New car or used? Buy either, but be smart

Also: How emergencies can ding credit scores, and will a spouse's bankruptcy rule out a home loan?

Dear Liz: My husband and I own a car that's on its last legs, and we are contemplating a replacement.

Normally we buy used, but the kind of car we want is not readily available as a gently used vehicle because people tend to keep this type of car for a long time. Also, the resale values tend to be high, so if we do find one that's just a few years old, it's likely to cost more than what we've saved so far.

Might it be a better idea for us to buy a new version with dealer incentives, such as low-rate financing, rather than continue searching for a used version to buy with cash?

Answer: You'll save a lot of money over your lifetime if you use cash to buy cars that are a few years old and then drive them for at least 10 years.

Buying used avoids the steep depreciation that erodes new-car values as soon as you drive the vehicle off the dealer's lot. Not replacing cars frequently also saves you money and gives you time to build up cash for the next purchase.

The problem with financing cars is that it can encourage you to buy more vehicle than you can really afford. Before you let dealer incentives sway you, check out car comparison site Edmunds.com's "True Cost to Own" feature. This handy guide shows you all the costs of owning a vehicle, including insurance, maintenance and repairs. In many cases, the true cost of owning a car is double, or more, the monthly payment.

That's not to say you can never buy new or never finance a car. But you should make sure it really fits your budget, and put strict limits on your spending (because lenders certainly won't).

If you're going to finance a car, put at least 20% down -- more if possible. Limit the loan to no more than four years, and make sure the payment doesn't exceed 10% of your gross income. A 5% limit is better for those with considerable mortgage payments or other debt.

Emergency costs dinged credit

Dear Liz: Help! In the last year, my credit scores have dropped 30 points. I don't know why except that my credit reports noted that I used 10 credit cards recently. (I've had many dire emergencies lately, but I paid off all my balances as usual.) I'm terrified of more drops. What can I do?

Answer: Build up your emergency fund.

Because you charged your emergencies, you used up more of your available credit. The more of your credit you use, the more negatively your scores tend to react. It doesn't matter that you paid your balances off each month. What counts is the balances that your credit card issuers report to the credit bureaus, which are typically the balances on your latest statements.

Now, the good news is that your scores probably will recover as soon as you start charging less. But you should take this as a sign that credit cards are a poor substitute for savings. An emergency fund could help you survive life's inevitable setbacks without having to run to your cards.

Marriage doesn't combine scores

Dear Liz: I have reunited with the love of my life. There is one problem: She has a bankruptcy on her record. If I have very strong credit scores and we marry, how will her credit affect my chances of buying a house?

Answer: You each will retain your individual credit reports when you marry. They won't be combined.

If you plan to use her income to help qualify for a home purchase, though, her credit scores will be used to determine the rate and terms you get. If the bankruptcy is recent or if she hasn't taken steps to rehabilitate her credit, that means you could pay more interest or have more trouble finding a loan.

If you don't need her income to qualify, on the other hand, her credit troubles don't need to affect your loan.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at www.asklizweston.com. Distributed by No More Red Inc.