One of our readers, Ben, sent us these questions:

I have a credit card account with a credit line of 20K that I opened with a 0% balance transfer for 15 months. I just paid off the card with another balance transfer offer with similar terms and will be paying off the loan by the time the 0% interest ends. I have an excellent credit and have a couple of other credit cards with no preset spending limit that I use regularly but never carry a balance.
My questions:

1.) Should I close my first balance transfer account which now has no balance?
2.) Should I close my second account once the balance has been paid off?
3.) I have a couple of Visa/MasterCard type of charge cards that have very small credit lines and do not intend on ever using them. Should I close them out?
4.) I have several store cards that I opened only to take advantage of their initial purchase discounts (i.e. JC Penney, Old Navy, etc.) and do not typically use them–I want to close the accounts so I can take advantage of discounts by opening new accounts after 6 months if I choose to. Should I close out the accounts?

Thank you in advance for your reply.
Ben

Thanks for your questions Ben!

Honestly, I would not close out any of your accounts until that balance transfer is paid down. However, since your credit is so good, you can probably get away with it to a point.

The basic rule for closing out accounts is to close out the youngest accounts with the lowest limits first.

Try temporarily picking up a credit monitoring service. I really like True Credit for this. You should monitor all three of your credit reports and scores. This way you can see exactly how closing each account affects your score, and you can be sure that the closed accounts get reported correctly to all three bureaus the following month.

Once you are monitoring your reports, close out those store cards first. I would close out at most one account per month, and only as long as your score doesn’t start falling.

When you start getting into accounts with larger balances I would only close out one every three to four months.

Unfortunately, nether FICO nor the three credit bureaus are willing to reveal exactly what’s in the secret sauce that makes up your credit score – so the best we can do is make an educated guess.

That is why I say you should monitor your scores. If you close out your first two to three store accounts and see no drop in your scores, then move on to the low-limit Visa and MasterCards. If you see a small drop after that, I would wait three to six months before closing anything else out.

There are two exceptions to this advice:

If you have a card with a high annual fee, and you want to avoid paying it, then close it out first, wait several months, and then start closing the other accounts out.

Also, I am assuming that you are not carrying revolving debt on any of these accounts (other than your new balance transfer.)

Whatever you do, make sure that the total amount you owe on that balance transfer does not equal more than about 25% to 30% of the total amount you are able to borrow on all your cards.

Otherwise, you will see your score drop considerably because you will appear to be using far more of your available credit than you were before you closed your accounts out.

Regardless, leave the card you initially transferred the $20k to open. That should let you close out most of those smaller accounts without a problem. Honestly, I would probably keep both of those balance transfer accounts open even after you pay the full balance. At the very least, make closing them your final step.

I say this because there is occasionally a snafu with cards that have no pre-set limit. Some companies report the amount you charge each month as the limit, so those cards could look maxed out no matter what your balance is. If you keep the two balance transfer accounts open then you will not appear to be using too much of your available credit each month.

Basically, just take your time. Getting in too much of a hurry to close out these accounts is what will make your score drop. One or two low-limit accounts every three to six months is the safest way to do it.

Hope this helps! Thanks again for your questions.
Jenna

Have a question for us? Leave a comment below!

One of our readers, Christine, sent us this question:

I have a FICO score of 824. I have credit card debt totaling $27,000. I would like to get a personal loan for $30,000(I found a good offer with a low rate and no pre payment penalties) and pay it all off. I would not get rid of my cards but I wouldn’t use them either. Will paying these off hurt my score?

Thank you for your question Christine!

Paying off your cards will never hurt your credit score. In fact, it is probably the best thing you can do as far as your scores are concerned.

I am a little worried that the first month you do this you may see your score drop for this reason: You took out the personal loan, and then paid your cards off. However in any given month your credit card companies will report the amount charged on your card for that month – even though you paid it off.

So, it will look like you took out the personal loan, and had a balance on your cards, but only for that first month.

I would say that after the first month, you can expect your score to go right back up. Since you have such excellent credit I doubt that even having both types of loans show up that first month will really hurt you. Credit bureaus and lenders are not nearly as skittish about people with excellent credit borrowing more money!

Getting the personal loan is a great idea because you will only have to make one payment, have one interest rate to deal with, and one bill to focus on paying off.

How exactly will it affect your credit?

The credit bureaus like to see that you are using less than 30% of the total amount you have available to borrow. In fact, the lower that number, the better. So, when you pay all of your cards off your score will go up. As long as you do not continue to charge on your credit cards, then you should not have any ill effects.

You are very, very smart not to close the paid off credit card accounts out. Closing those old accounts out would cause your score to plummet. It would actually look like you were approaching 100% of your borrowing capacity instead of well under 30% so just be careful. If you do find that you need to close any of those accounts while you are still paying off your personal loan, try to only close out the newest accounts, or the ones with the lowest limits.

I wish that I could tell you for certain how this will affect your score, but I can’t. FICO only gives general breakdowns and outlines for the way scores are computed – not specific numbers (i.e. doing this will drop your score this many points) So. If I were you I would monitor all three of my credit reports and scores for a couple of months, just to be on the safe side. The best deal that I have found is through TrueCredit. Right now it’s $14.95 a month for all three credit reports and scores. I use it, and I’ve been very happy with it.

I would say, that as a worst case scenario, just don’t plan to open any other new accounts, close any old accounts, etc. for about 6 months. If your score does take a small initial hit, then it will definitely recover in that period of time because you will no longer be carrying revolving balances.

Thanks again for your question, and good luck!
Jenna

Wow, there we a ton of incredible posts in the financial arena this week, it was really hard to decide who to include!

Here are some of my favorites:

• Mrs. Micah wonders How Foreigners Get Credit in the United States? This is a really good question. It’s one I may even have to explore myself in the future!
• The Dough Roller has a magic recipe for Turning Gift Cards Into Cash. I could have used this one last Christmas when I was swimming in cards for restaurants I never go to. If you have gift cards from Christmas that are about to expire or have their balance reduced, then be sure to check this one out.
• Brip Blap tells us to forget about work / life balance because it isn’t going to happen. I have to admit, I agree. He offers a unique solution though, so it’s worth a read.
• Over at Get Rich Slowly J.D. Roth gives us the lowdown Dirty Secrets of Debt Reduction. He fearlessly flies in the face of the common financial advice that instructs us to pay down our high interest debt first.
• Trent over at The Simple Dollar gives us a list of 100 Things to Do During A Money Free Weekend. This is a neat concept, and I’m going to try it out with my family next weekend. As long as it doesn’t kill them, it may become a regular thing!
• MoneyNing gives us 7 Reasons Why We Need to Start Budget Tracking Now. Tracking your budget is like investing in the stock market. The best time to do it was yesterday. The second best time is today. It’s hard to break the debt cycle if you ignore where your money is going. Trust me on that one! My budget was one of the first places I started when I finally decided to get control of my money.
• Money Under 30 gives us Five Reasons to Apply for a Business Credit Card as an Individual Consumer. Hmm…you know I’m not sure I agree with this article, but I did list it here because I know some of you have had questions about it, and they make some valid points.
• Student Scrooge extolls the Benefits of an Online Savings Account. This one I absolutely agree with. I use an online savings account and my interest rate is three points higher than all of my friends and family’s rates at their normal banks.

That’s it for this week’s Best of the Web Roundup. Here’s wishing you blue skies and cheaper gas! See you on Monday

This question was sent in by one of our readers, Jean Gallagher:

I recently had to take out a $15 k loan ($500 a month payments), for attorney fees and to get my daughter a car. My air conditioner / condensor unit went out and I had to finance $6200 to get it replaced. My husband and I both had surgery done so we are drowning in medical bills. My mortgage is $1000 a month (this includes escrow).

Both our income combined is $2500. I have a $2500 cc that is maxed out, a $3000 limit on a credit card that is cut up and thrown away (as instructed by Wells Fargo to do). I just got another credit card in the mail from the company I bought my air conditioner / consdensor from because my credit is very good (according to them). We are are living like spartans now because we can’t make ends meet and this $7500 credit card looks pretty enticing as far as my doctor bills are concerned.

I am in debt but don’t want to create anymore….how do I take care of all out outstanding doctor bills with out having to use the $7500 credit card? Should I transfer the balance of the $2500 credit card to the $7500; cut up the $2500 one but keep it active and then pay my past due bills on what’s left of the $7500.00? Help!!
Thank you
Jean Gallagher

Thanks for your question Jean!

If it were me (and this is what I would really do – but understand that I am not a financial adviser.)
I would take the $7500 card, balance transfer the $2,500 card to it if you can. Then I would use the $2,500 card to absorb some of your medical bills. There are several important things to remember though:

1) You would be balance transferring your card because it will lower your debt ratio back down to around 30 percent (as far as your credit cards are concerned.)

2) I would make sure that I did not go over 30% of the 2,500 card either. Once you start putting medical bills on it.

3) Go ahead and start an emergency fund. Even if you can only put in $20 every time you get paid, it will still be there when you need it.

4) If your $3,000 card is only cut up and not maxed out, you could consider re-ordering the card and using it for your medical bills as well.

Now, if I understand correctly you guys are making about $30,000 a year and you are $23,700 in debt before your mortgage and your medical bills.

Were I in your shoes (and I have been very close) I would also do the following things:

• Contact the hospitals and doctors you owe money to. See if there is any program you can get into to reduce the bills based off of your income. I believe that $30,000 is right around the cut-off, so you will probably qualify. Especially since you have a child. This could cut your debt considerably.
• Make sure your daughter is the new owner of that car payment. Even if she is making the payment to you each month. If she is old enough to drive, then she is old enough to pay for the car and insurance, at least in part. Trust me when I say you are not doing her any favors by giving these things to her. My parents did this for me. Instead of appreciating it, I abused it, and I never learned how necessary it was to keep a job to pay your bills until I got in trouble.

  Now, I doubt your daughter is like me. However, the time you have remaining with her in your home is limited. Don’t be afraid to talk to her about your financial situation, and why it is necessary for her to work. This will be a far greater gift than the car ever was. It would be an excellent time to talk to her about credit cards too, before she has credit card companies giving away free iPods and T-shirts on her college campus in return for applying for a credit card.

• Pay down as much of your credit card balances as you can each month. Start with the one that has the highest interest rate first, even if it is not the lowest balance. This will save you money over the years it may take you to pay the cards off.
• Make sure you do not charge anything on those cards but your medical bills, and only after you try to get them lowered.
• Try looking for ways to increase your income. If you enjoy writing, try heading over to Freelance Writing Gigs They put up lists of on-line writing jobs early each morning. This is something you could do from home, no matter what your medical condition may be. You or your husband could also consider having one of you take on part time employment at a job close to you.

It will be a struggle to pay this debt down, but if you are determined enough, you will be able to do it. You also sound like you have an excellent credit rating. Unless you are forced to go delinquent, I would not work with a credit counseling agency, or consider bankruptcy. In fact, you would probably do better to simply have a free consultation with an accredited financial advisor or an accountant. Get your paperwork together, and take it with you. I know that you will be able to work out a budget that will get everything re-paid on time! I would avoid taking out new loans to pay everything back – with the exception of the new credit card.

7 Tips for Raising Your Credit Score:

1. Pay your bills on time – every time.
   This is the all-important key to a good credit score. It matters more than just about everything else combined. Make sure that you pay not only your credit cards on time, but your mortgage, car payments and even utility bills. Otherwise you can run into what is called “Universal Default”. That basically means that because you were late paying your electric bill, your credit card company can raise your interest rate. Shady, I know. Not all credit card companies practice Universal Default, but enough do that you will want to be careful of it.
2. Dispute inaccurate information on your credit report.
   This one is probably a no-brainer, but you would be surprised how many people do not do it. It has been estimated that up to 40 percent of people have bad information on their credit reports. That bad info could cost you a loan, or raise your interest rates – and you don’t even know it’s there!
3. Monitor your credit report regularly – at least once a year.
   This goes along with step number two. If you are checking your credit reports from all three bureaus regularly, then you will be able to spot mistakes when they happen. It will also help protect you from identity theft because you will notice any suspicious accounts on your reports. You can get a free copy of all three credit reports here.
4. Don’t close old accounts, even if you no longer use them.
   There are some exceptions to this, we’ve talked about that before. As long as you are not paying outrageous yearly fees on a credit card, then it’s probably best to leave the account open, even if you no longer use the card.
5. Don’t try to open too many new accounts at once.
   Each inquiry on your credit report can lower your score as much as twelve points. There are two exceptions to this: Pulling your own report does not count against you, and shopping for a home or car loan with different companies will not lower it much either – as long as all the inquiries are within the same 30 day period.
6. Never charge more than 30% of your available credit on any of your cards.
   This is a big one. Charging up all your cards looks very bad to prospective lenders. Your average balance, and the maximum you have ever charged on the card get reported to the three credit bureaus. So, to really protect your credit, keep those balances low – Under 30 percent. Under 10% is even better! It is best to never carry a revolving balance.
7. If your credit score is low, consider getting a secured credit card.
   Secured cards are not just for people with judgments or bankruptcies. If your credit score is on the low side because of late payments, secured cards could probably benefit you. For one thing, they typically have low interest rates, and many have low yearly fees. They are the only cards where you are in control of your credit limit because you can send a deposit in any time you need to raise it. You can raise your credit score pretty quickly if you use them correctly.

No matter where your credit score is right now, if you apply these seven steps regularly, then you will see it go up, sometimes in a matter of months!

One of our readers, Steve Crowder, sent us this question:

I work in the credit card business and I have read your information on how the FICO score is computed. Good information but too bad that more people don’t get it. There are many credit counselors out there telling people to close out most, if not all, of their credit cards to protect their credit? I am seeing people closing out multiple accounts with wonderful credit histories that go back several years. It would seem that most of these so called credit experts are actually handing out advice that is directly counter to your information and can harm their believers. Is there any entity that monitors or certifies these credit counseling services?

Thanks for your question Steve! As it turns out, yes there are.

Here’s the lowdown:

There are a several organizations that require credit counseling services to go through an independent certification in order to join. The two main ones are the National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA).

The National Foundation for Credit Counseling requires that all prospective credit counseling agencies follow all the laws in the area they work in, conform to the NFCC’s own member quality standards, and then they have to be certified by the Council on Accreditation, an independent organization.

The Association of Independent Consumer Credit Counseling Agencies (AICCCA) also requires independent accreditation, and they too, have their own set of guidelines.

So, if you are trying find out if a credit counseling service is legitimate, then look for these clues:

They should be non-profit and they should belong to either the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA).

They should also be independently verified by at least one of the following two agencies, if not both:

The Council on Accreditation (COA), or the International Standards Organization (ISO).

You can search for agencies listed with the NFCC here, and agencies listed with the AICCCA here. You should also do a thorough check with the Better Business Bureau before you make your final decision.

If you would like to find out more about how to choose a credit counseling service, you can keep on reading right here.

Have a question for us? Leave a comment below!

My kids have been playing Wii the whole weekend. So it’s now time to bring them to the park. So this will be short and sweet. Here are some carnivals that I participated in. There are some very good posts so please check them out.

Carnivals I participated in

Carnival of Financial Planning

Carnival of Money Stories #67

Carnival of Personal Finance - Best Financial Advice Edition

Carnival of Debt Reduction #147

Carnival of Everything Finance #19

Carnival or Personal Finance - American Flag Edition

Carnival of 20 something finance - Brazilian Carnival Edition

Carnival of Credit Report Stories

One of our readers, Heather sent us a question.

The collection company she believed she had already paid off has sold her debt to another collections company, and she is being taken to court over the total amount of the debt she previously owed. You can see Heather’s full question in the comments section here.

Dear Heather,

Thank you for your question. This is a terrible thing to have to go through.

Here’s the thing: you have taken the right steps – you’ve sent certified letters, you kept records of everyone you spoke to, you saved your payment receipts. You are going to have to go the extra, final mile to finally get this settled.

Get your papers in order, but do not send them off to the county court just yet. If you want to have any chance at having this resolved in your favor you are going to have to get a lawyer, and go to court on your assigned date. Do not make the mistake of assuming you can send the papers and have it resolved virtually. You will most likely end up with a judgment and a wage garnishment if you do it that way. Not showing up is as good as an agreement that they are right and you are wrong.

Given the amount of supporting paperwork you have I would imagine that you have a fairly strong case in the hands of a professional. Hiring a lawyer may be expensive, but it is really the only way to ensure that you don’t have to continue paying on a debt that you have already paid off.

So, once you have your papers in order, let’s take a quick look at how you would begin the process of finding a lawyer:

1. Research and contact a lawyer in the area you will have to go to court in, or one who is willing to travel (if you have to). Make sure that it is someone who has handled your type of case before. If you can find someone who specializes in it, even better.
2. Look for a lawyer who offers a free consultation. There is no sense in paying for something if you do not have to. When you sit down with them, bring your paperwork. Make sure they know that you have payment records, but not a settlement agreement, or a debt discharge letter.
3. You will need to be able to give them the history of the debt, from the first company to the last. They will need phone numbers, addresses, etc.
4. Make sure they are willing to make payment arrangements with you. Any good lawyer will do this. If they do not, move on.
5. Ask them if there is anything else you can do prior to the court date to help resolve the issue.

I know the last thing you want to do is incur even more expense because of a debt you have already nearly killed yourself paying off. But if you do not, it will follow you. They will garnish your wages, the judgment will show up on your credit report for many years, and you will not be able to get a decent line of credit for a very long time. By jumping through the last final hoop, you will save yourself a lot of grief in the long run. Even if you think your credit is bad now, it will be damaged even further by this new company if you do not meet them face-on.

Trust me when I say, when you leave that lawyer’s office the weight of the world will come off your shoulders. You will have an expert who can tell you what to do every step of the way. Once it is finished, you can begin the process of rebuilding your credit and in a few years, you will be back on top.

As a final note, once this is settled, be sure to wait a few months and get a free copy of your credit reports. You will need to do this so that you can be sure the new company is no longer reporting the debt to the credit bureaus. If it were me, I would take a copy of whatever the court decides and challenge any negative information from the new collection company that may already be on your report. That should help raise your score a bit and get you back on track.

I wish you all the best as you handle this matter. It is horrible, but as long as you take the necessary steps, it will be over soon and you can finally move on!

Thanks,
Jenna

Have a question for us? Leave a comment below!

One of our readers, Andy L. sent us this question:

My aunt has an outstanding doctor bill that is past due. The account for this bill is in her name only. Without my approval, she told the office manager at the doctor’s office to start sending me the bill for payment. I have not made any payments, and have not signed any agreements to pay this bill, even though the bills are now being sent to my address. The bill is now past due and will be sent to a collection agency, since it is delinquent. Will non-payment of this bill affect my fico score? If so, what do I need to do to clear this up?

Dear Andy,

Thanks for your question! First, I am going to have you go get the most recent bill you received on her behalf. Is it in your name? Or is it in her name and being mailed to you?

If the bill is in her name, but being mailed to you then it most likely will not show up on your credit report if it goes further delinquent. From your question, it looks like this is the case.

If the bill has been transferred to your name, then you have a problem. As long as that bill is in her name, it should only affect her credit score, even if it comes to your address. However, if the bill is actually addressed to you and has your name on it, then yes, it will affect your credit if it goes past due.

Here are some steps you can take to help protect your credit score from someone else’s debt:

1. Call the doctor’s office and speak to their billing department. Explain to them that you did not authorize this debt, that your aunt does not live with you, and that you have no intention of paying someone else’s bill. Ask that they remove your address from their records. If you can do this before it goes to collections, then you can avoid collection calls at your address once they do sell the debt.
2. Temporarily purchase a credit monitoring service. I highly recommend Transunion’s credit monitoring service, True Credit. I use it myself, and I really like it. It will cost you around $15 a month to monitor your credit report at all three credit bureaus. You do not need to purchase your credit score, just your credit reports. Keep an eye on your reports for the next two to three months. That will be long enough to be sure that her debt is not showing up on your credit reports. You will need to monitor all three of your credit reports because not all collections companies report to all three credit bureaus.
3. If you begin getting phone calls from collections companies asking for your aunt, do not hang up on them, they will not go away. Your best bet is to tell them exactly what you told the doctor’s office. This is not your debt, you are disputing it. Make sure they know your aunt does not live with you. If possible, give them her information instead. You may have to tell them this up to three times before they will quit contacting you.
4. Alternatively, if you do not wish to spend a lot of money monitoring your credit, simply wait about 3 months to be sure the doctor’s office has sold her debt, and then request a free copy of all three of your credit reports. You only get one free credit report from each bureau per year so you will want to wait long enough to be sure that the debt is showing up.

It is a difficult situation any time you have a family member who is avoiding their debt. I wish you the best of luck as you get everything worked out. Please come back and let us know how it goes?

Thanks,
Jenna

Have a question for us? Leave a comment below!

Well, it’s July. And you know what that means? It’s all downhill to Christmas from here!

Since major retail stores feel it’s appropriate to begin celebrating Christmas in July, I thought we could have a quick conversation about some of the common store credit offers, and what they could mean to your credit score.

From here on out, you can expect to be deluged with 90 days same as cash, zero money down, “Save 40% if you apply today!” offers.

So, they’ve got you there, at the checkout, already worrying about how you are going to pay for all these expensive gifts, when they spring it on you: Just fill out a quick application and you can save as much as 40 percent on your total purchase!

“Yes! “ You think,” I’d love to save 40% today! That sounds great.”

Well, if you fill out that application, several things are going to happen:

1. You get an inquiry on your credit report. In some cases, this alone can lower your score up to 12 points.
2. You get rejected for the card because you don’t know your credit score, and whoops, now you have an inquiry and a rejection.
3. Or, you get approved! You save 40 percent, and eat the inquiry cost to your credit report. You are now the proud owner of a credit card with a 24% interest rate!

So, before we gear up for the spending season, let’s take a little bit of evasive action:

• Pay down or pay off a Visa or MasterCard with a reasonable interest rate.
• Set an amount you are comfortable charging. Hopefully it will be an amount that you can pay off within the first month, or no later than the second.
• Designate that card for your Christmas expenses.
• If possible, make it a cash back card so that you at least get some reward for charging.
• If you do plan to apply for store credit, pick your stores carefully. Don’t just jump on that spur-of-the-moment offer. Make sure that opening that retail account is what you really want to do.

  Most of all, remember that before you apply for any sort of credit, it never hurts to get a copy of your credit report, and check your credit score.

  What about you? Do you think it’s too early to start thinking about Christmas? How do handle your Holiday budget? Do you ever regret what you charge, or do you have it well in hand? You can give us your opinion below.