Ask Liz Weston

Dear Liz: You’ve written that it’s generally better to have small balances on several credit cards than a big balance on one card. Would you please elaborate on this?

When it comes to revolving credit, it was my understanding that the credit score is looking at the total utilization for all revolving debt. For example, I have the following: a Visa card with a limit of $10,000 and a balance of $5,000, another Visa card with no balance and a $20,000 limit, and a furniture store card with a $2,000 balance and a $5,000 limit.

My total revolving credit available is $35,000 and my utilization is $7,000 or 20%. Before reading your article, I was considering transferring both balances to the high-limit card. My utilization would still be 20%, so why would it be better to leave the balances on the other cards?

Answer: The leading FICO credit scoring formula looks at both your overall credit utilization and the credit utilization on each card. That’s why the company that created the score, also known as FICO, advises that in general it’s better to have small balances spread across several cards than a big balance on one card.

In your case, however, shifting balances would probably leave you better off. Instead of credit utilizations of 50%, 0% and 40%, you’d have utilizations of 0%, 35%, and 0%.

There’s no hard and fast rule about how much of your available credit you should use on each account. The less you use, the better.

Dear Liz: As a result of the implementation of the new credit card legislation, my card issuer for the first time is going to charge me an annual fee of $60, effective April 1. I am strongly considering canceling my credit card because I rarely use it. I have two other cards that I use on a regular basis. But I heard that canceling a credit card can hurt your credit score. Is this true? If so, how many points could I lose?

Answer: Yes, closing cards can hurt your credit score, but it’s impossible to predict in advance how much. Typically, the lower your scores and the fewer open card accounts you have, the more you should avoid closing accounts. You also don’t want to close accounts if you’re about to apply for a major loan, such as a mortgage or car loan.

Because you have high scores and two other open accounts, though, you may be able to close this card without a huge effect on your scores, particularly if it’s not your highest-limit card. (Credit scoring formulas are sensitive to the amount of your available credit you’re using; most of the negative impact of closing a card comes from the reduction of available credit.) If you’re not in the market for a major loan and the issuer won’t rescind the fee, it’s certainly an option worth considering.

Dear Liz: I am 20 and trying to build my credit. I rented an apartment for a year, and I bought a car last year but needed a cosigner to get the loan. It seems like none of this is factoring into my credit score, because I can’t get a credit card! I applied for one through my credit union and was denied.

Is there any other credit card I can get besides a secured card needing a deposit? I want to refinance my car to get the cosigner’s name off it, but if I have zero credit I’m not sure I’ll be able to.

Answer: You’re right that your apartment rental probably isn’t being factored into your scores. Landlords typically don’t report rental payments to the credit bureaus. But your car loan should be helping build your credit as long as it’s being reported to the bureaus and you’re making every payment on time.

The fact is, building credit when you’re young is tough — and it’s about to get tougher for people under 21, because of new restrictions on credit card issuers that just went into effect.

The Credit Card Accountability, Responsibility and Disclosure Act requires issuers to make sure people under 21 have an independent source of income before giving them a card. If the applicants don’t, they’ll need an adult cosigner.

But credit card issuers were tightening their standards even before the CARD Act was passed last year. Even credit unions, which traditionally have been easier places to get credit, raised their standards for who could get a card.

So unless you can find someone to add you to an existing card as an authorized user, or who is willing to cosign an account to make you a joint account holder, a secured card is probably your best bet.

You’ll want a card that reports to all three credit bureaus and that has an annual fee under $75. You can find offers at CardRatings.com, CreditCards.com, LowCards.com and the Index Credit Cards site

Dear Liz: Lots of “credit card remedies” are being marketed now. Is debt settlement a reasonable way to reduce debt? I have a good track record of payments and good credit scores (my median FICO score is 745). I’m concerned I’ll damage my creditworthiness for years to come.

Answer: Debt settlement means you’re paying less than you owe — and creditors really don’t like that. Debt settlement can trash your credit, which is why it isn’t a good option if you can find other ways of dealing with your debt.

If your interest rates are relatively low and you can easily make your minimum payments, your best bet is to simply pay off the debt on your own, throwing as much money as possible at your highest-rate card while paying the minimums on your other debt. Once your highest-rate debt has been retired, you can apply that payment to your next highest-rate debt, and so on until you’re debt free.

Or you can transfer your debts to a fixed-rate personal loan and pay that off over time. Many credit unions offer three-year personal loans at rates of 10% to 15% to people with good credit.

If you’re struggling to make your minimum payments, you should arrange two appointments: one with a legitimate credit counselor (you can get referrals from the National Foundation for Credit Counseling at www.nfcc.org) and another with a bankruptcy attorney.

The credit counselor may be able to put you on a debt management program to pay off your debt at lower interest rates. Credit counseling is a neutral factor in credit scoring formulas — neither helping nor hurting — but your creditors may report you as late, which could hurt your scores.

Bankruptcy would really trash your scores, driving them down into the 500s. But it could wipe out your debt and give you a fresh start if you aren’t able to pay your bills.

What you want to avoid, if possible, is raiding retirement funds or home equity to pay credit card debt, particularly if bankruptcy may be an option. Retirement funds are protected in Bankruptcy Court and so, in many cases, is home equity.

Dear Liz: I have almost $250,000 in my retirement accounts. I also have almost $50,000 in credit card debt. Should I take $50,000 from my 401(k) to pay off the debt?

Answer: No, no, no.

In case that wasn’t clear: No.

Of all the dumb financial moves you can make, raiding retirement funds to pay off credit card debt ranks near the top. You’ll pay penalties and taxes that typically equal one-quarter to one-half of any withdrawal, plus you lose the future tax-deferred returns that money could make. If you’re 30 years from retirement, that $50,000 withdrawal would cost you $500,000 in lost retirement income, assuming an 8% average annual return.

The fact that you have that much debt puts you at high risk of bankruptcy. In bankruptcy, your unsecured debt can be wiped out or reduced, while your retirement funds would be protected from creditors.

If you can’t figure a way to pay off your debt without raiding your retirement, you need to make two appointments: one with a legitimate credit counselor (visit the National Foundation for Credit Counseling at www.nfcc.org) and another with a bankruptcy attorney.

Dear Liz: In a recent column, you wrote that if a credit card due date falls on a banking holiday, the due date is moved to the next business day. I found myself in exactly that situation in November, because my due date fell on Veterans Day, and my credit card issuer refused to remove the late fee. It would be helpful if you would clarify exactly how due dates work.

Answer: Most of the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009, including many of the new rules about due dates, don’t go into effect until Feb. 22. Some issuers changed their policies to implement the changes earlier, but others did not.

Dear Liz: We are fortunate to be debt free with a nice cash reserve. We typically pay our bills in cash, by check or by a credit card that’s connected to our brokerage account. Imagine our surprise when we applied for credit at two retail stores to get a discount on items we wanted and were turned down on the spot at both places. We have asked for, and received, the government-required reports from the three major credit bureaus, and the information provided seems correct, to the best of our interpretation. Short of a significant effort to get more credit, which we can survive without, what do you recommend we do?

Answer: Under the Equal Credit Opportunity Act, you have a right to know why you were turned down for credit. Simply referring you to the credit bureaus isn’t sufficient — the retailers should have given you the reasons your applications were refused. If you haven’t received letters by now explaining their rationale, write each retailer’s credit-granting department and point out that they’re required by law to give you an explanation.

It could be that your scores weren’t high enough. Even though your finances are in good shape, the fact that you have only one active credit account might be damping your scores. If that’s the case, simply adding another credit card could boost your scores and make you eligible for instant credit offers.

Or it could be your scores are fine and the problem is your income, or what the retailers think your income might be. Credit card lenders are under regulatory pressure to consider borrowers’ incomes, and some are using various services that purport to estimate incomes based on other information in your credit reports, such as the size of your mortgage or your credit limits. If you have no mortgage and only one card with a low limit or no limit reported, that estimate could be way off.

But you don’t have to guess. The retailers should tell you. If they don’t, you can report them to the Federal Trade Commission.

Dear Liz: I am trying to rebuild my credit and am following many of the tips I’ve read in your articles. I recently obtained a secured credit card and an auto loan just to help with rebuilding my credit. Can I increase my credit score even if I pay off the entire credit card balance due each month before any finance and interest charges are incurred? And can I increase my credit scores over time even though I currently have a tax lien and judgment on my credit report?

Answer: Let’s tackle your last question first. You can mitigate the effect of serious negative marks such as tax liens, judgments, bankruptcies, foreclosures or repossessions by being responsible with your other credit accounts, but these missteps will still drag down your score as long as they’re on your credit reports. Most negative marks will drop off after seven years, although bankruptcies can be reported for up to 10 years and there’s no limit to how long unpaid tax liens can remain on your report — which should be a good incentive to pay those off.

Being responsible with your credit accounts means paying them on time and using only a fraction of your available credit card limit. (Using less than 30% is good, and using less than 10% is even better.) It does not mean you have to carry a balance. Credit reports and credit scores typically don’t distinguish between balances that are carried month to month and those that are paid off, so you might as well save the finance charges and pay your bill in full each month.

Dear Liz: I applied for a 10-month, interest-free loan at an appliance store to purchase a washing machine and was refused. We own our house, have no outstanding debt and pay our credit cards in full each month. I’m worried that if something happens to my husband and I want to buy a car or whatever I need, I won’t be able to get credit.

Answer: If you were turned down for credit, you should have been given free access to the credit report the lender used to make its decision. In any case, everyone in the United States can get a free look at their credit reports from the three bureaus once a year at www.annualcreditreport.com. You should peruse the reports to see whether there are any obvious errors, such as accounts that aren’t yours or late payments when you paid on time.

The problem could be that all the credit you have is in your husband’s name. If that’s the case, you should begin building your own credit. If you’re already an authorized user on his cards, see if the credit card issuers will report the accounts to your credit reports as well as his. Opening a credit card account in both your names, as joint account holders, also can help build your history.

ear Liz: As a customer service representative for a credit card company, I enjoy your articles on the credit card industry. But I wish you would do an article from the credit card companies’ point of view. While I agree that many credit card practices are unfair, a lot of the customers I speak to are oblivious to basic credit card rules. Many people do not understand why they cannot charge on an account that has not been paid in three months, or why they get a late fee when they fail to pay on time. Just like a store raising prices to cover the cost of shoplifting, credit card companies make their policies based on their worst customers, not their best ones. If you are a great customer and usually pay on time, just call and the fee may be waived. Credit cards are a confusing business. You are good at helping consumers know their rights, but I think they need to know their responsibilities.

Answer: Your point is well taken. Paying on time is an important responsibility, and one that became easier with the Credit Card Accountability Responsibility and Disclosure Act of 2009, which banned arbitrary deadlines, such as considering late a payment that arrives after 1 p.m. on the due date. (Any payment received by 5 p.m. on the due date is now considered to be on time.)

Card issuers also are now required to mail statements at least 21 days before the due date (up from 14) and to make the due date the same day each month, rather than moving it from month to month. If the date falls on a Saturday, Sunday or banking holiday, the due date is moved to the next business day. These rules should make it easier for responsible users to avoid late fees.