A question of debt, and more debt

By Michelle Singletary
Sunday, June 27, 2010; G04

While I'm away for a short vacation, I'd like to pass along some interesting questions -- and answers -- about debt from a recent online discussion.

I'd like to pay off a couple of credit cards. If I pay them off and carry a zero balance, will that have an adverse effect on my credit report? Or should I pay them off and then use them minimally and pay off the balance each month? I'm hoping to refinance my house before interest rates go up too much higher.

I get this question a lot, and it defies common sense.

Paying off credit card debt -- and staying out of debt -- is always a good thing. And no, you don't have to use the cards to boost your credit score. As I tell people over and over again, the No. 1 way to get a better credit score is to pay your bills on time, not by using credit.

My husband and I bought a home in October. He had substantial credit card debt in his name before we married. I had zero debt, and I have had one credit card in my name for the past two years. I attempted to get credit to purchase furniture and was denied. Is his credit affecting my ability to obtain credit?

I'm sorry, but you can't blame this on your hubby. The fact is his credit history did not migrate to your credit file when you married. His credit history stayed his, and yours, yours. It's probably the purchase of the home that led to your credit denial. Creditors have become a lot tougher on granting new credit. You just bought a home -- a big purchase and a big debt.

However, you should check your credit files. Have you paid any bills late? That could have resulted in your credit denial. Anyway, when it comes to couples and credit, your history only merges when you have debt together (i.e., the house).

Is this a really bad time to buy a new car? We financed the Hyundai Tucson we just bought. We found a brand new 2009 base model, with a manual transmission, on the dealer lot and managed to get over $5,000 off the price. We gave my nine-year-old Saturn with 140,000 miles to my very deserving son-in-law, who was driving a complete disaster of a car. We were happy, but suddenly we're wondering if we should have just kept our Saturn and stayed put. What sayeth you?

I sayeth it's a moot point.

The deed is done. You got what appears to be a good deal, and you helped out a relative. So roll down the car windows, enjoy the summer breezes and stop worrying about it.

Is it possible to roll the student loan debt of two people (a married couple) into one big loan with one payment? We owe about $36,000, but we'd rather just pay one big loan.

Consolidating federal student loans was never a good idea, because both spouses became jointly responsible for the debt in full. If the loans were kept separate and your spouse died, that person's debt could be discharged. But this, too, is a moot point. In 2006, the law changed, and now spousal consolidation is no longer allowed.

My husband and I are debating the best way to pay for some needed repairs on our house. We are young retirees, just turned 60. I have a government pension, and he works part time. We have substantial savings, but 80 percent of it is in the government Thrift Savings Plan and individual IRAs, which we don't want to tap just yet. If we paid for some renovations with cash, this would wipe out half of our non-tax-advantaged savings. If we took out a loan, the servicing costs of the loan could be paid with what our investments are currently earning. So which sounds like a better approach: Use our cash and then rebuild the savings, if possible, from our limited income, or take out a loan and pay it off with (hoped for, not guaranteed) earnings from our investments?

Cash, baby, cash.

If you take out a loan, the costs will increase because of the interest you pay. And as you point out, there is no guarantee your investments will return a certain amount, or that your husband will continue to work part time. If you have cash, don't use debt.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

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