Credit
“I received a letter about my APR going up from 14.72% to 18.99% on my credit card, and was given the option to ‘opt out’ of the rate increase. I understand that by opting out, the APR will remain the same until the card expiration date, and then at that time the account will close. I seldom use the card, and have been paying down the balance on a monthly basis with a bit over the minimum payment. Does closing an account at a ‘customer’s request’ hurt a credit score? Currently, my credit score is 775, and I don’t want to do anything to hurt that.”
-Kerry, New Jersey
Your credit score is partially calculated using something called your debt-to-credit ratio (also known as your utilization ratio) – it accounts for about a third of your credit score. When you close an account, you lower the amount of credit you have available to you. That will generally lower your credit score — the question is by how much. Your ratio works to your best advantage when you’re using only 1/3 or less of your available credit.
So, to answer your question, think of your available credit as a pie. Is this card a big slice of the credit you have available, or is it a small, “I’ll pass on the whipped cream” sliver? For example, if you have $10,000 in available credit, and this card equals $8,000 of that, that’s a big piece of pie – you may want to re-think letting that account close. But if it’s only a small piece of your available credit, it may be worthwhile to pay off the card at the lower rate by the time it expires, and take the inevitable (but small) hit on your score. More…
My husband has a couple of credit cards that have high limits but no balances. We are considering added my name to those accounts in an effort to improve my debt ratio and credit score. Is this a good idea?
- Traci, Alaska
Whether or not adding your name to your husband’s accounts will improve your credit score depends on a couple of factors. “If the account is new, or young then your score could go down,” says Credit.com’s John Ulzheimer. He adds that if the accounts become overly utilized, it could ding your score as well. However, if your husband’s accounts are well established and you don’t foresee over-utilization being an issue, by all means, add yourself as an authorized user. Here’s why doing so can give your credit score a boost:
It can lower your utilization ratio. When you sign on to your husband’s accounts, it will affect something know as your aggregate revolving utilization ratio, which in turn affects your credit score. Revolving utilization is the amount of your revolving credit limits that you’re currently using. Revolving accounts are those where your monthly payment is based More…
I received a letter from my credit card issuer today stating that since I had not used my card for “an extended period of time” that they permanently closed my account. My goal in not using my cards was to improve my credit score. My question is since the issuer was the one that closed the account, will it reflect negatively on my credit report?
-Lori, New Jersey
It seems logical right? Don’t use your card, you won’t have a balance and you won’t have to worry about paying it off. Unfortunately however, that’s not the case. “Card issuers have been closing out millions of inactive accounts…they are doing this in order to limit their risk as they are facing mounting losses related to card members who are unable to make payments on their credit cards,” says CardRatings.com’s Curtis Arnold.
If you don’t use your credit card over about a six-month period, it may be considered inactive and your issuer may cancel your account. Unfortunately, this will impact your credit score. “Closing out an account that you haven’t used in a while on the surface may seem like a prudent thing to do, but doing so will likely adversely affect your credit score,” says Arnold.
The decreasing of your score has to do with a little something called your utilization ratio. More…
More and more Americans are being hit with increased credit card rates. What’s the best way to cope? Watch the video below to find out.
QUESTION: This morning on your segment, you said we as consumers can opt out of any new interest rate set by the credit card companies as long as we close the account and simply pay off the balance. This theory is correct on four out of five accounts of mine. One company told me there was no opt out options and I would HAVE to pay their new, higher percentage rate. Is this illegal on their part? What can I do?
-Brad, South Dakota
ANSWER: Thanks to new credit card reform laws, it’s becoming easier to opt out when you’re hit with a higher interest rate. However, the date in which the notice reflecting your change in terms was mailed will affect whether or not you’re able to opt out of the new interest rate you’re asking about.
If your notice was mailed before August 20th, 2009, then you may be out of luck. This is due to the fact that the portion of the Credit CARD Act of 2009 that outlined the rules for disclosure of contractual changes went into effect on that day. As the law stands now, your credit card company must give you at least 45 days notice in advance of any interest rate hikes. This wasn’t always so. More…
Interest rate hikes, increases in annual fees and higher balance transfer fees are just a few of the changes taking place in the world of credit cards. How can you protect yourself? Watch the video below to find out.
I have heard you mention credit counseling through the NFCC. There is an agency in my hometown. Can you tell me what kind of help they can give my husband and me? We have a large amount of credit card debt as well as equity line debt. We are paying our bills on time but can only pay minimums. Do they negotiate with the credit card companies on our behalf?
-Lisa, Alabama
Every year the NFCC assists over 3.2 million people who are struggling with their finances. For over 50 years, NFCC member agencies have offered free or low cost services (whether or not you’ll be charged for the help they provide depends on the member agency and the laws in your state) to those wanting to take control of their debt. The NFCC offers confidential help via phone (through their national toll-free hotline), online or in person.
Through credit counseling, the NFCC can help you to work towards paying more than the minimum amount on your bills. During a session, your counselor will address your credit issues and help you find ways to work towards solutions. “Adjusting the budget, decreasing spending and increasing income would be ways to find extra money to pay more than the minimum and get out of deep incredibly sooner,” says the NFCC’s Vice President of Communications Gail Cunningham.
If you’d like the NFCC to negotiate with creditors on your behalf, they can do that through a Debt Management Plan, or it’s commonly known, a DMP. A DMP is essentially a plan to help More…
A couple months ago I answered a question from Nancy in Texas who wondered what effects canceling a credit card would have on her credit score. In response, Jacque in Colorado asked the following:
“Is there an amount to overpay on a credit card that helps your credit score? For example is paying double the minimum due best or does any amount help?”
Answer: In short, no, overpaying on a credit card will not directly affect your credit score. “Paying the minimum or more than the minimum doesn’t have a direct impact on your scores because that level of detail is not reported to the credit bureaus,” says Credit.com’s John Ulzheimer.
What’s the best way to improve your credit score? Paying down your debt. “You can improve your scores by paying your debt down, which generally requires more than a minimum payment,” says Ulzheimer.
Aside from paying down your debt, there are other things you can do to pump up your score. Here are a few steps you can take to give it a boost:
Cut, don’t cancel. If you have a card that you rarely use, don’t cancel it. The longer your relationship with your lender the more beneficial it is to your score. If having the card in your possession is too much of a temptation, cut it up, don’t cancel it.
Be punctual. 35% of your credit score is based on our payment history and even one late payment can ding your credit score. One of the best ways to More…
I have a 17-year-old daughter that will be 18 in January 2010. What type of credit card should I get her to start building credit for her?
-Christine, New York
When teens and credit cards mix, the outcome can sometimes be disastrous. But, if handled correctly, credit cards can be a great tool for teaching your college-age kid the basics of financial management.
After your daughter turns 18 in January, she may want to hussle to get that first card. Otherwise, she will need a cosigner. When another piece of the new credit card legislation takes effect on February 22nd, any person under the age of 21 will be required to have a parent to co-sign on their credit card. “Mom needs to be sure she is comfortable with co-signing, which could affect her credit score if her daughter misses a payment,” says Karen Blumenthal, author of “The Wall Street Journal Guide to Starting Your Financial Life.” If your daughter can prove that she’s making enough money to handle having her own credit card, she may be able to side-step the need for a cosigner.
When you start shopping around for a credit card, let your daughter do the work. “It’s good practice for the student to research the options–the interest rate on charges, the interest rate on any cash advances, and the fees you’ll pay if you pay late or go over your credit limit. That way, the card holder knows exactly what the terms will be,” says Blumenthal.
As you probably know, the options for credit cards can be overwhelming. To make it easy on your daughter keep things simple. “I recommend a young person apply for a plain More…
I am curious about consumer credit counseling. Can you tell me how it affects your credit? Is it as bad as filing bankruptcy?
-Kelly, Oldsmar Florida
You’re right-using consumer credit counseling to manage your debts can potentially affect your credit score. What may surprise you, however, is the fact that when your score is calculated using the FICO scoring model, whether or not you’ve received counseling won’t affect your score. “Any notation on a consumer credit report indicating that the consumer is or has been involved in credit counseling is ignored by the FICO scoring model,” says CardRatings.com’s Curtis Arnold.
However, what you do with the advice you get from your consumer credit counselor is another matter. For example, if a counselor advises you to manage your debt or credit cards a certain way, and you follow through with that advice, it could potentially have a negative impact on your score.
One thing is for certain though; getting credit counseling will have much less of a negative impact on your credit than bankruptcy will. “The negative impact of credit counseling is fairly minimal, whereas a bankruptcy has HUGE negative implications. For example, according to Credit Counseling of Arkansas, your score can drop as much as 100 points if you file bankruptcy,” adds Arnold.
If you decide to move forward with credit counseling, a good way to start looking for help is through the National Foundation for Credit Counseling. The NFCC is a national, nonprofit network of counselors whose mission is to help you get out of debt. Through the NFCC, counseling is available by phone, online or More…
