of interest go up for persons with bad credit scores.”
In other advice, Freeman said “do not file bankruptcy. It will haunt you for 7 to 10 years.”
As with good credit, poor credit scores are determined by lenders, Braga said.
“Some see poor credit as anything below 620; some set the bar lower at 580,” she noted. “With poor credit, the interest rate you pay on loans is usually much higher than the advertised rates. There are lenders out there that will loan to almost anyone, regardless of their score. But the rates are usually astronomically high, as the risk for the lender is very high.”
The absolute worst thing you can do to your credit score is to not pay your bills, Braga further emphasized.
“Whether it’s a 30-day late payment, a 60-day late payment, a collection account or a repossession or foreclosure, you have to pay your bills to have solid credit,” she said.
Is There Any Way Out of Bad Credit?
If you feel there is no way to lift yourself out from having poor credit, “you’re wrong,” Braga emphasized, noting that re-establishing credit is easy to do if you know the right steps to take.
“It’s not the poor credit score that holds people back — it’s the embarrassment, the shame, and/or the lack of knowledge on how to rebuild a credit score that holds people back,” she said. “Get over it and talk to someone.”
Your financial institution should be your first stop in the journey to improving your credit score.
“They should offer resources to help you and have products and services that fit your needs,” Braga said. “Compare institutions. You’d be surprised in the differences in interest rates and fees charged between various banks and credit unions. Knowledge is power when it comes to your credit score and ultimately what interest rates you pay. Continue to educate yourself and ask questions.”