Over time, unpaid accounts fall off credit reports
Dear Liz: My credit reports don’t show any of my old unpaid collection accounts. I also have one judgment that is not showing from 2005. My wife (who has perfect credit) and I are looking to apply for a mortgage. What will the lender find? I recently applied for a credit card to start rebuilding my credit. The issuer approved me for a card with a $1,000 limit and told me my score was in the high 700s. I am so confused.
Answer: If your collection accounts are older than seven years, your lender shouldn’t see them when it reviews your credit reports. Most negative marks have to be dropped from reports seven years and six months after the date the account first went delinquent. Civil judgments also have to be dropped after seven years unless your state has a longer statute of limitations; in that case, the judgment can be reported until the statute expires. California’s statute of limitations for judgments is 10 years.
If none of those negative marks shows on your reports and you’ve handled credit responsibly since then, your credit scores (you have more than one) may well be excellent.
Since you’ll be in the market for a major loan, you and your wife should get your FICO scores from MyFico.com. Mortgage lenders will look at all six scores (one from each of the three credit bureaus for you and your wife), basing your rate and terms on the lower of the two middle scores. If that score is 740 or above, you should get the best rate and terms the lender offers.
Your FICO scores will cost $20 each, which is a bit of an investment. You can get free scores from various online sites, but those aren’t the FICO scores that mortgage lenders use and are of limited help in understanding what rate and terms you’re likely to get.
Pay off home loan with windfall?
Dear Liz: I’m 65 and my wife is 62. We recently sold a business for over $900,000 and will net somewhere between $550,000 and $600,000. Should we use the proceeds to pay off our mortgage? Our home is worth about $1.5 million with a mortgage of $390,000 at 3.586%. We contribute an extra $200 per month to reduce the principal. We have no other debt. Our savings, retirement and brokerage accounts total $1.2 million. My wife receives a pension of $483 a month and works part time as a substitute teacher. I plan to continue working until age 70 with a salary of about $170,000 per year. On retirement we should receive about $4,400 per month in Social Security benefits.
Answer: Many people feel more comfortable having their mortgages paid off by the time they reach retirement age — even when the interest rates on the loans are so low they’d almost certainly get better returns elsewhere. (The after-tax cost of your mortgage is likely less than the longtime inflation rate of about 3%.) Not having a mortgage payment can substantially reduce your monthly expenses, which means you have to take less from your retirement accounts. Such withdrawals often trigger taxes, so you essentially save twice.
Other people feel perfectly comfortable carrying a mortgage into retirement. They’re happy to take advantage of extraordinarily cheap interest rates and keep themselves more liquid by deploying their savings elsewhere. And many people have to carry debt because they can’t pay it off before they retire, or paying off the mortgage would eat up too much of their available funds.
Because you do have choices, discuss them with a fee-only financial planner. If you pay off the mortgage and invest what’s left, you could draw about $50,000 from your retirement funds the first year without a huge risk of running out of money. That plus your Social Security and your wife’s pension may give you enough to live on. If not, you may want to invest your windfall and continue paying the mortgage down over time.
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