Credit Cards Category
Dear Liz: Recently you wrote about debt being forgiven after seven years, but in your book “Deal With Your Debt,” I’m sure you said after four years credit-card debt is usually not collectible. Could you clarify? When I tell debt collectors about this, they merely laugh.
Answer: That’s understandable, because there is no forgiveness for most debt. It’s legally owed until it’s paid, settled or wiped out in Bankruptcy Court.
Each state sets limits on how long a creditor has to sue a borrower over an unpaid debt. Those limits vary by state and the type of debt. In California, credit card debt has a four-year statute of limitations. Creditors may continue collection efforts after four years; they’re just not supposed to file lawsuits.
Seven years is how long most negative marks, such as unpaid debts, can remain on your credit reports. Technically, most unpaid debts are supposed to be removed seven years and 180 days after the account first went delinquent.
Dear Liz: I have $8,000 in savings. Should I use it to pay the accrued interest on federal student loans that go into repayment soon? Or should I pay credit card debts of $662 at 11.24%, $3,840 at 7.99% and $3,000 at 6.99%?
Answer: Pay off the credit card debt. The interest isn’t tax deductible, and balances you carry on credit cards just eat into your economic well-being.
Your student loans, by contrast, offer fixed rates, a wealth of consumer protections and tax-deductible interest. You needn’t be in any rush to pay them off, particularly if you’re not already saving adequately for retirement and for emergencies. Federal student loans offer the opportunity to reduce or suspend payment without damaging your credit scores should you face economic difficulty and the possibility of forgiveness. Those aren’t options offered by credit card issuers.
If your student loan payments exceed 10% of your income when you do go into repayment, you should investigate the federal government’s “Pay as You Earn” program, which offers more manageable payments for many people, especially those with large debts and small incomes.
Dear Liz: I’m attracted to the credit card offers that give substantial mileage bonuses for opening and using an account. Most also waive the first year’s fee. I have taken advantage of one such card, and then I canceled it before any fee was due. (I certainly enjoyed using the miles.) I hesitate to take another offer because I fear opening and closing extra accounts might have a negative effect on my credit rating.
On the other hand, I am in my mid-60s, have excellent credit and am debt-free. I also don’t plan to make any credit purchases. What’s your advice?
Answer:If you have good credit and aren’t in the market for a major loan such as a mortgage, you shouldn’t worry about opening or closing a credit card account occasionally. Yes, such actions can ding your credit scores, but the effect is likely to be minimal, especially if you have several other open accounts that you regularly use.
If you are going to open a new card with an upfront bonus, make sure you understand the fine print. Most cards require you to spend a certain amount within a certain time frame to get the extra points. Typically the bigger the upfront bonus, the bigger the required “spend.”
Dear Liz: After a divorce, I had to start my life over at 62. I got three credit cards. Somehow, I failed to see the online bills for one of them and neglected to pay it. The company didn’t contact me until three months had passed. I got a letter saying the small balance ($130) was forgiven and the card had been canceled. I was shocked. I made several calls but was told nothing could be done. Now one of the credit bureaus has my score at 640. I’m a reliable person and always pay my bills on time. This was a great oversight. Is there anything else I can do?
Answer: Even seemingly small missteps can have outsized effects on your credit scores. Missing even one payment can knock more than 100 points off good scores.
And as you’ve learned, creditors tend not to be sympathetic to the idea that you didn’t pay because you didn’t see the bills. You’re expected to know when your bills are due and pay them. A quick phone call or visit to the credit issuer’s website would have told you what you owed.
Fortunately, you still have the other two cards. Those should help you rehabilitate your credit scores as long as you use them properly and you don’t cause any further damage.
Before another day passes, set up automatic payments for both accounts. You typically can choose to have one of three amounts taken every month from your checking account: the minimum payment, the full balance or a dollar amount that you specify. Ideally, you would choose to pay off the full balance each month, since carrying a balance won’t help your scores and will cause you to pay unnecessary interest.
Mark the dates of the automatic payments on your calendar and set up alerts to make sure that there’s enough money in your checking account on that day.
Use both of your cards lightly but regularly, charging small amounts each month. Don’t use more than about 30% of your available credit — less is better. To rehabilitate your credit scores even faster, consider adding an installment loan to your credit mix, if you don’t already have one. Mortgages, car loans and personal loans are examples of installment loans.
Finally, make sure you don’t fall behind on any other bills or let any account, such as a medical bill, fall into collections. Another black mark would just extend the time it takes to rebuild your scores.
Dear Liz: Late last year, I applied for a credit card to buy a new computer on the computer maker’s website. I was declined. I was given the chance to talk to the credit card company’s agent and was belittled for having not-so-perfect credit, not enough credit and using too much credit, all in the same phone call. Needless to say, I got the message. I was also reminded that I’d had a charge-off on a competitor’s card in 1992! I always thought bad credit dropped off after seven years, certainly 10. Maybe you can clarify?
Answer: You need to take a look at your credit reports to see what lenders are seeing.
A charge-off from 1992 should have been removed in 1999, said credit expert John Ulzheimer, president of consumer education at CreditSesame.com. Charge-offs aren’t public records, so there would be no way for a credit card company to know that a competitor wrote your account off as a loss unless it’s still showing on your credit reports.
“This is why it’s a great idea to pull your credit reports from time to time to make sure ancient debts aren’t still on [them],” Ulzheimer said.
If the charge-off is still showing, you should dispute it with the credit bureaus to have it removed.
What might still be a public record is a judgment, if your old creditor filed a lawsuit against you and then took the trouble to renew the judgment to extend how long it could appear on your credit reports.
“That’s a little trick some lawyers play to keep judgments from expiring,” Ulzheimer said. “They’ll re-file them, sometimes in different jurisdictions, and the byproduct is new credit reporting.”
Under the Fair Credit Reporting Act, civil judgments have to be dropped after seven years unless your state has a longer statute of limitations. If it does, the judgment can be reported until the statute expires. The statute for judgments ranges from three years to 20 years. California’s statute of limitations for judgments is 10 years. Bills.com has a list of state statutes of limitation athttp://www.bills.com/statute-of-limitations-on-debt/. If you find a judgment on your credit report that should have expired, dispute it with the credit bureaus.
You also should remedy the other problems the representative brought up. You need to pay down the balances on the credit accounts you’re using (preferably paying them off in full). Once you’ve done that, consider adding another credit card to your mix — but use it only if you can commit to paying the balance in full each month. Paying your bills on time and responsibly using credit will help you put your “not-so-perfect credit” behind you.
Dear Liz: When I opened my airline-branded credit card almost 10 years ago, it was well worth the $50 annual fee. I was able to book many flights for free because of the miles I earned and the airline’s generous rewards program. However, I moved a few years ago to a location that is not serviced by the airline. Now the airline’s reward card is my “last ditch emergency” card since I have two other cash-back rewards cards that offer a better return (I pay all my cards in full every month).
I know that annual fees on credit cards are not good, but I’m struggling with the decision on whether to keep it or not. It is the second-oldest credit account I have and about a third of the amount of credit I can use, and I am concerned about my credit score dropping if I close it. My credit score is excellent, but I am concerned about how much of a drop in my score this would cause. I did try to “convert it” to a cash-back credit card with no annual fee, but the bank wouldn’t do it. So now I’m stuck on what to do. Should I continue to pay the $50 annual fee to keep my credit score intact, or should I close it and see if I can increase my credit on my other cards?
Answer: Most good travel rewards cards these days charge annual fees, and those fees aren’t a big deal if you’re getting airline tickets or lodging that more than offset the cost. Your card may pay for itself with a single trip if it waives baggage check fees (as many airline-branded cards do).
If you can’t even wring that much value from the card, consider closing it. Given how much of your available credit the card represents, though, you might want to open another card first. Available credit matters far more to your credit scores than the age of your accounts. And even if you close this account, your history with it will continue to be reported for many years, so you shouldn’t hold off just because it’s your second-oldest card.
Dear Liz: How can I get a clear and complete picture of the debts that are hurting my credit score? I have my credit report already. I’m a bit lost and I need to get my credit cleared up to buy a home.
Answer: You actually have three credit reports, one at each of the major credit bureaus: Experian, Equifax and TransUnion. Your mortgage lender is likely to request FICO credit scores from each of the three, so you need to check all three reports.
You get your reports for free at one site: http://www.annualcreditreport.com. There are many sites masquerading as this free, federally mandated site, so make sure that you enter the URL correctly. You may be pitched credit scores or other products by the credit bureaus while you’re on this site, but you won’t be required to give a credit card number to get your free reports. (If the site is demanding that you give your credit card number, you’re at the wrong site.)
You should understand that old, unpaid bills may be depressing your scores, but paying them off may not improve those scores. In other words, the damage has been done. You may be able to reduce the impact if you can persuade the collectors to remove the accounts from your reports in exchange for payment, something known in the collections industry as “pay for delete.” But you probably can’t erase the late payments and charge-offs reported by the original creditor before the accounts were turned over to collections, and those earlier marks against you are even more negative than the collection accounts.
That’s not to say you should despair. Over time, your credit scores will improve as you handle credit responsibly. But you shouldn’t expect overnight miracles.
Dear Liz: Recently I’ve paid off almost $20,000 in credit card debt and am determined not to go down that path again. Because I haven’t used these cards in a while, though, I’m starting to get notifications from the credit card companies that they’re closing my accounts because of inactivity. I know having long-standing accounts on your credit report is a good thing, but I don’t want to be tempted to use these cards just to keep the account open. Is it a bad thing if almost all of my credit card accounts get closed?
Answer: Your good histories with these cards should remain on your credit reports for years. But if you stop using credit entirely, eventually your credit reports won’t generate credit scores. That could cause you problems if you later want to borrow money (say, to buy a home) and could even affect your insurance premiums, since insurers use credit information as well.
It’s not too hard to keep accounts active without slipping into debt again. Simply set up a bill to be charged automatically to each account, then set up automatic payments with the credit card issuer so the full balance is taken out of your checking account each month.
Dear Liz: I’m confused about paying down credit card debt. Some say to pay the lowest-balance cards first and others say the highest balance or the one with the highest interest. I have almost $16,000 on credit cards ranging from a $4,930 balance on a card with an 8.24% interest rate to $660 on a card with an 18% rate.
Answer: Actually, the first question you should ask is “How much credit card debt do I have compared to my income?” If your balances equal half or more of your annual earnings, you may not be able to pay it all off. You should make appointments with a legitimate credit counselor (such as one affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org) and a bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org).
If your situation isn’t that dire, the fastest way out of debt is to pay the minimums on your lower-rate cards and send as much money as possible to your highest-rate card. Once that’s paid off, concentrate on paying off the next-highest-rate card, and so on. Some people instead like to target balances from smallest to largest to get a quicker feeling of victory, but you typically pay more in interest with that approach.
Dear Liz: My wife and I have had our bank’s airline cards a long time, but we want to change because it’s become almost impossible to cash in the miles. What I don’t see in various card-comparison articles are ratings of the card issuers for customer service and fraud protection. Our bank has been quite good at both, but what about the other issuers?
Answer: People are often unduly impressed when their credit card issuers contact them frequently about possibly fraudulent charges. The issuers are the only ones at risk in these situations, since under “zero liability” policies you can’t be held responsible for bogus charges. Also, if their software were better, they might do a better job of separating legitimate from fraudulent transactions and have to bother you less.
In any case, it’s tough to tell as a customer how good the issuer’s fraud prevention measures are. So perhaps a better metric to use is customer service, and J.D. Power publishes an annual credit card satisfaction study that tries to gauge six factors: interaction; credit card terms; billing and payment; rewards; benefits and services; and problem resolution. American Express has ranked at the top of the survey every year since it started seven years ago. Discover ranked second for 2013 and Chase ranked third.