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

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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

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, 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!

The average cost of monitoring all three credit reports and scores is $30 a month. ($360 a year). Now, with a hefty yearly cost like that, I have to wonder, are these companies really providing a service that valuable? Do I really need to know my credit score every month?

The answer to that is going to depend on your goals and your credit history. This is an excellent example of how past mistakes on your credit report can come back to bite you in the wallet. Now, I think most of us are automatically going to agree that this is a pretty poor way to spend $360 a year. However, there are certain circumstances where you absolutely should be paying for this service. In other words, under certain conditions, credit does win over finances.

Let’s take a quick look at when it would actually benefit you to pay for a credit monitoring service.

1) If you suspect your identity has been stolen, and you do not want to freeze your credit report - In this case, monitoring your credit reports for 3 to 6 months would be a wise idea because it will allow you to quickly see if anyone else is opening accounts in your name.

If my identity was stolen, I would freeze my report for 3 - 6 months. Then, after I un-froze it, I would place a fraud alert and purchase a monitoring service for an additional 3 - 6 months just to be on the safe side. In this case, you could probably skip purchasing your credit scores, and just view your reports. This would save some money.

2) If you are trying to repair your credit after a default, judgement, or bankruptcy - Purchasing a credit monitoring service is especially important after bankruptcy because you will need to be sure that companies whose debt was covered under the bankruptcy do not continue reporting negatively after your bankruptcy is discharged.

3) To make sure your “credit repair” credit cards are reporting properly to all three credit bureaus each month. Let’s face it, repairing your credit is an expensive proposition. Secured credit cards require money up front. Unsecured credit cards for people with bad credit often have high yearly fees, application fees, monthly fees, and even more fees when they raise your limit. Not to mention high interest rates if you dare to leave a revolving balance.

So, if you are going to all the trouble of paying for these types of things to repair your credit, then it makes sense to go the final mile and monitor your reports and scores. That is the only way to know whether or not your score is actually going up, and by how much.

One other thing - depending on how low your score was, it could take some time to raise it. Monitoring helps you track your progress, and pick your next course of action. Finally hit above 700? You can qualify for better deals, maybe even to refinance your high interest cards and loans. Above 720? Even more likely.

By paying to monitor your score regularly, you will prevent needless inquiries on your report. (Whoops, sorry, your score is 680 at Experian, not 700…Denied…) Monitoring will save time, and give you the confidence you need to go apply for better deals as you qualify for them.

For a breakdown of the different credit score categories, you can click here (It’s in the middle of the article.)

What do you think? Is using a credit monitoring service important for people with excellent credit too, or just those trying to repair their credit?

Have a question for us? Leave a comment below!

Today we have more opportunities than ever before to manage our finances and, if need be, consolidate our debt in order to pay it down. If you are feeling stretched by too many payments, or having trouble managing your various accounts, then debt consolidation can definitely be a smart financial move. The only question is, how will it affect your credit score?

Balance Transfers:

Who wouldn’t want to transfer the balances on several cards with various interest rates to one card with a low, or even 0% interest rate? Before you do this, just keep in mind the golden rule of balance transferring: Keep your accounts open. Closing your old accounts after you transfer the balance off of them can hurt your credit score.

Just like in part 1 of our series, closing those old accounts hurts you in two ways:

1) By lowering the overall amount credit you have available. (30% of your credit score)
2) By lowering the average age of your accounts. (15% of your credit score)

If you need to close those old accounts because they have high maintenance or yearly fees, then make sure you aren’t going to apply for a home or auto loan in the next six months to a year. Keep making on time payments to your new card, and your score will go back up.

Also, remember the second rule of balance transferring: Keep your old accounts open, but do not charge them back up. Unless you’d like to double up on your debt!

Debt Consolidation Companies:

Consolidating your debt through a debt management company does not necessarily hurt your credit score – but it can. It all depends on the company.

What happens when you make an agreement with a debt consolidation company:

Once you decide on a company and agree to a debt management plan, the company you have chosen will begin to negotiate with your creditors on your behalf. You will write a monthly check to your debt consolidation company, and they will disburse it to your creditors.
There will be a notation made on your credit report that you are repaying the loan through a debt management company. At this time, that notation does not hurt your credit score.

Here’s the problem:

Many credit card companies will not negotiate things like settlements or reduced interest rates until you are past due on their account. Unscrupulous debt management companies will allow your accounts to go past due for several months so that they can negotiate new terms with your creditors. This will hurt your credit score. The solution? Choose your debt consolidation company wisely. You can read more about how to do that here:

Have a question for us? Leave a comment below!

Question: Let’s say you have a credit card that you’ve had since your college days. It has a relatively high interest rate, and a whopper of an annual fee. Your credit has improved since then, and you are now eligible for far better offers. What do you do?

Financial Answer: The smart financial decision is to close the old, unused account, and then open up a new credit account with a better interest rate, and some decent rewards. This way you benefit from your improved credit rating instead of paying a high interest rate and yearly fees on a card you no longer want.

Zing! Yup - You guessed it, you just lowered your credit score…

Why closing that old account will lower your credit score:

Your credit score is based on several factors, and closing an old account affects two of them:

1. How long your accounts have been open - Closing that old, unwanted account is going to lower the average age of all your open credit accounts, and that will lower your score.

   Credit Score Rundown: The length of time your accounts have been open is 15% of your total score.

2. The total amount of money you have borrowed, vs. the amount of money you are capable of borrowing -

   When lenders consider your creditworthiness, they want to know how much you currently owe on everything - credit cards, mortgage, car payment, everything. Then they compare it to your total lines of credit. Basically, they want to see that you are not actually using more than 20% - 30% of all your available credit lines.

   If you close that old, paid off account, then you will appear to be using more of your total available credit than you were before you closed the account - especially if you are carrying revolving balances on any of your other credit accounts. This will lower your credit score.

   Credit Score Rundown: Available credit vs. used credit is 30% of your credit score.

So what do you do? You choose your own adventure!

Choose your Credit Score First:

If you are actively trying to raise your credit score, then leave the account open, make a small charge on the card every few months, and pay it off to avoid the high interest rate. Unfortunately, you will have to chalk the yearly fee up to the cost of raising your credit score.

Quick Tip: Call your credit card company. See if they can waive the annual fee, or reduce the interest rate. If your credit history with them is good, they may be more willing to help you than you think!

Choose Your Finances First:

If your goal is to streamline your accounts, and get rid of additional expenses like the high interest or yearly fees, then go ahead and close the account.

Quick Tip: If you are planning to apply for a new credit account any time soon then make sure you have the new card in hand before you close the old account - that way your credit score will be highest when you apply for your new card, and you can get the best deal possible.

Check back with us Monday for part two of our Finances vs. Credit series!

What’s your 2¢? Leave a Comment Below!

How do I get a free copy of my credit report from all three credit bureaus?

If you are going to apply for a credit card or a loan soon, then it is wise to check your credit reports before you apply. Even if you are not planning to apply for a credit card, it is good practice to check your credit report at least once a year to look for problems or false information.

There are three major credit bureaus: TransUnion, Equifax and Experian. Each bureau keeps it’s own records about your credit history. The information on your Transunion report could be very different from the information on your Experian report, so you need to check your full credit reports at each bureau if you want to see your whole credit history.

You are entitled to one free copy of your credit report each year. All three credit bureaus allow you to download and view your credit reports online. However, if you choose to do that you may be “encouraged” to sign up for a variety of credit monitoring services, which are not free.

You can start the process of viewing your credit reports by clicking on the links to each credit bureau below:

• TransUnion - View your credit report at TransUnion.
• Equafax - View your credit report at Equifax.
• Experian - View your credit report at Experian.

If you can afford to wait a week or two to see your credit reports, then you can print out this form. This is an official request form to get your credit reports from all three credit bureaus. One free form, all three credit reports - it doesn’t get any easier than that. Once you have filled out the form, it should be sent to this address:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, Georgia 30348-5281

I recently spoke to a friend who had poor credit score. He has credit card debt, student loan debt, a second mortgage (loan consolidation) and obviously a mortgage as well.

He was paying over 7% on his mortgage. This mortgage was taken out a few years ago and the remaining mortgage to home value (questionable) is about 60%.

Given that the Federal Reserve has lowered rates by 75 basis points, mortgage rates have fallen as well to below 6%. That applies to conforming mortgages (ie mortgages below $417,000) and not jumbo mortgages.

Well, my friend’s mortgage is definitely a conforming mortgage. He decided to refinance his existing mortgage because he was paying an above market interest rate. He applied to a couple of banks and guess what? He was turned down for them. What was the reason?

Very simple actually.

1. His credit scores were bad

2. He had too much debt.

3. His interest payment to income ratio is too high.

4. He even had incorrect “bad reports” on his credit report.

My friend was disappointed to say the least. If he had been able to refinance, he would save a couple of hundred dollars on interest payment and could use that to reduce his debt faster. But this episode was a wakeup call I guess. Here is his plan going forward :

1. Develop a plan to reduce his credit card and student loans in about a year.

2. Remove any incorrect negative reports on his credit reports.

3. Apply for a mortgage refinance at the end of the year.

I guess this is a clear example of the price of having poor credit - and that is it makes it even harder to improve your credit or reduce your debt faster. I’m glad he is now taking action and I’m sure at the end of this year, his situation will have improved.

Insurance companies also using credit scoring methods to determine the premiums you pay. It also turns out that the better your credit score, the more likely you will have to pay less premium that someone with a worse score.

In the year 2000, Metlife published a report that showed the loss ratio of insurance companies against various credit factors. The results reinforces the fact that those with better credit scores make better customers for insurance companies. Here is a sample of the findings :

Collection accounts, Derogatory public records, Late payments, Debt Utilization Ratio, Amounts Past Due were all factors that affected an insurance companies loss ratio. For example, those with no collection accounts had an average loss ratiio of 74.1% versus 97.5% for one collection account and 118.6% for three or more collection accounts. Those with no amount past due had a 70% loss ratio. Once the figure exceeded $100, the loss ratio jumped to more than 90%. Below are a couple of data to illustrate the point.

Collection Accounts - Loss Ratio
None - 74%
1 —– 97.5%
2 —– 108.4%
3 or more –118.6%

Account Status - Loss Ratio
No Late Payments - 72%
One or more Late Payments - 92%

Now the six million dollar question is what goes into an insurance score. Well, unlike the consumer credit space where FICO is the score that is used, each insurance company has their own scoring method. But Fair Isaac, the company that invented the FICO score has given some ideas. Here is a list of things to be aware of :

1. About 40% of an insurance score is determined by payment history. This is against 35% for a consumer credit score. So make sure you pay your minimum payments on time.

2. About 30% of insurance score is based on credit utilization. The same principles apply here as in your regular credit. Use debt sparingly.

3. 10% of an insurance score is based on the length of credit history. This is versus 15% of a regular FICO score.

4. 15% is based on the types of new credit that you have got recently, how long it has been opened etc. In contrast, only about 10% of your FICO score is based on this.

5. About 5% of an insurance score is based on the type of credit used versus 10% for the FICO score. Obviously, the more types of credit you have available, the better it is.

One can argue if there is any causal relationship between having a good credit score and having less claims and being a better customer for an insurance companies. Many consumer advocates are against insurance companies using credit scores at all. Regardless of what you think, they do, and the better your credit score, the better your insurance rates are (especially for auto insurance - health insurance is a slightly different matter).

The moral of the story is that having a good credit score not only helps you get a better rate on your mortgage, auto loans etc, but your insurance premium will probably be lower as well.