Q&A: Frequent flier cards

Dear Liz: I have an airline credit card but I find it really hard to use the frequent flier miles I get. The “free” flights have gotten more expensive (they take more miles) and harder to find. I’m getting sick of paying an annual fee for nothing. Would I be better off with a cash-back card?

Answer: Good cash-back rewards cards typically offer rebates of 1% to 2% on most purchases, and some have rotating categories that offer rebates of 5% to 6%. If you’re not an elite frequent flier or trying to amass miles for a special trip, then putting most of your spending on a cash-back card can make sense.

Think twice about closing that airline card, though. It likely offers some perks worth keeping, such as free checked bags and priority boarding. If you take one or two flights a year, the card may pay for itself.

Q&A: Discontinuing automatic payments after death

Dear Liz: I use auto-pay for bills in both my business and my personal life. What can we, as consumers, do to protect ourselves and our estates from companies taking advantage of the auto-pay when we die? Do our heirs have to cancel right away? They will have so many other things to deal with in those first months after a loved one dies.

Answer: You may have read about Pia Farrenkopf, the Michigan woman whose mortgage and utility bills continued on auto payment for five years after she died. It was only after her account ran dry, the bank foreclosed on her home and a contractor was sent to fix a hole in the roof that her mummified corpse was found in a Jeep parked in her garage.

The companies receiving the payments weren’t taking advantage of her — they had no way of knowing she was dead. And not all bills will or should stop getting paid at the moment of someone’s death. Even if Farrenkopf’s death had been noticed right away, the person settling her estate likely would have kept the utilities paid and the insurance in force until the home was sold.

If you’re concerned about auto-payments continuing for too long, make sure that your executor or successor trustee has access to your bank accounts. Your bank has a power of attorney form that you can use to grant instant access, or you can provide your login credentials, either now or in the estate planning documents this person will receive at your death.

Q&A: Will closing high-interest cards hurt your credit score?

Dear Liz: I have a few credit cards with very high interest rates — in the mid-teens. My FICO has improved (805 to 830) and I carry little or no balance on the credit cards. I have contacted the issuers asking for lower interest rates but they won’t budge. I have other credit cards with single-digit interest rates. I would like to close the credit cards with the higher interest rates and understand that I may see a drop in my FICO score. How long will take to get my credit score back in the 800s? Is this a wise move?

Answer: Sites that offer credit scores often also have simulators that estimate what might happen if you take certain actions, such as closing cards. You’ll note, though, that these simulators come with plenty of caveats that add up to: Your mileage may vary. A lot.

The reality is that it’s often tough to predict exactly how account closures will affect your scores or precisely how long those scores will take to recover. That doesn’t mean you can never close a card. For example, if you’re not using the card and you’re tired of paying an annual fee, then closing it can make sense if your scores are good and you’re not going to be in the market for a major loan, such as a mortgage. (You don’t want to close or open other accounts while you’re in the process of getting a loan.) If your scores drop a bit, it won’t be a crisis.

Closing a bunch of accounts at once, however, is generally not a good idea — particularly if you’re just doing it to “show them who’s boss.” If you’re not paying interest on these cards, their rates are irrelevant.

Q&A: Will paying off collections help credit scores?

Dear Liz: I have a question about clearing up collections on my credit reports. I used a credit repair company that did help me with most of the setbacks on my credit reports, but I still had collections that were recent and my scores were going up and down. The credit repair company left me to deal with the collections. Will it hurt my scores if I pay them off, and is there a way to get them off my report for good?

Answer: Paying off the collections shouldn’t hurt your scores, but probably won’t help them either. You can try to negotiate with the collection agency to stop reporting the collection accounts in return for payment, something known as “pay for delete” or “pay for deletion,” but debt experts say few agencies will agree to do that.

Plus paying off collections is more complicated than it may seem. Many agencies pay pennies on the dollar for collection accounts, which means virtually anything you pay them is pure profit. That means you should be able to negotiate a significant discount of 50% or more if you can pay in full.

However, not all collectors are ethical. Some pretend to own debts they actually don’t, so any payment to them is money down the drain. Other agencies will re-sell any debt you don’t pay in full to another collection agency, which means more collection calls.

Before you attempt to settle any collection account, visit DebtCollectionAnswers.com and download the free e-book written by consumer advocates Gerri Detweiler and Mary Reed.

Q&A: Credit cards just keep coming

Dear Liz: I use only two credit cards. But I have several credit cards I never use. When the cards expire, the issuers send me new ones. I just received two more cards, with new expiration dates, which I will not use. I keep hearing that cancellation of cards results in lower credit scores. How can I cancel all the unused cards I have without affecting my 797 score, and how can I stop them from sending me new ones without my authorization?

Answer: Your issuers can continue sending you new cards until the accounts are canceled. Your “authorization” isn’t necessary once you’ve applied for the card. Some credit card companies will close an account that hasn’t been used in more than a year, but others will keep accounts open hoping you’ll start using the cards again someday.

Having several credit cards is typically good for your scores — of which you have many, by the way, not just one. But you don’t have to keep unwanted cards forever. If your scores are in the high 700s you can close the occasional credit card account.

What you don’t want to do is shut down a bunch of cards at once, or close your highest limit cards. Credit scoring formulas are sensitive to the amount of your available credit you’re using. Anything that significantly reduces the amount of available credit you have can hurt your scores.

Q&A: Paying credit card debt after death

Dear Liz: I am 80 and I have a substantial amount of credit card debt, approximately $30,000. What becomes of this credit card debt in the event of my death? Will it become a future liability for my two sons or will this eventually become a bad debt for the credit card company? I would hate to see this become a financial burden for my sons.

Answer: Any credit card balances you leave behind will be a liability for your estate, not for your sons — although the debt could reduce any inheritance they get. Creditors have to be paid before any remaining assets are distributed. If you don’t have enough assets to cover the bill, creditors will get a proportionate amount of whatever’s left after paying your final expenses. Any remaining debt will be a write-off for the creditor, and your sons typically wouldn’t get anything.

You didn’t ask for help dealing with this debt, but you shouldn’t assume you can just tread water until you die and leave it for someone else to sort out. Your life expectancy at age 80 is another eight years if you’re male and nearly 10 years if you’re female, and you could live considerably longer. If overspending or medical bills led to the debt, you could accrue a lot more before you’re done. If you rack up so much debt that you can’t make the minimum payments, your interest rates could skyrocket and you may have to fend off collection calls.

You should at least discuss your options with an experienced bankruptcy attorney and with a nonprofit credit counselor.

Q&A: Effects of closing credit card accounts

Dear Liz: I would like to know how to close credit card accounts and not get a bad credit rating for doing so. We are trying to improve our credit after filing for bankruptcy seven years ago.

Answer: If you’re trying to improve your credit, then avoid closing credit accounts. Doing so can’t help your scores and may hurt them. Credit-scoring formulas are sensitive to how much of your available credit you’re using. The formulas like to see a wide gap between your credit limits and the amount you charge, both on individual cards and in the aggregate. When you close an account, you reduce your available credit, which narrows that gap and can ding your scores.

If you want to speed up your recovery from the bankruptcy, continue using the cards lightly but regularly and paying the balances in full every month. Make sure to pay all your bills on time so that a skipped payment doesn’t undo all the progress you’ve made. Review your credit reports and dispute any errors, including accounts that were included in the bankruptcy but are still showing up as active debts.

That doesn’t mean you can never close unwanted credit accounts. You just don’t want to do so now, or when you’re in the market for a major loan. You can close an account or two once your scores are in the high 700s on the 300-to-850 FICO scale and you don’t plan to apply for credit in the near future.

Q&A: The ins and outs of credit scores

Dear Liz: I’ve been using a free credit site to learn more about credit reports and credit scores. Recently I looked around and found reviews about how “horribly inaccurate” these free scores are. Where can I go to find my real FICO credit scores? I need the ones that matter, the ones that lenders use.

Answer: Some free scores aren’t used by any lenders. But many sites these days give out VantageScores, a FICO rival that’s being used in a growing number of credit decisions. So VantageScores are “real” scores, just not the most commonly used scores.

Here’s the thing, though: You generally can’t predict which scores a lender will use. Not only are there different name brands, but FICO offers versions customized for certain types of lending. The scores typically used by credit card issuers are different from the ones used by auto lenders, for example. These industry-specific FICO scores are on a 250-to-900 scale, rather than the 300-to-850 scale used by other FICO scores.

There are also different generations of each type of score, much like the different operating systems for your computer. Some lenders quickly upgrade to the latest version, just as some computer users upgraded to Windows 10 when it came out. Others use older versions of the scores, just as users may cling to Vista or XP. (For you Mac users, that would be something like hanging on to Mountain Lion or Snow Leopard instead of updating to El Capitan.)

Mortgage lenders, in particular, use relatively old versions of FICO. That’s because the agencies that buy most home loans, Fannie Mae and Freddie Mac, haven’t updated their requirements so that lenders can use newer versions.

Some credit card companies offer their customers free FICO scores, typically from one bureau. You can get a glimpse of the array of scores lenders might use by buying the most commonly used FICO, the FICO 8, for about $20 each from MyFico.com. Along with each FICO 8 you buy (you can buy three, one from each of the three major credit bureaus), you’ll get additional versions used for auto, credit card and mortgage lending.

If you’re going to be in the market for a major loan, such as a car loan or a mortgage, it makes sense to buy your FICOs so you can get a better idea of how lenders might view you. If you’re just interested in tracking your scores generally, though, the free versions can be perfectly adequate.

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.