Q&A: Cashing out an IRA to pay off credit card debt

Dear Liz: I owe about $49,000 on my credit cards and now have the money to pay them off in full. Should I? Or should I slowly pay them in large amounts?

Answer:
There’s typically no reason to delay paying off credit card debt. Carrying balances costs you money and doesn’t help your credit scores. You’ll see the fastest improvement if you pay them off in one fell swoop.

The only excuse for delaying would be if this windfall comes from a retirement fund. Cashing out a 401(k) account or IRA to pay off debt is not wise, since you’ll trigger huge taxes and penalties. Add in the future tax-deferred compounding you lose and the total cost is far more than you’ll save in interest.

Q&A: Purchase protection

Dear Liz: A few months ago, I purchased a large television from a nearby store. I was offered no interest for 12 months using the store’s credit card. The TV was stolen from the back of my pickup truck before I was able to bring it into my apartment. I called the police and filed a report. The next day I returned to the store and asked if anything could be done. They said they could only offer another television for a discounted price. I wrote to the credit company and they responded that it wasn’t up to them and any deals would have to be made with the store, which I did not return to. I have since made small payments on the loan, and will expect to pay if off in a few months with no problem. The remaining amount is just over $900. My question is, how bad would it affect my credit score if I simply decided not to pay the balance? Currently, I have a great score. My only other debt is for another television I purchased.

Answer: Failing to pay what you owe will trash your credit, because a single missed payment can knock more than 100 points off good scores. You’ll lose more points the longer the bill goes unpaid and suffer additional damage when the account is turned over for collections.

A better approach is to pay what you owe and resolve to stop borrowing to buy televisions. Instead, use a credit card that reimburses you for such losses and then pay off the balance in full by the due date.

As you’ve discovered, store cards often don’t offer this “purchase protection” that kicks in if an item is lost, damaged or stolen. Purchase protection is a free benefit that comes with higher-end credit cards and shouldn’t be confused with overpriced paid add-ons such as “credit protection.” Check your current cards to see if any offer this feature. If none of your cards do, use your good credit to get one that does and use it in the future for all large purchases.

Q&A: Credit card billing errors

Dear Liz: I have a dispute with a credit card company over an online transaction that I canceled. The company charged me three times but refunded only one of those charges. The credit card company initially canceled the other two transactions but I was rebilled without my knowledge. Despite my submitting evidence and the card company agreeing that I don’t owe the money, it will not take the charge off. Who do I contact to get this settled? When I call the card company, they say they will look into this and contact me in 10 days, which they never do.

Answer: It’s convenient to dispute credit card billing errors over the phone. If you want to preserve your rights under the federal Fair Credit Billing Act, though, you need to put your complaint in writing.

Your letter should be sent to the address given for billing inquiries, rather than the address where you send your payment, according to the Federal Trade Commission. The letter needs to include your name, address and account number along with a description of the problem. You should send copies of any receipts or other documents that back up your case. The letter should be mailed in time to reach the creditor no later than 60 days after the statement with the error was generated. The letter should be sent by certified mail, return receipt requested.

That’s a cumbersome process, and often not necessary for people who monitor their statements and catch a problem early. Ideally, they first would contact the merchant and give it a chance to correct the problem. If the merchant doesn’t do so within a few days, the customer can contact the credit card company and give it time — say, 30 days — to resolve the situation. If that doesn’t work, then the customer can fire off a letter.

Even if you’re now outside the 60-day window, you should still send a letter and ask for a prompt response. If you don’t get one, you can file a complaint with the Consumer Financial Protection Bureau, which intervenes with credit card companies to resolve such disputes.

Q&A: Authorized credit card users

Dear Liz: I have read that only the primary cardholder is responsible for the balance on a credit card, not the authorized user (such as a spouse). When that primary cardholder dies, there is no obligation for an authorized user to pay off the balance. Is this accurate? What would prevent someone whose primary cardholder is near death from racking up purchases and then, after the primary cardholder dies, refusing to pay it?

Answer: In a community property state such as California, spouses typically are both responsible for debts incurred during the marriage. In all states, the deceased spouse’s estate would have to pay all creditors before any leftover money was doled out to survivors. So a spouse who went on such a spending binge wouldn’t come out ahead, unless the primary cardholder was broke and left no estate.

Other authorized users might have no such restraints, however. Anyone who thinks an authorized user might pull such a stunt would be smart to take that person off the card before it becomes an issue.

Q&A: Credit reports for the deceased

Dear Liz: How does one get credit reports for someone who is dead? My deceased husband is still on my mortgage and I’d like to review his report to make sure it is correct. The estate went through probate, so I have court documents showing I am the executor. I looked at credit bureau websites and attempted to contact them by phone but have not been able to determine what information they need or where it should be sent.

Answer: The only thing that needs to be correct about your husband’s credit reports is the fact that he’s dead. Any other mistakes are irrelevant at this point, but his identity can still be stolen if the bureaus don’t know he’s deceased.

This is no small issue. About 2 million dead people have their identities stolen every year, either because they’ve been deliberately targeted or because criminals filling out credit applications used made-up Social Security numbers that happen to match those of people who have died, according to a 2012 study by research firm ID Analytics.

Eventually, the credit bureaus should get word of a death. Bureaus periodically check the Social Security death master file, which is a database of all the deaths reported to the agency. Lenders also notify the bureaus when they receive information that someone has died.

Just to make sure, though, you should notify the bureaus directly. Ask that a “deceased alert” be added to his files. Send death certificates — the real thing, not photocopies — by certified mail, return receipt requested. The addresses to use include:

TransUnion LLC, P.O. Box 2000, Chester, PA 19022
Experian, P.O. Box 2002, Allen, TX 75013
Equifax, P.O. Box 740260, Atlanta, GA 30374

Q&A: Credit card useage

Dear Liz: I recently refinanced my home and one of the perks was a 0% interest credit card. The problem is that I have two credit cards and I am happy with them, but I am afraid that having a third will adversely affect my credit score. I have no plans to borrow money in the near future but I can’t shake the feeling that it is a detriment to have the card. I haven’t activated the new card and I never carry a balance on either of the older cards I use. What do you advise?

Answer: The new card affects your credit reports and scores whether or not you activate it. Chances are good, though, that the overall effect will be positive.

Yes, your scores may have been dinged a few points when the new card was issued, but over time responsibly handling multiple credit cards will help, not hurt, your numbers.

Failing to use the card, on the other hand, could cause the issuer to close it, and that could negatively affect your scores.

Just do what you do with your other cards: Charge lightly (no more than about 30% of the card’s limit) and pay the bill on time and in full. There’s no credit score advantage to carrying debt.

Q&A: Paying for credit repair

Dear Liz: I’m seeking help in reviewing my credit report and how to fix any issues. I am not financially distressed, but have FICO scores in the 675 range. Could you recommend someone I can hire to assist as I need to refinance a house I bought for cash?

Answer: There’s so much fraud in the credit repair industry that you’re likely better off doing it yourself rather than exposing yourself to rip-offs.

Credit repair companies aren’t supposed to take money upfront or promise things they can’t deliver, but many do.

One of the scammers’ most common ploys is to flood the credit bureau with disputes and to take credit for any negative information that temporarily disappears. By the time the negative information pops back up on the file, the scam artists have disappeared with your money.

Another approach they recommend is starting over with a “clean” slate, sometimes using borrowed or stolen identification numbers. That’s fraud, and even if it works, you’ll often find yourself worse off with no credit history than with a flawed history.

The Federal Trade Commission has some helpful advice on do-it-yourself credit repair.

You’ll need to first get copies of your credit reports from each of the three credit bureaus, which you can do once a year for free at www.annualcreditreport.com. Dispute any inaccurate information, such as collection accounts that aren’t yours or late payments that you made on time.

Follow up with any creditors that persist in reporting bogus information.

One relatively fast way to improve your scores is to pay down any credit card debt to 10% or less of the accounts’ credit limits. Don’t close any accounts while trying to improve your scores, since that won’t help your score and could hurt.

Opening new accounts can ding your scores as well, but it can be worth it to add another credit card to the mix if you only have one or two.

Q&A: Credit scores and new accounts

Dear Liz: My spouse signed up for a store credit card to receive a discount on a large purchase. As she has no strong interest in maintaining a line of credit there, is there a simple way of discontinuing this account without affecting our credit scores, given that we may apply for a mortgage in the near future?

If not, is it critical we maintain some frequency of use on this account?

Answer: First, let’s correct a popular misconception that marriage somehow combines your credit records. Assuming she applied for the card in her name alone, this account won’t show up on your credit report or affect your scores.

Should you apply for a mortgage together, however, her scores could affect the interest rate and terms you get. Opening and closing accounts can ding scores, so it’s best to avoid both when you’re in the market for a major loan.

Issuers vary in their policies on closing inactive accounts, so it’s hard to predict how much activity would prevent the card from being shut down. Typically, though, a small charge every two to three months is enough to keep an account open.

Q&A: Credit CARD Act

Dear Liz: I have a business credit card that offers cash rebates. It has an interest rate of 15.24% on purchases and 25.24% on cash advances. I carry balances in each category. Each month the issuer posts my entire payment to my lower-interest purchases balance and nothing to my cash advance balance. I telephoned to complain but I was told that they will not post any payments to my cash advance balance until my purchases balance is completely paid off. I thought that there was a federal regulation that payments had to be posted to the highest-rate debt balance first. Am I mistaken? If not, to which federal agency can I complain?

Answer: There is indeed a federal law that requires payments in excess of the minimum to be applied to the highest-rate balance. It’s part of the Credit Card Accountability Responsibility and Disclosure Act of 2009. But the Credit CARD Act applies only to consumer credit cards — not business cards.

It’s not a good idea to carry a balance on any credit card, but it’s even more dangerous to carry a balance on a card that lacks the consumer protections promised in the Credit CARD Act. Talk to the bank that has your business checking account to see if you can arrange a lower-rate loan to pay off your balances.

Q&A: Credit card interest rates

Dear Liz: I have had a certain credit card for over five years. I just received a letter stating that my interest rate was going to be raised from 10.24% to 12.24%. My FICO score is 819 and I have never had late payments on any of my cards. I called the issuer to complain about this change but they will not reduce the rate. The letter states that they obtained my FICO score of 819 from Experian and used the score to make the decision to raise my APR. They told me that they are raising rates across the board for customers with FICO scores over 800. Why are credit card companies allowed to do this? It is so unfair.

Answer: Credit card companies are no longer allowed to raise interest rates arbitrarily on individuals’ existing balances, as they could — and often did — before the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. Now card issuers are allowed to raise your interest rate on an existing balance only if you’re 60 days or more late with your payment, a promotional rate has expired or the index to which a variable-rate card is linked has gone up.

Credit card companies can, however, raise your interest rate going forward for pretty much any reason they want, and new balances will accrue at the higher rate. Also, the CARD Act’s restrictions apply only to consumer credit cards; business credit cards aren’t covered by the law.

Changeable rates are just one of the reasons why it’s not smart to carry credit card balances. Since you have high credit scores, though, it should be easy for you to find another card with a low promotional rate. Some cards now offer a 0% rate for 12, 15 or 18 months, although you’ll typically pay a balance transfer fee of around 3%. Sites such as CreditCards.com, NerdWallet and LowCards.com, among others, list these competitive offers.

Once you get the new card, you should work to pay off the entire balance before the promotional rate expires.