Lenders may deny credit more than 10 years after a bankruptcy

Dear Liz: I was recently solicited by a credit card company. I didn’t need another credit card, but this offered airlines miles that I collect, so I applied. They didn’t approve the application because: “You have filed for bankruptcy and your previous account(s) with us was included in that filing. This includes any of your accounts issued by (us) such as Visa, MasterCard, store cards or gas cards.” Liz, the bankruptcy was 12 years ago, and I am very well financially situated now. I thought there was an expiration date on bankruptcies appearing on your credit report.

Answer: There is. Bankruptcies have to be removed from your credit reports after 10 years.

Individual lenders, though, are allowed to have much longer memories. And some have opted not to forget. If you ever file a bankruptcy that wipes out debt on one of the accounts they issue, they may never again approve you for credit. That’s perfectly legal.

Not all lenders are so unforgiving, of course, and those who don’t know about your bankruptcy likely will be perfectly willing to extend you credit as long as your credit scores are good. But you’re probably wasting your time trying to induce this once-spurned lender to change its mind.

Use extra savings to boost retirement contributions

Dear Liz: My husband and I are in our late 40s. My husband is the sole provider. We have $200,000 equity in our home and a 5.875% interest on our mortgage. We have nine months’ worth of expenses saved in an emergency fund, plus we contribute $100 a month to our son’s college fund and 6% to my husband’s 401(k). We make regular monthly payments on a student loan balance of $12,000 (at 4.167% interest) and a personal loan balance of $12,000 (at 0%). My husband has had two stretches of unemployment over the last five years, each lasting for about six months. We have begun saving in a secondary account and are uncertain how to best use that money. Should we pay off the student loan? The mortgage? Invest in a CD or IRA? Or consider some other investment strategy?

Answer: You don’t say how much is in your husband’s 401(k), but a 6% contribution rate when you’re in your late 40s is unlikely to generate a big-enough nest egg to retire. Boosting that contribution rate should be your priority, and you should consider contributing to a Roth IRA for each of you.

Likewise, saving anything for your child’s college education is smart, but $100 a month won’t get you far. Just for comparison, consider that parents of newborns need to save around $600 a month to pay the full cost of a public college. Those who start later or want to cover a private college have to contribute much more.

Most families aren’t able to save that much, so the next best thing is to simply save what you can — after you’re fully on track with your retirement savings.

You shouldn’t prioritize paying down your relatively low-rate debts over these two far more important goals. But you may want to consider refinancing your mortgage to dramatically lower your rate and perhaps free up more cash for your goals. Just try to make sure the loan will be paid off by the time you plan to retire. A 15-year loan, in other words, might make more sense than refinancing into another 30-year mortgage.

Why home refinancing is no longer so simple

Dear Liz: Why does a request to lower the interest on an existing mortgage require a new appraisal, inspection, title search, etc., when the home is the same? Think how much money could be put back into the economy with a simple keystroke.

Answer: The short and obvious answer is that “nothing is the same.”

Home prices are down 33% from their 2006 peak, with even bigger drops in many areas. Lending standards are dramatically tighter as well. When your loan was originally made, lenders might not have cared much if your home’s size or amenities were fudged, or if the wrong “comparable properties” were used to arrive at your home’s value, or if you made the income or had the assets you claimed. Now they care, deeply, about all of those things.

Even if the world hasn’t changed, your property may have. Deferred maintenance could have reduced its value, while improvements may have increased it. Lawsuits or other problems may have popped up that affect the title.

And when you think about it for a moment, you’ll realize that all those loans that were made so easily in the past — with simply a few keystrokes — are what helped lead to the economic mess we’re in today. Yes, the pendulum may have swung too far and made refinancing unnecessarily tough, but the old easy lending standards were simply unsustainable.

Liz Weston is the author of “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via asklizweston.com. Distributed by No More Red Inc.