DEAR MARY: My sister believes that it is in her best interest to never pay off her mortgage. She is convinced that if someone sues her or her husband (they have a small business), the house, as an asset, could be taken. Please give me a compelling argument against this belief. I don't want her to feel like she has to stay trapped in debt because of this. — SUSAN MISSOURI
DEAR SUSAN: I've heard of lots of reasons to keep a mortgage, but this is a new one for me.
You could answer this using a calculator. Determine the amount of interest she pays every year on her mortgage. Get a quote for, say, a $2 million umbrella liability insurance policy (or more, according to her level of concern). Compare the annual interest with the annual premium.
Since the insurance is really cheap, I think you can show her that carrying a mortgage is about the most expensive kind of "insurance" she could hope to buy. And even then, it doesn't mean that a creditor couldn't take that asset if it prevailed in a lawsuit, even with a mortgage.
There are other ways that she could potentially protect the home, through trusts, changing the way title is held and other kinds of financial planning tools. Your sis is someone who could benefit from a professional planner.
DEAR MARY: I understand the rationale for lowering a person's credit rating if they take on more debt, such as a new credit card, but I don't understand why the rating is lowered if you close an account with no balance. — MARGO, EMAIL
DEAR MARGO: Your credit score is not so concerned with how much you owe or even how debt-free you are, but rather your credit utilization ratio — how much of your available credit you are using at any given moment.
If you close an account with, say, a credit limit of $5,000 and a $0 balance, suddenly you have reduced your available credit by $5,000. If your other accounts are close to being maxed out, your utilization ratio is going to skyrocket, and your score will sink. If, on the other hand, you have other accounts on which you carry little, if any, debt, your score is not likely to flinch. It's all about ratio.
Here is the rule of thumb: Keep your credit utilization at 30 percent or less. This applies to your total available credit, as well as the individual accounts. Even maxing out a credit card for a onetime purchase that you plan to pay off immediately means your credit score will take a big hit because your credit utilization ratio on that account was nearly 100 percent.
Closing one account may or may not affect your credit score. It all depends on your other available credit and how you are using it.
Do you have a question for Mary? Email her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.
