Money Management Q&A

February 15, 2008

To boost your credit, try this tool; The drawbacks of installment sales; Are bond ETFs cheaper than funds? When taking more risk makes the most sense; How the tax law treats rental condos; The wrong time to buy closed-end shares; When you can't rely on a divorce decree; When water damage is a casualty loss

To boost your credit, try this tool

I applied for a car loan and was told that my credit score is too low to qualify me for the best rate, so I'd like to try to improve it. How can I find out whether closing old accounts or making other changes would help?

TransUnion has a free credit score simulator on its affiliated website, http://www.truecredit.com (click on Learn, then on Credit Score Simulator), that lets you play around with the variables to see how certain changes would affect your score. Fair Isaac, the company that invented the FICO score, also offers a simulator as part of FICO Deluxe ($47.85 for a one-time purchase or $42.84 annually), which includes credit scores and reports from all three major national credit bureaus. Keep in mind that the law entitles you to a free copy of each of those three reports (excluding credit scores) annually from http://www.annualcreditreport.com.

In your Feb. 1 issue, you mentioned that an installment sale is one way to postpone some of the tax on a real estate gain. I like that idea, but what are the potential downsides?

Since a portion of your profit remains locked up in the property until the buyer pays the last installment, the resulting loss of liquidity limits your options. So you'll want to make sure there's no chance that you'll need the proceeds sooner. You may also face an "opportunity cost" if you later learn that you could have earned more by skipping the installment sale, paying the 15 percent tax on your gain, and reinvesting the remainder in another property. An installment sale also involves potential hassles. If the buyer gets behind on his payments or defaults on the purchase, for instance, you'll either have to hound him yourself or hire an attorney to collect your money or reclaim the property. Finally, if the law changes before an installment sale is completed and the tax rate rises, you'll end up paying more tax than expected on a portion of your profit.

Are bond ETFs cheaper than funds?

Last year I sold shares of the Vanguard High-Yield Corporate Fund and reinvested the cash in Vanguard Total Bond Market Index Fund, which has an expense ratio of 0.20 percent. Now Vanguard is offering ETF shares for the latter fund, and those have an even lower expense ratio. Since minimizing expenses is a key way to boost fund returns, should I switch to the ETFs?

Probably not. If you tend to trade fixed-income investments rather than hold them long term, you'll likely increase your costs rather than reduce them by switching to the ETFs. The difference in the expense ratios between your current fund and the new ETFs is just 0.09 percentage points, and the brokerage commission you'd pay each time you buy or sell ETF shares could easily wipe out any savings the lower expense ratio would garner.

When taking more risk makes the most sense

I'm 30 and just starting to set aside money for retirement and other long-term goals. My father, who has a lot of investing experience, says I should buy mutual funds that invest in value and large-company stocks, the kinds that have done well for him. Does that strategy make sense for me, too?