Fri 18 Sep 2009
5 ways to optimize your credit portfolio
Posted by lizweston under Liz's Blog
[6] Comments
I’ve been talking about the importance of diversifying our credit sources the same way we diversify our investment portfolios and, hopefully, our income streams. (Don’t have a side business yet? Why not?)
As issuers continue to reduce limits and raise rates, the importance of diversifying is becoming ever more obvious. The smart folks over at CreditCards.com suggest these five ways to optimize your credit card portfolio (with my additions in italics):
- Strategically choose the best credit card for you. Don’t just apply for offers that come to you in the mail. “Pre-approved” credit cards may not offer the lowest fees and interest rates. Research offers via comprehensive online credit card lists that specify terms and qualifying data to ensure your next card fits your credit lifestyle. (CreditCards.com is, of course, one good place to look for offers, as is CardRatings.com, LowCards.com and the finance forum at FatWallet.com. Also check with your credit union, since CUs often have good rates and terms.)
- Carefully read all mail and correspondence from creditors. Keep a close eye for any change in terms, such as the annual percentage rate and the credit limit. If you see changes, contact your creditor immediately to find out why. Consumers now have the right to opt out by phone or mail within 45 days of receiving a change in terms notice. However, choosing to opt out will close the account, which could have negative credit score consequences. (If you’ve switched to paperless statements, be sure to check your email and the issuer’s Web site to make sure you don’t miss any account-changing announcements.)
- Be on time. When making credit card payments, pay early, don’t miss any payments and always pay at least the minimum balance (and preferably more). (Set up automatic debits so at least the minimum gets paid, no matter what. One late payment can knock 100 points off your credit scores.)
- Don’t max out your credit cards. Try to keep balances — both of individual cards and overall — at 30% of the credit limit or lower. Not doing so puts you into a risk category in the creditors’ eyes, since they like to see a credit utilization ratio of no more than 30%. (There’s actually no line-in-the-sand number, but lower is better: 30% is better than 50%, 10% is better than 30%.)
- Know and respect your limits. Even if you think you know the exact credit limit for each card, call the number on the back of each card or check your accounts online to find out so you don’t mistakenly overcharge (which can trigger over-the-limit fees and penalty interest rates). Many creditors are reducing credit lines, even for cardholders who keep all accounts in good standing, and your spending ceiling could have been lowered since the last time you checked. After February 22, 2010, issuers will no longer be allowed to automatically authorize purchases beyond your credit limit unless you specifically request opt in to that process. (And I’ll add: push back if your credit limit has been lowered and you have good credit scores–FICOs of 740 or above. You can easily take your business elsewhere, and your issuer knows it.)
- Have a Plan B. If the rate on your primary card skyrockets or your credit limit is cut, have a plan to transfer your balances and new purchases to another card in your wallet with friendlier terms. If you don’t have a suitable card waiting in the wings, consider applying for a low-rate emergency or backup card now to provide yourself with options. (This is the diversification I’ve been talking about. Look for a card that not only has better rates and terms but that’s from a different issuer as well. Don’t overdo it, since applying for a fistful of cards will negatively impact your score; one or two Plan B cards should be fine.)
how many points in credit score does one expect to drop when cancelling a credit card?
You can’t know in advance. Sometimes scores aren’t affected at all, other times they take a bit of a hit. If you’re in credit score improvement mode, the best advice is to hold off on closing accounts. If your scores are already, you can probably close an account or two without major damage, although you should try to keep open your oldest and highest-limit cards.
You mentioned that everyone should have a side business. What are some of the advantages of having a side business? I want to become a writer, so can I claim the same benefits as a “business?” I really don’t want to do Mary Kay, etc.
Is there a past blog/article of yours that outlines the benefits of a side business? I thought I had heard that if one doesn’t earn enough revenue then the business is considered a “hobby” and not a business and the tax implications are different/worse?
Please help!!
Thanks, from “Clueless”
How can I improve my score when I’m in bankruptcy? I pay all cards and repayment in bankruptcy on time?
It sounds like you’re on a Chapter 13 repayment plan. Paying according to your plan will help your score from getting worse, but you typically need to wait until your BK is discharged to get any real traction on improving your scores.
Jeff Schnepper’s MSN column “The ultimate tax shelter” explains the tax benefits and how to avoid being labeled a hobby. The other big advantage to a side business is having an income stream that’s separate from your job. I haven’t written in depth about this but you’re inspiring me to do so soon.