Color of Money Live

Columnist Michelle Singletary was online to field questions about everything from retirement planning to protecting your credit rating.

A transcript follows.

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Michelle Singletary: Welcome. Glad you are all here. So let's get started.

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Clinton, MD: Greetings Michelle:

I'm going to retire at the end of the year and I'm putting my rental property on the market next week. The market is good right now and I want to use the money to add to my nest egg. I'll be 55 July 8. What if any downside is it to selling my house before or after I turn 55?

Michelle Singletary: None I can think of. Just know that by retiring early you potentially have a long time to live so create a plan that will allow you to live off that money for the many years to come. In other words, don't spend it all in one place :)

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Washington, DC: Hi Michelle,

Love your chats. I have two questions about credit report updating. Once I pay off a credit card, how soon after does that show up on my credit report? I've also paid off a debt that had been taken over by a collection agency. Will the collection agency information still remain on my report? And if so, for how long? Thanks!

Michelle Singletary: First good for you. Paying off and down debt is such an accomplishment. You should be proud of yourself.

As far as the reporting, your credit report is updated constantly so whenever your credit card company sends new information to the credit bureaus is when you can expect to see it recorded that your debt is paid. As to your second question that's a little more tricky. The fact is negative information can stay on your report for 7 years. Even so as time goes forward and you get some time behind you for that collection debt you should be in good shape. And remember the best way to improve your credit score is to pay your bills on time all the time. That's the biggest factor (even over bad debt).

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White Plains, MD: Hello Michelle. Is there an advantage to having a home equity line of credit?

Michelle Singletary: There's always the tax break. In fact I'm hearing of more and more folks using a home equity loan to buy cars "because of the tax break." But folks do the math. Is it really worth it. You need to figure out how much of a tax break you are getting, how long it's going to take you to pay off that home equity line and at what interest rate. If you could get a low interest rate for the car and pay if off in four years you might be better off leaving the equity alone. Do the math.

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Md: Is there any reason not to get an equity line of credit for emergencies? I have little cash and a lot of equity- just for emergencies- what do you think?

Michelle Singletary: You could just "establish" an equity line of credit that you would have access to in case of an emergency. Remember you can't get an equity line of credit if you don't have a JOB. It may cost you up to $100 a year to maintain the unused line of credit but if you don't have a lot of cash available and you are worried about your financial circumstances this could be a good move.

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Boston, MA: Why pay off your mortgage in today's dollars when 20 years of inflation will make the real value of what you pay much smaller?

Michelle Singletary: I thing the question of when or if you should pay off your mortgage is "it depends." Personally, as I get close to retirement or in retirement I don't want a home loan. I don't want the worry. But now with three children to put thu college starting in about 10 years every red cent is being invested not dumped into my house. Why? Because if I need that money the banker has it. I either have to refinance (at a cost), sell or get an equity line of credit. But always when it comes to questions like this do what makes you sleep at night. Some people just hate paying a mortgage and want to own their home free and clear as soon as possible. That's alright. But if you think you can invest the money you would use to make extra payments and get better returns that's a good move as well.

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Arlington, VA: Thanks for the on-line discussions. My question is about the credit scores and the Key Factors. How/where do you find out what they mean. I recently received a copy of my credit report when I applied for a mortgage. The numbers are fine but the Key Factors identified in reducing my score don't make sense at all.

thanks

Michelle Singletary: Try myfico.com. This site is run by the Fair Isaac folks that created the widely used FICO score. There is a ton of information about credit scoring. However, if you got a great score, say 700 or better, don't sweat it. You're credit golden.

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Laurel: "If you could get a low interest rate for the car and pay if off in four years you might be better off leaving the equity alone. Do the math."

It isn't just math. Using a HELOC means that to the dealer you're paying cash, which makes it a LOT more straightforward to compare deals when you don't have to compare the relative value of 1.9% interest. Everything can be compared on a straight cash basis.

I did this last time I bought a car, and getting three e-mail offers within $100 of each other made me feel good about comparing for the best deal.

Michelle Singletary: Oh please. You should shop on the price of the car first anyway so it doesn't matter if you are paying cash. We all are being "sold" on the idea of using equity lines of credit. Besides dealers actually like folks who might take their credit because they make more money. So actually they might not be so inclined to give you a great deal if you walk in with cash. But you do make a good point. Shopping for a car online is a great way to find a good deal.

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Fairfax, VA: Hi Michelle, love your books and chat. I want to upgrade out of our 3 bedroom townhome to a single family home in Spring/Summer 2005. I already have a healthy 4-6 month cash reserve for emergencies. But in the meantime, I contend that it makes sense to stash any additional savings my husband and I accrue each paycheck into the principal of our existing mortgage. We are still fully funding our retirement, so this is money that would otherwise sit in our checking account for the next year. Our time horizon is a year, so I don't see the value in putting the money into a short term CD or mutual fund. Any thoughts?

Michelle Singletary: First congrats on your saving habits. But if you are going to sell in a year why oh why give your money to the bank via extra mortgage payments. Keep your dough and earn even the pitiful interest rate in a savings account. Even if you get that money back in a sale, it's like putting it in one pocket and pulling it out the other (no interest at all.) Besides with a larger house you will need the cash. Stash the cash and don't worry about paying down the mortgage if you're going to sell soon.

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Arlington, VA: Hi, I'm recently married and my wife just changed jobs. She has about $12K from the previous 401k in a rollover coming. We're currently in about $30K revolving debt. Is it worth taking the 10% hit to use her rollover to pay a significant bit of debt down to work towards a home? Otherwise it doubles or triples our 'payoff time' on the debt. Never mind the depression realizing that 5 years ago I could afford a house when my salary was 20% lower while today we almost can't afford anything.

Michelle Singletary: No. Don't use the 401 (k) money. Seriously. You are forgetting that if you take the money, it's not just a 10 percent hit. You also have to pay taxes on that money. So you are talking about maybe getting $6,000. That's a huge hit in my opinion. Not to mention if you let the money roll all the interest you could earn on it during the years. I know debt is tough but don't compound your debt mistake by tapping into your retirement money. Leave it be. Look it's going to take time to get out of debt and perhaps that's a good thing. It will be hard and maybe that will help you avoid doing it again.

Also when that money comes over make sure your wife's former employer doesnt' cut the check to her. Make sure you roll over the money DIRECTLY to financial institution otherwise the employer will be required to take out taxes.

Finally, dont' beat yourself up. Debt happens. Just learn from your mistakes and soon enough you will get your home.

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Detroit, MI: Until recently, I had one credit card, which I paid off every month. I wasn't happy with the service I was getting from the credit card company, so I opened a second credit card account with another company. Now I don't know what to do about the first credit card. I would like to close the account, but since I've had that account for 15 years, I'm afraid closing it will cause my credit score to drop a lot. Does it make sense to keep that account open, and just not use the card? Since I already own a home, and I'm not planning to buy a car for the next couple of years, would a drop in my credit score affect me much?

Michelle Singletary: Good question. Keep the old credit card account. Having a long-term credit account contributes greatly to your credit score. So yes, keep it open and just don't charge on it -- as long as you don't have to pay an annual fee. But closing it could drop your credit score.

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Tysons Corner, VA: Michelle, I love your column and your advice and I would really appreciate your input on my money issue. Frankly, I wish I had the willpower to do the right thing sooner. I'm 24 and looking to buy my first home in about 10 months. I have an inheritance that's currently in stocks of about $30K (which I plan to use as my down payment) and I have about $7K in my checking account. I'm also saving $1K a month until I purchase the home. Here's the problem: I have $10K in credit card debt. I don't know what makes better financial sense: do I pay off my debt with the money in my checking account plus a few more months of savings or do I start paying off the debt more slowly and try to capture as much of my monthly savings (and the money in my checking account) for additional money for my down payment? Also, how will my credit score be affected by this $10K in credit debt when I go to get a mortgage? I really appreciate your advice, this has been worrying me sick for months.

Michelle Singletary: Stop worrying. First keep your emegency money (three to six months living expenses) regardless of whether you buy a home or not. In other words even if you buy try not to touch that money for the purchase of the house (trust me you will need a cushion). Second maybe it's your timetable that needs adjusting. What I mean is why not take some of the inheritance and pay off the credit card debt. I'm not sure what interest rate you are paying but I bet it's more than you are getting in return on any of that inheritance money. So now you are down to $20,000. So spend the next 10 months saving that $1,000 a month toward your home purchase. Take baby steps. Don't rush. Forget whether the debt might affect your home purchase. Do you really want to be in so much debt as a new home owner? What if you lost your job? You are in a good position to pay off your credit card debt and buy a home. Better than some people I've seen.

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Washington DC: First of all, I read your columns to keep my inspiration going to pay off debt. My husband and I were married two years ago and we had over $50,000 in debt. $15,000 student loans, $15,000 car note, and $20,000 in credit card debt. We are now down to $15,000 of student loans and car payments. My question is this: We live in a one bedroom apartment with an 18 month old, and we REALLY want a house. Should we wait until we have more savings, or should we check out the interest only payments that some lenders offer? We would also like to have another child so we need more rooms!

Michelle Singletary: Ah how sweet. Now as I said to the last person. Take your time. I know you are cramped but home ownership is no joke. People talk about it like the moment you open the door to your home you save money. Not true. Sure you get a great tax break but girl the money goes flying out that door for all kinds of things -- furniture, curtains, towels, new dishes, etc. With just $15,000 in debt you would probably be approved (assuming you've got good income between the two of you) But do you want to be house poor from the jump? If not stay put and save a little more. Interest only mortgages sound great but will you be able to afford that payment when that interest only loan has to be paid off? For many people it's a false sense of security. Same thing with the second child. Far be it from me to tell you when to procreate but you got a lot going on financially right now. Take your time and when you move and or have a second child do so when you're sure you can handle all financially.

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Bethesda, MD: Michelle, I recently bought a new house and it will take time to get comfortable with the payments. I have always been a good saver and will get back to that as soon I get used to my new house budget. If you had to give up either saving for retirement or saving for college for say a year or two, which would you pick?

Michelle Singletary: Hands down I would let go saving for college. Your children can borrow to go to school. You can't borrow to retire.

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Rockville, MD: Hey Michelle!

Love your columns and chats. You're motivating in such a positive way, thanks!

My question: We will be buying a house within 3-6 months. In the meantime, we're saving about $1000 a month for closing costs, etc. Where should we keep this money for easy access, but with the best return?

Thanks!

Michelle Singletary: Thank you and sorry to say if you will need the money soon, you have to keep in safe and sound. And that means money market, savings account or a 3 month CD.

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Upper Marlboro, MD: I am a single mother saving for retirement and college. Someone suggested that I stop saving for college and buy life insurance that can also be used for college? Do such financial products exists? If so, what resources can I go to or read to learn more about them?

Michelle Singletary: Ok, don't listen to that person who said life insurance used for college. As a single mother you should have life insurance in case YOU die. Your child or children will need to live off something. So buy term life insurance. It's cheaper. Now as far as college vs. retirement. As I wrote in an earlier answer. You should save for your retirement over a college fund. If you can do both, great. If not you come first. I know that's goes against what we think as parents but there are so many ways kids can get to college these days -- even if means taking out loans. You might also check out 529 plans. It's a great way to save for college. Money grows tax-free and isn't taxed when you take it out to use for college. Go to www.savingforcollege.com for more information on 529 plan. I have three 529 plans for each of my children. Plus as a Maryland resident you get a $2,500 break on your state taxes per account.

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DC: Excuse me? Closing a credit card account will DROP a credit score? I thought that creditors and raters looked at your total credit limits and if they were too high (i.e., you could get into a really big hole), they dinged you for it. I've been closing seldom-used accounts (like department store charge cards) to simplify and reduce the number of open accounts we have to keep track of. Have I ruined our credit rating? We've had, and still have, major credit cards for 35 years, with a near-perfect payment record.

Michelle Singletary: You're worrying too much. If you close a long held credit account it can drop your score. This becomes an issue only if you are about to get a major loan (car, home loan). But if you're not in the market for credit and you have other old credit cards by all means close accounts you are not using. Your score might take a minor ding but in a short time it won't matter as long as you continue to pay your bills on time and don't max out the cards you do use.

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Waldorf, MD: Is there any way that someone with a credit score of below 500 can trade in their car?

Michelle Singletary: Well, if you can hold onto the car I would. A credit score of 500 is really, really low which means IF you can get a loan the rate is going to be really, really high. So fix the old car until you can improve your score. If that's not possible. Buy the cheapest, safest car you can find because the rate you get will mean a very high car payment.

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Washington DC: How and where can (if I can) get a copy of my credit score, as opposed to my actual credit report ?

Michelle Singletary: You can order your credit score at any time as often as you like. Just to to the web site for the three major credit agencies. And in most cases you get the credit report with the score.

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Minnesota: Michelle,

I'm in the middle of trying to resolve a billing dispute with a phone company from several years ago. The account should now be paid in full and then some, thanks to my payments and a credit from my long-distance carrier for a billing error they made -- but so far no one at the company has been especially helpful in resolving the matter. I learned last week that this is actually showing up on my credit report, and I've taken action that I hope will settle the account once and for all. Assuming I get the matter resolved, how can I get this item removed from my credit report?

Michelle Singletary: Old debts have to be removed after 7 years. But there is a little gray area on this matter. If you pay off the debt or renegotiate it could start the clock ticking again, which means it could ding your credit. If you do pay it off try to get in writing that they won't reage the account or report something negative on your credit report.

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Frederick, MD: Yesterday I read an article on Washingtonpost.com. The article spoke about the warning that banks and other lending institutions have been given in what amounts to an effort to reduce the number of loans. It also outlined some dangers of borrowing against equity in one's home based on home values today coupled with rising interest rates. Do you, at this point in time, consider refinance or home equity loans a viable option for home owners to tap for various reasons?

washingtonpost.com: U.S. Warns Lenders To Elevate Standards

Michelle Singletary: This is such a great question. My answer is always "it depends."

Clearly with interest rates still relatively low and home values in many areas skyrocking, homeowners have an opportunity to use equity in their homes to get ahead financially. Many people are tapping their equity to make home improvements, pay down debt and even buy cars.

However, I think people still need to be aware that what goes up and most certainly come down. It's possible that some folks may find themselves upside down when it comes time to sell -- meaning they owe more than their home is worth. Or in the case of home equity loans they may someone forget they are borrowing other people's money. I've seen many people borrow against their home to pay off credit cards only to run the cards right back up.

So if you are refinancing to pull money out of your home or thinking about a home equity loan just be careful because at the end of the day you are putting your home -- the place you live -- in the line of fire.

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Washington, DC: I'm currently a graduate student in DC and I expect to complete my program in December 2005. I received my BA in May 2004. I keep on reading conflicting advice about consolidating my undergraduate federal loans. I have about $25,000 in federal loans from my undergraduate studies (no federal loans for graduate school). Some articles say that the expected rate hike in July won't affect payments as much but others say it will. I haven't started any payments for my loans yet because I'm eligible for deferment because of my student status, but I am financially able to begin payment if it's better to lock in a low rate before July. Any advice?

Michelle Singletary: You are in good shape. No one can say for sure that rates will go up in July but probably. Your best bet is to talk to your lender. But you may want to consolidate now to lock in the low rate. I think it's safe to say the rate won't go down. It might stay the same or go up.

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Warner, NH: Hello,

After raising five children and helping to put them through college, my parents have little in the way of a retirement plan. They are still working and in their 50s. What advice can I take to them to help them financially plan something for their retirement?

Thank you.

Michelle Singletary: That you will take care of them in their older age :)

Just kidding. But herein lies the problem. Many people like your parents forget about their retirement and instead spend themselves into working into their 70s or 80s. Just do whatever you can to press upon your parents that they need to aggressively start saving for themselves. Every penny has to be put away for their retirment now. Send them to this website www.choosetosave.org. There are a number of tools that can help them. And listen the fact is they may need to work much longer than they had planned. If they can it's not the worse thing in the world.

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norristown, pa: I'm 25, going back to grad school in the fall and I have $25k in my 401k. At some point I'll probably need to use money from either here, or I'll need to take a loan. Which do you suggest I do and why?

Michelle Singletary: Wait to go back to school when you can afford it. Leave your retirement money where it is. Remember it won't be $25,000 if you take it out. It will be about half that because of taxes and penalities.) If you need to use your retirement money for grad school you can't afford grad school. Why not work a while longer, get more experience under your belt and save for school or save enough so that you don't have to borrow so much.

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washington: Hi Michelle - Really in need of your advice. My husband and I have amassed about $24,000 in credit card debt for a variety of worthy and bad reasons. After paying our mortgage, 2nd mortgage (we used a home equity loan to pay off his student loans), daycare and groceries, we send about $1500 a month to the various cards (4 in total). Three of the 4 cards have 0% APR until Jan. '06.

Do you think it's a good idea to pull more equity out of our house (we have a ton thanks to the market) and pay off the cards? i feel like it would be easier to send one payment to one company rather than figuring out how to split the payments and all the different due dates. Any other ideas?

Thanks.

Michelle Singletary: I give you a cautionary "yes" to refinancing your home to pull money out to pay down the cards. But look if you haven't mended your spending ways don't do it because you might be right back in the same boat.

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Michelle Singletary: Oh my look at the time. I have to run. I'm so sorry if I didn't get to your question. But as always I will try to answer some in a future column on in my weekly newsletter (are you a subcriber?). Thanks so much for joining me today and come back next week -- same time, same place. My guest will be the author of this month's book club selection "Boomerang Nation" about adults who move back home.

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