Coupling Your Credit

My wife and I have kept our finances separate since we married two years ago. Now that we have applied jointly for a mortgage, I have discovered that her credit score is about 100 points lower than mine. How do lenders assess a couple's creditworthiness when they have disparate credit scores? Will it affect our interest rate? -- M.S., Washington, D.C.

It could make a big difference. Lenders collect credit scores for both spouses from the three credit bureaus, then focus on the median score for each spouse. The lower of those two scores usually determines the rate and terms of the loan, says Brad Sherman, a loan officer with Nationwide Mortgage Services, in Rockville, Md. If your wife's FICO credit score falls below 620, for example, then you'll have a tough time qualifying for a mortgage at all -- even if your score is much higher, says Sherman. To qualify for the best interest rate, both of your median scores should be at least 740. The lower the score, the higher the interest rate you will pay and the bigger down payment you will need.

If you put 20% down and the lower of the two median FICO scores was 660, Fannie Mae, which guarantees mortgages, would require a one-time pricing hit of 2.5 points, says Randy Johnson, of Credit.com. "That's $7,500 on a $300,000 loan," Johnson adds. Depending on her score, making a larger down payment could help qualify for a lower rate.

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If your wife's score sends you below a key cut-off point, it may be worthwhile to try to qualify for the loan based solely on your income (joint assets can still count when applying for the loan in your own name, as long as both of you will be on the title). "If their scores are too far apart, then it doesn't make sense to apply jointly," says John Ulzheimer, of Credit.com.

If you decide to take out the loan together, don't worry about a joint mortgage dragging down your credit score -- as long as you make your payments on time. "There is no crossover of bad credit history from one individual to another," says Maxine Sweet, of credit bureau Experian. "Each person has his or her own credit report."

All-in-one fund

I am looking for a single index fund that would provide broad diversification for my Roth IRA. Is there such a fund? -- Michael Jones,Rochester, N.Y.

It's great that you recognize the importance of diversification, but you've given yourself -- not to mention us -- a tough assignment. Ideally, you want a fund that invests in both foreign and domestic stocks and bonds. There are plenty of actively managed funds that fit the bill. Unfortunately, nearly all of the best choices levy sales charges.

BlackRock Global Allocation A (symbol MDLOX) is one to consider, especially if you can get it without the load (for more, see BlackRock Funds Worth a Look).

If you still want to go the index-fund route, you'll have to use several funds to build your portfolio. Let's say you want a portfolio that's two-thirds in stocks and one-third in bonds, and that's two-thirds domestic and one-third foreign within each asset class. You could allocate two-thirds of your assets to Vanguard Balanced Index (VBINX), which will give you exposure to U.S. stocks and bonds. Invest 16.7% of your assets in Vanguard FTSE All-World ex-US Index (VFWIX), which covers foreign stocks. We know of no foreign-bond index funds, so you'll have to use an actively managed fund to cover that terrain. Invest the rest of your money in Pimco Global Bond (Unhedged) D (PGBDX).

You can also use exchange-traded funds to achieve a well-diversified portfolio of stocks and bonds. In that case, you would place two-thirds of your money in Vanguard Total World Stock ETF (VT). That gives you a foothold in U.S. and foreign stocks. (Note that only 40% of this ETF's assets are in U.S. stocks, a figure in line with the U.S. market's share of global stock-market capitalization.) Invest one-sixth of the portfolio in a domestic bond ETF, such as iShares Barclays Aggregate Bond (AGG), and the rest in SPDR Barclays Capital International Treasury Bond (BWX), which invests mostly in government bonds in developed markets.

Spousal IRAs

I recently retired, but my wife continues to work. Can I contribute to a Roth IRA? -- M.C., Newton, Mass.

Although there is no age limit for contributing to a Roth IRA, you generally need earned income from a job to qualify. Pensions and other forms of retirement income, such as Social Security benefits, don't count. But because your wife still works, she can contribute to a spousal IRA on your behalf. Spousal IRAs can benefit nonworking spouses in a variety of situations -- when the spouse is retired, a stay-at-home parent or temporarily unemployed.

This means your wife can contribute up to $5,000 to an IRA for her and $5,000 to one for you (up to $6,000 if you're 50 or older), assuming she earned at least as much as the combined IRA contributions. She has until April 18, 2011, to contribute to IRAs for 2010.

Roth IRA contributions are subject to income-eligibility limits. You can contribute to a Roth as long as your joint income doesn't exceed $177,000 in 2010. For individuals, the Roth income-eligibility limits top out at $120,000 in 2010.

Expiring education tax break

My ex-wife recently received sole custody of our son. My divorce decree states that I must pay one-half of his college tuition. My question: Can I claim the American Opportunity Credit for my portion of my son's college tuition on my 2010 tax return? -- Richard Hodnicky, Cliffwood Beach, N.J.

It depends on who claims your son as a dependent for tax purposes. If you do, then you may be able to take advantage of the American Opportunity Credit, which applies to undergraduate tuition and qualified expenses (including fees, books and related course materials).

To qualify for the full $2,500 credit, you must have paid at least $4,000 in qualified expenses during 2010, and your adjusted gross income as a single filer must be $80,000 or less. The tax credit, which reduces your tax bill dollar-for-dollar, phases out entirely if you earn more than $90,000.

But if your former wife claims your son as her dependent, any money you paid directly to the college under a court-ordered divorce decree is treated as if the payment was made by your son. That means if your ex-wife claims your son as a dependent on her tax return, then she may be able to count your payments toward her American Opportunity Credit, says John W. Roth, senior tax analyst with CCH, a tax-publishing company.

The American Opportunity Credit is scheduled to expire at the end of 2010. If you are eligible and haven't spent enough to qualify for the full credit, you may prepay expenses for the spring 2011 semester up to December 31, 2010.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.