Starting out, with a strategy

Dear Liz: I've just graduated from college and landed a good job with a steady income. I contribute 10% of my salary to a 401(k) and my company contributes an additional 4%. My money is in a target-date retirement fund that matures in 2040. What's my next step? I am saving for rainy days and vacations, but my ultimate goal is to buy a house. I also have a lot to pay back in student loans. I am in a small town and don't know if I can get professional and unbiased financial advice.

Answer: Take a deep breath. You're off to a good start.

Now that you've started saving for retirement, your next step typically would be paying off any high-rate debt. But you didn't mention having any credit card debt, so we'll assume you don't.

Examine your student loans. If you haven't consolidated your federal student loans, wait until after July 1 to do so, because rates are coming down. Choose the maximum payback period (20 or 30 years instead of 10, for example) to give yourself some flexibility in paying back this low-rate, typically deductible debt. There's usually no rush to pay off this kind of debt -- your money is better used elsewhere.

Focus instead on paying down any private student loans you may have. These tend to be more expensive and less flexible than federal student loans. You should try to pay these off as soon as possible.

Continue building up your emergency fund, which can double as a home down-payment fund. Wait to buy a home until you can make a 5% down payment and still have enough left over to cover at least three months' worth of payments. You also should be sure you can stay put awhile; declining home prices mean it may take years for you to build up enough equity to offset the costs of eventually selling your house.

Because your finances are fairly simple so far, you may not need professional help. But know that many qualified, fee-only planners are willing to work over the phone.

Improving a low FICO score

Dear Liz: My brother and I share ownership of a house that we inherited. He would like to buy me out but was turned down for a mortgage because his FICO score was 560. The broker said my brother should get his score up to 640. My brother said the primary reasons for his bad score were that he was late on some payments, had a $17,000 judgment for past child support (which was paid last summer) and filed Chapter 7 bankruptcy in 2001. Can he improve his score enough within 60 days if he catches up on his late payments and explains that he was unemployed? (He gets disability payments now.)

Answer: Credit scores don't care why you were late, only that you were. So excuses don't help.

It's not clear whether "catching up" on his payments will improve his scores. If the accounts aren't in collections, it may help him to get current and it will certainly prevent further damage to his credit.

If his accounts have been charged off and turned over to collectors, however, he should not expect much improvement in his scores. He'll probably have to pay the collection accounts, though, if he wants to get a mortgage loan.

He may be able to offset some of the damage by paying down any credit card balances and using less than 10% of his credit limit on such accounts. But it's likely to take more than two months to see much improvement in his scores.

Questions for possible inclusion in this column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston

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