Ask Liz Weston

Get smart with your money

Liz Weston

Adjustable mortgage poses risks

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Dear Liz: Should my retired wife (age 74) and I (age 78) refinance our home just to lower our monthly payment by $100? I’m considering going for a five-year fixed at 2.74% followed by a 25-year variable. Our outstanding loans amount to $200,000. The value of our home has decreased to $400,000. My wife is fearful of the 25-year variable.

Answer: As she should be. According to mortality tables, she’d have to live with it longer than you will.

You two are old enough to remember the double-digit inflation of the 1970s and the havoc that wreaked. If inflation like that (or anything close) were to return, your mortgage payment could quickly become unaffordable.

Economists are concerned that all the cash that’s been pumped into the economy to fight the downturn could spark inflation if growth resumes. Too much cash chasing too few goods is what traditionally has led to serious inflation.

In any case, lenders know that today’s record low interest rates won’t last. That’s why they’re so eager to push loans that will become variable at some point — so that the borrowers will be the ones to shoulder the interest rate risk.

Some borrowers can take that risk, but they tend to be younger folks whose incomes are also likely to rise if inflation returns. For people on fixed incomes, the math really doesn’t work.

Do yourself and your wife a favor. If your current loan has a fixed rate, stay with what you have. If it doesn’t, consider refinancing to one that does.

When you should consider bankruptcy

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The conventional wisdom—that people who file for bankruptcy are deadbeats who choose not to pay their debts—is typically dead wrong.

Ask any bankruptcy judge or trustee. Most people who file for bankruptcy don’t do it as a first resort. Most people, in fact, put off filing for far too long. They struggle for years with impossible debts, often draining retirement funds or home equity in vain attempts to satisfy their creditors. The tragedy is that the money they’re pulling from their IRAs or their homes would be protected from those same creditors if they had filed for bankruptcy sooner. But they try to do the right thing, and as a result wind up far worse off than they might have been.

Add up all your unsecured debts. Unsecured debts include:

  • Credit card debt
  • Medical bills
  • Unsecured personal loans
  • Loans from friends and family

Unsecured debt does not include auto loans, mortgages or student loans.

If your unsecured debts equal half or more of your current income, then you should make two appointments:

  1. Visit the National Foundation for Credit Counseling and set up an appointment with a legitimate credit counselor. These folks can tell you if you may qualify for a debt management plan that would allow you to pay off your credit card debt within three to five years. Credit counselors try to help you avoid bankruptcy, so to get a complete picture of your options you should also:
  2. Visit the National Association of Consumer Bankruptcy Attorneys and get a referral to a nearby experienced bankruptcy attorney. The attorney can review your situation and let you know your options in bankruptcy court. Many of these attorneys offer free or discounted initial sessions.

Even if you’re determined to avoid bankruptcy, you should consult with a bankruptcy attorney about your situation if you’re being sued over your debts or your wages have been garnished to pay your debts. Once the courts are involved, you need a lawyer’s help.

How to bounce back from bad credit

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Foreclosure, bankruptcy or a history of missing payments can send your credit scores into the basement. The good news: nothing is permanent in the world of credit and credit scoring. You can rehabilitate your scores over time if you know how.

Here’s what to do:

Pull your credit reports from all three bureaus. Check for errors and dispute any serious mistakes, such as accounts that aren’t yours or late payments being reported when you paid on time.

If you don’t have any credit cards, apply for a secured card. These cards give you a credit line that’s equal to the amount of cash you deposit with the issuing bank. NerdWallet recommends the Capital One Secured Card and the Orchard Bank Secured Card.

Use your cards lightly but regularly. Your charges shouldn’t total more than about 30% of your credit limit—10% or less would be even better. And you shouldn’t charge more than you can afford to pay off in full every month. Carrying balances doesn’t help your credit scores, and it’s expensive. So don’t do it.

Apply for an installment loan. Your credit scores will recover faster if you have a mix of credit, which means both revolving accounts (credit cards) and installment accounts (mortgages, auto loans, student loans). If you don’t already have an installment loan, consider applying for a personal loan from your local credit union. These member-owned financial institutions often have been rates and more flexible credit standards than traditional banks. Don’t belong to a credit union? You can find one you’re eligible to join here.

Pay your bills on time, all of the time. One skipped payment can devastate your scores. So can an account that’s charged off, or that’s turned over to collections.

You can track your progress by using a credit monitoring service that includes your credit score. Some sites, like Credit Karma, offer credit monitoring for free, although the credit score you get isn’t the FICO score most lenders use. To get your FICO, you’ll need to sign up with MyFico.com.

Will home sale trigger eviction?

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Dear Liz: Our landlady has been diagnosed with an advanced stage of cancer. In her precarious health, I find myself concerned that we may have to move if she gives up the duplex and moves to a care facility.

I’m unemployed and my 72-year-old husband has recently been diagnosed with early stages of dementia. I find it difficult to face the prospect of returning to work and finding proper care for him even though I know I need to do so very soon.

If she sells the duplex or leaves it to someone in her will should she die, what protection do we have against having to move out in a hurry or have our rent raised dramatically? Either situation would put us into chaos. What are our options?

Answer: If you have a lease, that contract typically would survive a change in ownership. The new owner would have to honor its terms until the lease was up. If you rent month to month, the new owner would have to follow minimum notice requirements determined by your state to raise your rent or terminate your tenancy. The Nolo website at http://www.nolo.com has additional information about tenants’ rights.

If you can no longer afford your rent, you may be eligible for government housing assistance if your income is sufficiently low. You can find more information by using the Eldercare Locator at http://www.eldercare.gov or calling (800) 677-1116. You should check out this federal service’s resources in any case, since you will have a big task ahead of you in caring for your husband even if nothing changes in your living situation.

Other good sites to explore include the Alzheimer’s Assn. at http://www.alz.org, which has information for caregivers and a “care locator” that can help you find care options in your community such as adult day centers, in-home care and respite care. And speaking of respite, you also should check out the ARCH National Respite Network at archrespite.org for people who can help when you need a break.

Carrying a balance won’t help your scores

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Dear Liz: I question your advice to the father whose son was turned down for a car loan. You told the father: “Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.”

Recently I was on the phone with a credit bureau questioning an item on my credit report. I have always paid off my credit card balance every month. The credit bureau representative told me that my credit score would be higher if I paid less than the full balance owed on my credit card every month. I asked her how it could possibly hurt my credit score by paying what I owe each month on a timely basis. She assured me that it does hurt my score. I still don’t understand it, but after I read your piece I thought I would pass on to you the advice I received from this credit bureau representative.

Answer: Just because someone works at a credit bureau’s customer service center does not mean she understands how credit scores work.

The information she gave you was dead wrong. She’s not only incorrect about how credit scoring works, but she seems unclear about how credit information is actually reported to her bureau.

The credit card balances that lenders report to the bureaus don’t reflect whether you pay your debt in full. The credit card issuers report the balance on a given day each month. Typically, but not always, it’s the balance from your last statement. You could pay the full amount the day you get your bill, or pay only the minimum. The credit bureaus would never know.

The leading credit scoring formula, the FICO, uses the balances that are reported to the bureaus to calculate your credit utilization. Since neither the bureaus nor the scoring formula “know” whether you pay that balance in full or not, there’s no advantage to carrying a balance. It doesn’t help your credit; it just costs you money. That’s also why it’s important to limit how much of your credit you use at any given time, since maxing out your cards can hurt your scores, even if you pay the balance in full.

“There is no reason to carry a balance to improve your score,” said Anthony A. Sprauve, public relations director for myFico.com, the only place where people can buy their FICO scores. “If someone is paying all of their bills on time; keeping their credit card balances low or at zero; and not opening new lines of credit, they are doing the three most important things they can to have a good credit score.”

The best used cars, from Edmunds.com

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If you’re in the market to replace a vehicle, check out Edmunds.com’s list of 2012 Used Car Best Bets, which include:

Compact Sedan: 2005-2010 Hyundai Elantra
Midsize Sedan: 2005-2010 Nissan Altima

Large Sedan: 2006-2010 Hyundai Azera
Coupe: 2005-2010 BMW 3 Series
Convertible: 2005-2010 Mazda Miata
Wagon: 2005-2010 Pontiac Vibe
Compact SUV/Crossover: 2005-2010 Honda CR-V
Midsize SUV/Crossover: 2005-2010 Ford Explorer
Large SUV/Crossover: 2005-2010 Chevrolet Tahoe
Minivan/Van: 2005-2010 Honda Odyssey
Compact Truck: 2005-2010 Toyota Tacoma
Large Truck: 2005-2010 Ford F-150
Luxury: 2005-2010 Infiniti G35/G37
Hybrid: 2005-2010 Toyota Prius

Sport Compact: 2005-2010 Subaru Impreza WRX

Edmunds.com editors picked the cars based on reliability, safety, value and availability. The editors considered cars that were two to seven years old, which is pretty much the sweet spot for used car purchases.

Since all cars are used cars as soon as you drive them off the lot, you might as well let someone else take the depreciation hit. You can tens of thousands of dollars over your driving lifetime by buying slightly used cars. Save even more by paying cash and keeping them for 10 years or so.

For more details on Edmunds.com’s list, visit http://www.edmunds.com/car-reviews/best-used-cars.html.