Ask Liz Weston

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 got my credit reports and scores from a website that said my credit score for one bureau was 699. Then I went to MyFico.com, which said my score for that bureau was 601. Which is right?

Answer: The MyFico score is likely to be closer to the score an actual lender would use.

Many sites promise to give or sell you credit scores, but these scores typically don’t use the FICO scoring formula that most lenders use. The scores you get from other sites can give you a general idea of how lenders may view your creditworthiness but often vary substantially from your actual FICO scores.

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: What is the best source for a free credit report with no strings attached (that is, you’re not required to sign up for credit monitoring or other offers)?

Answer: The one and only site to get your free, federally mandated look at your credit reports is AnnualCreditReport.com. There are plenty of look-alike sites that try to fool you, so make sure you get to the right one.

Also, be aware that you’re entitled only to free credit reports, not free credit scores. If you want to see the FICO scores that lenders use, you will have to buy those at the MyFICO site. If you want to see free credit scores that aren’t FICOs but that give you some idea of where you stand with lenders, visit the Credit Karma 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 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 am a divorced 49-year-old man who has a lot of debt. I recently (and shamefully) turned in the keys on my ridiculously upside-down home in Arizona. My credit scores have plummeted and all my credit cards have raised their rates to 28% and above.

I am remarried to a wonderful woman who is more fiscally responsible and wants to buy a home. I’d like a quick fix, but that seems unlikely. I’ve avoided commingling our assets and credit so far, but recently I asked my wife to cosign a personal loan to consolidate my debt. I’ve also requested to be an authorized user on some of her high-limit, low-balance credit cards.

I fear this may be a break point for our relationship. She has worked hard to be responsible and I — well, I have not. My strategy seems sound. What do you think?

Answer: Your plan could dramatically lower your interest costs, allowing you to repay your debt more quickly. It also could help rehabilitate your battered credit scores.

But the cosigned loan would put your new wife’s credit in your hands. If you missed a single payment, her hard-won credit scores could plunge overnight. If you failed to pay the debt, she would be responsible for it.

That’s a huge risk for her to take, so you shouldn’t hold it against her if she declines. Adding you as an authorized user of her cards involves much less risk, since she wouldn’t have to actually give you access to those cards, but she’s under no obligation to do that either.

If she turns you down, you might want to consider a visit with a legitimate credit counselor (one affiliated with the National Foundation for Credit Counseling) as well as a session with a bankruptcy attorney so you can be apprised of all your options regarding your debt.

Dear Liz: The day before my son got married, he proudly had a long-term 800-plus FICO credit score. The day after he got married, his FICO score became 600. It seems his new wife had many outstanding major debts incurred before the marriage. They live in a non-community-property state. How can he rebuild his credit either with or without a divorce?

Answer: Unless your son filed for bankruptcy the day after his wedding, the scenario you describe is pretty much impossible.

Our credit reports don’t get merged or combined when we marry. And it’s highly unlikely that any of the debts his wife incurred before marriage would be added to his credit reports unless he agreed to be added as a joint account holder or an authorized user.

As a practical matter, of course, he’ll want to help his new wife address these debts, since they’ll affect the couple’s life together.

But he’s not legally responsible for them. Because she incurred these bills before the wedding, they’re her separate responsibility in every state — community-property states included.

An appointment with a marriage counselor might be in order if she actively concealed these debts from him. But they needn’t contact divorce attorneys to fix this problem.

They should probably make two more appointments, however: one with a legitimate credit counselor affiliated with the National Foundation for Consumer Credit (www.nfcc.org) and another with an experienced bankruptcy attorney. The counselor and the attorney together will provide a complete picture of her options.

By the way, just as there’s no such thing as a combined credit report, there’s also no such thing as a “long-term” credit score. Each score is a snapshot of your credit situation and changes as the underlying information in your credit reports changes — which is basically all the time.

Dear Liz: My son lives in an area where the real estate market took a major hit. His first and second mortgages total $320,000. The value of his home is now $180,000 to $200,000. He has a good job but is having trouble making ends meet. He can’t refinance, although if he could this would save him hundreds of dollars.

He is 34 and has talked about just walking away. His credit score is around 800, and he pays all his bills.

If he walks away, how long would it take him to reestablish his credit to buy another home? He has talked to his bank, but for the bank to help, he would have to have lost his job. Please provide advice on what he needs to do. He is getting frustrated living check to check.

Answer: This seems to be Concerned Parent Day.

Your son should first check with a housing counselor approved by the U.S. Department of Housing and Urban Development to make sure he understands all his options. He can find one at www.hud.gov.

A foreclosure or short sale (selling the home for less than what he owes, with the bank’s permission) would trash his credit scores, but with otherwise responsible credit behavior, he could begin rebuilding his credit to near-prime levels within a few years.

He could get another mortgage from a conventional lender two years after a short sale and five years after a foreclosure. He could get a mortgage from the Federal Housing Administration two years after a foreclosure.

Once he understands his options, he’ll still have to make a decision about whether he’s comfortable walking away from this debt. Many people believe they have a moral obligation to pay a mortgage if they possibly can.

Dear Liz: I’m 27 and a recent immigrant to the U.S. who just got a Social Security number. What’s going to be my initial credit, and how can I improve it as quickly as possible?

Answer: Until you actually apply for credit, your credit reports are likely to be a blank — which is going to make getting credit tough.

The best way to start is probably with a secured credit card. You make a deposit with the issuing bank of $200 to $1,000 and get a card with a credit limit that’s the same amount. (You can find secured-card offers at www.cardratings.com, www.creditcards.com and www.indexcreditcards.com.)

As long as the bank reports the card activity to all three credit bureaus, that will help you build your credit. Use the card lightly but regularly and pay it off in full every month.

In addition, consider getting a personal loan from a credit union (again, one that reports to all three bureaus). Paying off the loan over time will also help boost your credit history and scores.

When your FICO scores reach the mid-600s, try applying for a regular, unsecured credit card to further increase your numbers.