Money 911: Can credit card debt be inherited?

What happens to a parent’s debt when they pass away? Does a high debt-to-credit ratio negatively impact credit scores? TODAY financial editor Jean Chatzky, “Start Late, Finish Rich” author David Bach and CNBC personal finance correspondent Sharon Epperson offer advice on these issues, plus wise words about protecting your credit, investing and more:

Q: My dad just passed away and my mom is left with some credit debt. My question is what happens to the credit card debt that was just his? Does she have to pay his cards? — Jannae, Delano, Calif.

Jean Chatzky: This depends largely on your state. In many community property states — and California is a community property state — the debt would be passed to your mother if they were incurred during the marriage. If you have questions about this, you can contact a consumer law attorney. In most instances, however, if the cards were in his name and his name only, your father's estate is responsible for paying the debt off. Once they are taken care of, the remainder of the estate will be divvied up as dictated in your father's will, if he has one, or probate, if he didn't. If there aren't enough assets to pay for the debt, the estate will be considered insolvent and his creditors will be notified accordingly. The debt will be forgiven.

As for any cards or debts that are joint accounts between your mother and your father — in other words, your mother was on the account as a co-signer — she'll likely be responsible for paying that debt off, with the help of your father's estate.

Q: I'm a graduate student going into my third year in a Ph.D. program. I have around $35,000 in debt from college and graduate school combined (all Stafford Loans). I recently viewed my free annual credit report and am concerned about my debt-to-credit ratio. Right now my only debt is student debt. I have three open credit cards with no outstanding balances on them. My debt-to-credit ratio according to the report is 95 percent! I think this is because my student loans have been in deferment since I'm still in school. Does this high ratio negatively impact my credit score? — Caitlin, Vernon, Conn.

Jean Chatzky:  I wouldn't worry too much about this. Student loan is considered good debt, which means that it is viewed favorably by creditors as long as you pay your bills on time once you graduate. You're being very responsible with your credit cards, and once you graduate, you can start expanding your credit file, maybe with a mortgage if you have the income to support it or a car loan. In the meantime, I'd keep doing what you're doing, because you're certainly on the right track by paying attention to your credit standing and staying away from credit card debt. You should also make a point to use those cards for small purchases every so often, and pay off the balance in full, so that the credit card companies don't close your cards or reduce your limit because of inactivity.

Q: I am a 26-year-old female with a part-time job that pays me $15,000 a year with full benefits. Somehow I am able to pay for my apartment, my monthly car payments, my cell phone, etc, with no problems. I am even able to add money to my savings each month. Because I'm pretty good at managing my money I have never had a credit card besides a few store credit cards. I believe my credit score is 690. Do you recommend that I get a credit card, and if so, how do I choose the right one for me? — Lauren, SUNY New Paltz

David Bach: Lauren, first of all I read this question twice to make sure I read it correctly and it wasn't a typo! You are earning $15,000 a year, living within your means, have no debt and a decent credit score, you are great example for America! We need to interview you on how you do this.

Now to your question, your score of 690 is decent. FICO scores range from 300-850 and the median FICO® score in the U.S. is 723. The reason your score at this point isn't higher is because you are young and don't have a credit record because you don't have a credit card (other then a store card) or a loan payment history. This is easy to fix in minutes and you should. Having a major credit card and using it responsibly helps you to build up your credit history. A solid credit history means a higher credit score. Your credit score plays a major role when you apply for a mortgage to buy a home or when you get a car loan, cell phone — even a job.

My recommendation is you go down to your bank (where you bank) and ask for a credit card. See if they will give you a card with a limit of $5,000. Then use the card for a regular payment like a phone bill. Have the phone bill debited each month from your credit card and then pay the card on time in full each month. This will start a monthly credit history for you.

To find a card that's right for you, log on to Web sites like bankrate.com, lowermybills.com or lowcards.com and start comparing. There are several questions you'll want to find the answers to before you sign up and these include:

• What's the annual fee?
• What's the interest rate?
• What happens if you are late with a payment? How much is the penalty?
• Does the contract include a Universal Default Clause and does the issuer practice double cycle billing? (If either are "yes" then find a different credit card company to do business with.) Both practices are, in my opinion, bad for the consumer and Congress is working to stop them with new legislation.

Also, be sure you always read the fine print before signing on the dotted line.

Q: My husband passed away 10 months ago and I am trying to consolidate my debt. We currently own a summer cottage in Michigan (which is for sale but no takers right now) and our primary house in Ohio. I have two girls: one in high school and one in college. I cannot refinance either home because I have no income coming in. I cannot find a job because no one is hiring. My husband died before the stimulus date for help. I do not have enough income to refinance but too much to receive loans for college. I am 46 years old and stuck in the middle of a tornado! How can I lower my payments or receive college help so down the road the government does not have to bail me out? I am trying to do the right thing but no one seems to want to help! — Gretchen, Loveland, Ohio

Sharon Epperson: Gretchen, I am very sorry for your loss. You are dealing with so much all at once — and these are major battles that have to be waged at the same time.

On the first front, I'm sure getting a full-time job is already your top priority. Even an entry level position that brings in close to what you're making part-time — but with heatlh benefits — would help immensely. Check out www.monster.com, contact friends, relatives, everyone in your network to let them know that you're looking and that you're open to many different types of positions.

Refinancing with a new lender will be difficult. The lender will want to see that you have enough income to pay back the loan. But you still may want to talk to your current lender about refinancing on your primary residence to see if they could refinance your current loan or alter the loan without checking income, since it won't be a brand new loan. It's a long shot, but worth a try. For now, rent the cottage, if you haven't already. Try to rent it so that you can cover your housing costs, but you may have to rent at a loss.

Paying for college is a bit more straightforward. The college should review your new family situation. Go to your older daughter's financial aid office and ask for a "special circumstances review" or "financial aid appeal." Tell the financial aid officer about the changes in your family situation, have a copy of the death certificate on hand, last year's income tax return or W2, and information on your current income (Social Security or other sources). The college can adjust the inputs on the FASFA form (the financial aid form requested by all colleges and universities) to reflect the change in your family's circumstances and that should result in an increase in financial aid.

You can also ask the financial aid office to increase the unsubsidized Stafford loan limit for your daughter or apply for a PLUS loan yourself. Even Bill Gates can get an unsubsidized Stafford or PLUS loan, there are no income restrictions. Increasing the limit on the Stafford loan (up to $4,000/year for a freshman or sophomore or $5,000/year for a junior or senior) is probably your best bet since the interest rate is lower than a PLUS loan. But you could take a PLUS loan to cover the entire cost of her education, minus any aid that she receives. Go to www.finaid.org for more information. Also www.fastweb.com is a great resource for finding scholarships.

A non-profit credit counselor or certified financial planner can also help. Find a credit counselor in your area at www.debtadvice.org and a financial planner at www.napfa.org or www.fpanet.org.

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