Advice on Credit Card Rates and Home Sale Exemptions

Dear Liz: I’m planning a trip to Europe soon and applied for a new credit card because it has a “no foreign transaction fee” feature. With my credit score sitting at 740, I expected to receive a decent interest rate. However, I was shocked today to learn I’m approved for a rate of 29%. That feels a bit steep, and I’d rather not deal with that fee. What should I do next, and how might this impact my credit score?

Answer: First off, don’t close the card. You might want to reconsider your approach.

It seems you’ve ended up with a rewards card, which typically comes with high interest rates but doesn’t impose foreign transaction fees. The best way to use these cards is simply as a convenience—only spend what you can pay off when the bill arrives. Ideally, it would be prudent to save money for your trip to avoid these issues.

If you find yourself racking up a balance, you could look into transferring that debt to a low-interest card. Just remember that those lower rates often come as promotional offers that last only for a limited time.

In general, it’s advisable to borrow only for things that will appreciate over time. For instance, a reasonable mortgage is acceptable, as homes usually gain value. Similarly, student loans can sometimes lead to higher earnings.

If you need to finance something that isn’t likely to appreciate, like a car, aim for the shortest loan term possible to lessen the interest you pay. Try to avoid borrowing for vacations or travel; those expenses should ideally be covered by your regular income.

Dear Liz: My late husband and I purchased our home back in 1969. Now that I’m 80, I’ve been told that being a widow doesn’t affect the home sale exemptions. Since he passed away, I’m concerned I’ll lose half of the $500,000 exemption we would have qualified for when selling the house. Are there any exceptions for older widows?

Answer: If you sell your home within two years of your spouse’s death, you can still qualify for that $500,000 home sale exemption, as long as you meet the other necessary criteria, like using the home as your primary residence for at least two of the last five years. This is contingent on the surviving spouse not having remarried and neither spouse having claimed the exclusion within two years of the sale.

If more than two years have passed, you might still benefit from significant tax advantages. In many states, when a spouse dies, that half of the home receives a “step-up” in basis, reflecting its current market value. In community property states like California, both halves of the home benefit from this step-up.

For instance, if you and your husband bought a house for $25,000 and invested $75,000 in improvements over the years, your tax basis would be $100,000. If, at the time of his passing, the house is valued at $600,000, under most state laws, half would carry a tax basis of $50,000, while his half would step up to $300,000. The combined basis would then be $350,000. If you sell for $650,000, your profit would be $300,000. You can subtract the $250,000 exemption and only end up with a $50,000 capital gain.

However, in a community property state, the tax basis would be $600,000 since both halves step up after your husband’s death. If you sold for $650,000, that exemption would offset any profit, resulting in no capital gains tax.