Credit Cards Category
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.
Dear Liz: One of my credit cards offers mediocre rewards — mainly an online store where I can use points to buy products I don’t really need. I would like a card from the same company that offers better rewards, but this is my oldest credit card and I don’t want to hurt my credit score by closing it. Should I just open a new card and use this one sparingly? Can I call the company to seek better rewards without closing the account? Thanks for any help you can offer.
Answer: If you have plenty of other open accounts, don’t be afraid of closing one occasionally. Most credit issuers continue to report the details of closed accounts to the credit bureaus for years, so your good history with this card will continue to contribute positively to your scores even if you close the account.
With that in mind, you can call the issuer and ask for a better deal, which will usually mean opening a new card. You also can shop for new cards at one of the many card comparison sites, such as NerdWallet, Cardratings.com or Creditcards.com.
Dear Liz: I currently owe $27,000 in student loans at an 11.5% interest rate. I have excellent credit and about $8,000 in savings and contribute 17% of my income to a workplace retirement plan. Should I invest less in my 401(k) and pay off debt instead? I just got a balance transfer offer for 0% for 15 months with a 3% transaction fee. I’m considering taking $3,000 and putting it toward my high-interest student loan.
Answer: If you had federal student loans, transferring any part of your debt to a credit card would be a bad idea. That’s because federal student loans come with consumer protections that allow you to reduce or even eliminate your payments if you fall on hard economic times. You certainly wouldn’t want to reduce your retirement savings to pay off these flexible, fixed-rate loans.
The higher rate you are paying indicates that you have private student loans, which typically don’t have the same protections and which usually have variable rates that will climb higher when inflation returns.
Credit card debt has similar flaws — plus you would lose the interest rate deduction on any student loans you paid off this way. Instead, you may want to investigate the option of refinancing and consolidating your private student loans with a credit union. Credit unions are member-owned financial institutions that often offer better rates than traditional lenders. One site representing credit unions, CUStudentLoans.org, currently advertises variable rates on consolidation loans that range from just under 5% to just over 7%.
If you continued to make your current payments on a consolidated loan with a lower interest rate, you would be able to pay off your loans years faster — saving on interest without jeopardizing your future retirement.
Dear Liz: My debit card was part of the recent Target data breach (my credit union called me). I’ve read articles telling me to pull my credit reports. Here’s the thing: I already requested two of my three free credit reports in early December. When I read about the Target incident, I requested the third one. So now, if I pull a credit report, I’d have to pay for it. I’m very concerned about this, as my finances are tight.
Answer: The information that was stolen in the Target breach — and immediately put up for sale on black-market sites — is not the kind of personal information that’s typically needed to open new accounts, said John Ulzheimer, credit expert for CreditSesame.com. So buying your credit reports or investing in credit monitoring, which is how you would spot new account fraud, isn’t strictly necessary, he said.
The information that was stolen can be used in what’s known as “account takeover,” which means the bad guys can take over existing accounts and make fraudulent charges. In the case of a debit card, that means they can drain your bank account. With a credit card, you wouldn’t have to pay the fraudulent transactions, but dealing with them could still be a hassle.
Either way, you would be smart to close any debit or credit card used at Target between Nov. 27 and Dec. 15, the time of the breach, and ask for a replacement, Ulzheimer said.
Dear Liz: Here’s a suggestion for the reader who prefers a debit card to a credit card so she will not get in debt: Use your credit card as a debit card. Every month I pay any credit card balance plus an additional amount equal to a month’s average purchases. Then I keep track of what I spend so I don’t go over that amount during the billing period. This is the same as paying the bill one month ahead. I don’t go into debt at all and still get my reward points.
Answer: Another way to accomplish the same end is to check your credit card balance every week and move that amount to a savings account. When the bill is due, you can move the money back to checking from savings and pay in full. It’s important in any case to stay on top of your balances and make sure you’re not spending more than you can pay off each month.
Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?
Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.
Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.
If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.
Dear Liz: I’m in my early 30s and never carry cash. I charge everything on my debit card. This seems to be a topic of discussion in my office. My co-worker keeps getting his identity stolen and says that using debit cards to pay for everything wreaks havoc on your finances. He says I should use my credit card instead. I just finished paying off all the expenses that creep up when buying a house and really don’t want to start using credit cards again. I don’t think I’d be as good as keeping track of where my money goes when it’s not coming automatically out of my account. But I don’t want to end up losing it all now that identity theft is running rampant. What’s the best solution here?
Answer: What you like most about your debit card — that the charges come directly out of your checking account — is also its greatest flaw. A bad guy who gets access to your account can drain it, and you’re left fighting to get your money back.
Contrast that with fraud on a credit card: You’re not required to pay the disputed charges while the credit card issuer investigates.
That doesn’t mean you should never use a debit card, but you should avoid using it in higher-risk situations. Using a debit card for online purchases isn’t smart, because your computer could be compromised with malware and because merchants often store purchase information in less-than-secure databases.
You also shouldn’t hand your debit card to anyone who could take it out of your sight, such as a waiter at a restaurant, since that person can swipe it through a device called a skimmer to steal the card’s relevant information before handing it back to you. Gas stations and outdoor ATMs can be risky as well, since criminals can more easily install devices to swipe your information than at more protected, better supervised locations.
Even at trusted merchants, though, things can go wrong. Tampered debit card terminals at Michaels craft stores allowed thieves to access customers’ bank accounts.
Using a credit card clearly has advantages, and doesn’t have to be an invitation to debt. Most issuers allow you to set up text and email alerts that let you know when balances exceed limits you set. Apps on your smartphone can help you keep track of charges as well.
Vigilance is the key to limiting the damage caused by identity theft. You should review transactions regularly on all your credit and bank accounts, regardless of what method you choose to pay.
Finally, keep in mind that debit cards do nothing to improve your credit scores, since debit cards are not attached to credit accounts. Light but regular use of credit cards can help achieve good scores, which in turn will save you money on mortgages, auto loans, utility deposits and, in most states, insurance premiums. You don’t need to carry a balance to have good scores, so exercising a little discipline in tracking your balances and paying them in full each month can save you money.
Dear Liz: I co-signed a credit card for someone and the person defaulted on payment. I started making payments but could not continue because I became unemployed. The debt started at $15,631.23 but has gone up to $17,088.08 because of interest and fees. I previously had to go to court because my bank account was frozen. I recently got a notice about this again. Should I file for bankruptcy or try contacting the attorneys who are seeking payment? I am working part-time and have a tight budget. I don’t have anything saved and am living from paycheck to paycheck.
Answer: You should have gone to a bankruptcy attorney the first time you got sued.
Many people try to ignore their debts or hope that collection agencies will be lenient. That’s not a good strategy at a time when collectors are increasingly willing to file lawsuits to get paid, said Gerri Detweiler, director of consumer education for Credit.com. Once collectors have a judgment against you, they can freeze your bank accounts or garnishee your paycheck.
If you don’t have anything saved and can’t come up with any money for payments, you have little leverage in dealing with a collection agency. Bankruptcy may be your only recourse to get these collection efforts to stop.
A bankruptcy attorney can let you know whether you are “judgment proof,” which basically means that you have and make too little for a creditor to collect on any judgments. If you are judgment proof, you may not need to file for bankruptcy, but you may have to deal with frozen accounts and regular trips to court when a collector oversteps.
You can get a referral from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org.
The only silver lining of this situation is that you’ve provided other people with a clear lesson in why they shouldn’t co-sign a credit card or any other loan for someone else.
Dear Liz: I just finished paying off my last credit card and checked my credit report as I am now separated from my wife. I found we had one joint account that she had not been paying. There are two stretches of five months each of no payment.
I immediately called up the creditor and paid off the balance and the creditor closed the account due to the lack of payments. This one account killed my credit score. I also found two old accounts on my credit report that are both still active but I have not used them for years. Both accounts are in good standing.
I was thinking that if I started using the accounts again, paying them off each month, it would boost my credit score faster. I am looking to buy a house this summer and would have an easier time with a better score. Do you think using the old accounts would help improve my score faster or do you think my score would be better if I closed those accounts?
Answer: Closing accounts can’t help your credit scores and may hurt them. You should avoid closing any credit account when you’re trying to improve your credit rating.
Your experience shows why it’s so important to separate financial accounts when you’re separating from a spouse. Failure to pay any joint account can hurt both parties’ scores. This would be true even if you were divorced and had a divorce decree making her responsible for the debt. Your creditors don’t have to pay attention to such agreements.
Lightly using a few credit cards can help you recover from missteps like this one. “Lightly” means charging 10% or less of their credit limits, and you should pay the balances in full each month, since carrying credit card debt doesn’t help your scores. You shouldn’t expect your scores to bounce back overnight, however. If you had good scores before this incident, it may take you a few years to recover completely.