Who Will Inherit Your Debt When You Die?

Student Loans

Federal student loans can be canceled upon the death of the borrower. In addition, federal loans typically do not require a co-signer, so there shouldn’t be an issue there. Parent PLUS loans are also typically canceled upon the borrower’s death. However, private student loans are not always canceled upon the borrower’s death, and they usually do require a co-signer, which means a parent, spouse or other co-signer may be held responsible for the loan if the student borrower dies before it is repaid. In fact, some lenders or servicers will accelerate the payment upon the borrower’s death, meaning they expect the balance to be paid immediately.

Who Will Inherit Your Debt When You Die?

Auto Loans

If you don’t own your vehicle free and clear, your auto loan debt could create problems for your loved ones. Again, if there is a co-signer on the vehicle loan, that person will automatically be responsible for the balance. And spouses in community property states may be responsible for the debt as well.

But what if there is no co-signer or spouse who is liable for the debt? Heirs may have a couple of options. One would be for a family member, such as a child, for example, to purchase the vehicle and pay off the debt. Another would be to contact the lender to find out whether it is possible to assume the payments. And the other option would be to return the vehicle to the lender. The lender will then sell it, but if the price they get is less than what is owed, the lender may try to collect the balance from the estate (if there is one).

Who Will Inherit Your Debt When You Die?

The IRS Wants Its Share

If a debt is not repaid, or if it is formally canceled due to death, there is another potential complication: taxes. The lender may report that amount on a 1099-C form. Canceled debt is considered taxable income unless the borrower qualifies for an exception or an exclusion. At a minimum, one of these forms may require help from a tax professional to make sure the “income” that results is handled properly on the tax return. Or worse, a co-signer could be saddled with a big tax bill due to this phantom income.

Who Will Inherit Your Debt When You Die?

Cleaning Up a Debt Mess

If a spouse, parent, grandparent or other relative has died recently, the person who is handling the estate (usually called the “executor” or “personal representative”) can order a copy of the deceased’s credit reports to find out which debts are still outstanding. Here’s how to order a credit report for someone who has died. Getting a credit report for someone who is deceased is also important because their information is sometimes stolen to commit identity theft.

While you are at it, it’s not a bad idea to get your own free credit report from all three credit bureaus to see which debts are reported. You can also get your credit score for free, but there really isn’t a point in getting a credit score for the person who is died.

Be very careful about taking money or property that belonged to the person who died if there are debts outstanding. Even if you aren’t personally responsible for those debts, creditors may have a claim on the property of the estate, and may look to you for payment if you took assets out of the estate without following the proper procedures. It’s best to get advice from an estate planning or probate attorney first.

Who Will Inherit Your Debt When You Die?

Protect Those You Love

If you have debts that would be a burden to your loved ones upon your death, try to get adequate life insurance so those debts can be paid off. Most financial experts recommend a term policy rather than credit insurance that only pays off a specific loan; however, if you are uninsurable due to a medical condition, your choices may be limited.

Also double check your insurance beneficiaries periodically to make sure insurance proceeds will go to the person actually responsible for the debt. If, for example, you were married to someone else when you first obtained your life insurance policy and you named them as the beneficiary but never updated it, they will get the proceeds — even if your new spouse is now stuck with debt you’ve incurred recently.

Of course, if you can get out of debt, that’s the best way to ensure your heirs won’t be stuck with your debt when you die.

5 ways to know you've got the wrong credit card for you

You had a closet full of clothes you adored as a teenager, but that doesn't mean you'd wear them now, right? The same thing goes for your credit card. Just because it worked for you 10 years ago doesn't mean it's a great fit for you today.

"As consumers, we evolve, and our needs change," says Bruce McClary, media relations coordinator for ClearPoint Credit Counseling Solutions in Richmond, Va. It only makes sense that our credit card changes along with us.

Unfortunately, we sometimes cling to an old card out of brand loyalty or sheer force of habit. But that can cost you cash in the form of useless fees, high interest rates and rewards you just can't use. Plus, you may be missing out on other advantages, such as the chance to pump up your credit history.

Granted, there's something to be said for keeping a credit card for a while, since a long history with a single creditor can boost your credit score. But if you haven't swapped cards since Bill Clinton was in office, make sure you're not making these mistakes:

Mistake No. 1: You carry a balance every month, but you have a really high interest rate.Welcome to the club, you're thinking. In this economy, who can get a great interest rate? Actually, it may not be as tough as you think. The average APR on a new credit card offer on Oct. 1, 2010, was 14.34 percent; meanwhile, the average default rate, which goes to cardholders who make late payments or other serious stumbles, was 27.88 percent. Even if you've been paying on time and have good credit, your credit issuer may have nudged your APR up around 20 percent.

On a big balance, sticking with that higher interest rate can cost you some serious cash. For instance, paid off over two years, a $5,000 balance on a card with a 21.99 percent APR will cost you about $1,225 in interest. With the 14 percent rate, you'll pay about $463 less. Of course, "moving debt around is not becoming debt-free," warns Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "You think, 'That new card we got has a really low interest rate, so surely it won't hurt to charge a little on it.' You add to the existing debt, and then when the introductory rate expires, you owe more than when you began."

Jumping from card to card can ding your credit report, too. But if you're committed to whittling away your balance before a low introductory rate rebounds, go to CreditCards.com's balance transfer credit card page to find a card that works for you. Or negotiate with your current card issuer for a lower APR. If they think of you as a valued customer, they may be willing to jump through a few hoops to keep you.

Mistake No. 2: You still have a secured credit card even though your credit score is on the mend. For credit card newbies or consumers with a Swiss-cheese credit history, a secured card -- one where you deposit your own money before you start spending -- is usually a smart way to build up a decent credit history. But according to McClary, it's not a card you want to live with forever. "It's the bottom rung of consumer credit card offerings at the most subprime level. So, once a year, check your credit score and see if it's where it needs to be for you to graduate to an unsecured credit card with a low rate and better terms."

What's the magic credit score number? It's a moving target, but aim for the high 500s or 600s before you start applying. CreditCards.com's list of credit cards for those with fair credit provides a good starting point.

Mistake No. 3: You pay an annual fee but don't take advantage of the perks. With 3 in 4 new card offers touting no annual fees, you've got to have a pretty good reason for shelling out $18 to $150 (and up) just for the privilege of keeping a card in your wallet. For some cardholders, generous rewards and better perks are reason enough, but if you can't remember the last time you actually used one of those rewards, it's time to rethink your card strategy.

For Galia Gichon, founder of DowntoEarthFinance.com, "the only reason to pay an annual fee is for frequent flier miles. But ask yourself if you've used a free flight in the last two years." If not, earn rewards with a no-fee card instead.

Mistake No. 4: You're racking up business expenses but you don't have a dedicated business card. For entrepreneurs and self-employed people, it's simple to charge business expenses to your personal credit card. But that's not necessarily smart. "I work with a lot of entrepreneurs," says Gichon, "and I'm a big fan of keeping personal and business expenses separate. You get more organized, you're more conscious of your cash flow, and when it comes time for taxes, your business credit card really helps you quantify deductions."

Mistake No. 5: You're still collecting travel rewards, even though you never have time to go anywhere. You may have opted for travel rewards back in the day when you still dreamed of your grand tour of Europe. But if you're now too busy to fly, those rewards may be going to waste. It could even happen if your miles are tied to a specific airline, but you've moved away from their hub. "I got an American Airlines card 10 years ago when I used to fly American a lot, but now I don't anymore," says Gichon, who ultimately swapped for a different card.

In the same boat? Switch to a card with rewards you'll love and use, such as gift cards, merchandise or a deposit to your kid's 529 account. Or go with the reward that 61 percent of American cardholders opt for these days: cash back. That's one reward you probably won't have to worry about using.

Learn the ABCs of credit scores, credit scoring

If you are completely confused by the concept of credit scores, you are not alone. In fact, you are probably part of the majority that finds themselves befuddled by how credit bureaus compile, calculate and use these scores to determine your creditworthiness, often with the input of credit card companies and other creditors.

Your keys to getting into the 700-plus credit score club
Having a solid credit history with a credit score over 700 will open doors to money-saving opportunities -- from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs. Here are a slew of tips that can help get you and keep you in the get and keep a great credit score.

A credit score is simply a numeric value that has been assigned to your historical credit habits. The original company that pioneered the creation of this score is called Fair Isaac Corp., which forms the acronym "FICO."

The combination of credit bureaus, credit card issuers and massive databases that warehouse consumer data means that virtually every American now has a credit score. This score is vital to determining whether a person can access low-cost credit, something more expensive or is even eligible to get new credit at all.

In general, the higher the score, the lower the interest rate a person will have to pay on a new credit card or consumer loan. Conversely, a lower score will translate to higher interest and less desirable terms.

FICO-based credit scores can range from a low of 300 all the way up to 850. Lenders generally segment scores into six ranges for the purpose of determining to whom they will make credit offers and at what terms. Anyone below the sixth tier can usually only obtain credit from a subprime credit card lender at very high interest rates. Listed below are the six average credit score ranges used by many of the nation's largest credit card, mortgage and auto lenders:

• 720 – 850
• 700 – 719
• 675 – 699
• 620 – 674
• 560 – 619
• 500 - 559

Individual banks solely determine the credit terms that they offer to each FICO score tier, but in general the best offers go to the top tier. Many of the top credit card issuers specialize in super-prime lending, meaning they target consumers with these tier 1 credit scores. However, competition among the largest issuers could allow those in lower tiers to be considered for leading offers, such as those that feature 0 percent APR introductory rates.