Too much credit won’t hurt your scores

Dear Liz: We just paid off nine cards totaling $49,000. We are credit card debt free. What should we do with the accounts as we are not going to use them except for a couple (to be paid off monthly) as recommended?

Answer: Congratulations! Whether you paid off the debt over time or received a windfall, you were smart to get out from under this burden.

If you can trust yourselves not to run up more debt, your best option is to leave the accounts open and use them occasionally so the issuers don’t shut them down for inactivity.

It’s something of a myth that too much available credit can hurt your scores. Having lots of available credit is actually a positive factor for your FICO credit scores, the ones used by most lenders, while closing the accounts could hurt your scores.

Separate your finances before divorce is final

Dear Liz: My wife and I each had excellent credit when we married 10 years ago. We are now divorcing (amicably). Since we married, we have put everything in her name: two houses in succession, three cars, all car insurance and utilities. We refinanced our house in February with her name first.

I recently opened checking and savings accounts in my name only and had my paycheck deposited there instead of our joint account.

What steps should I take before a divorce decree to be sure I retain a great credit score?

Answer: To protect their credit, divorcing couples should make sure to close all joint credit accounts and transfer any balances to the partner who will be responsible for paying the obligation.

The same is true for mortgages and other loans that are in both names. Whenever possible, these debts should be refinanced in the responsible party’s name only.

All this should be done before the divorce is final. Otherwise, your ex can trash your credit — deliberately or not.

If your name is still on the mortgage, car loans or credit cards, your scores could plummet if she misses a payment. You would have little recourse because your creditors aren’t bound by your divorce agreement, even if it plainly requires her to stay up to date on these obligations.

Closing accounts and opening new ones can inflict temporary dings on your credit, but these pale in comparison to the damage done by a single skipped payment. If you want to keep that amicable vibe and your excellent scores, separate your credit accounts now.

Using most of your credit limit is asking for trouble

Dear Liz: I have four credit cards with balances that are $800 to $1,200 below the cards’ credit limits. The lowest limit is $1,500 and the highest is $4,000.

Earlier this year I received a notice that my interest rate on one was jumping to 31.99%. Then I got a letter from the same bank saying that because I was so close to my limit, it was closing my credit card. I was $950 below my limit of $4,000, plus I had not used this card in four months.

Because I feel this is an unfair move, I want to report this bank and have it documented that it closed my account. I’m not sure where to go to do this. Any suggestions? By the way, how does this closure affect my credit score?

Answer: Using most of your available credit is a bad, bad thing.

It’s always been bad for your credit scores, which tend to dive the closer you get to your limits. But these days it’s also bad for your relationship with your credit card issuers. In the past, they may have been willing to overlook maxed-out cards. Now they’re fleeing risk and looking for any reason to dump customers they think are more likely to default.

The fact that you haven’t missed a payment so far isn’t actually relevant here. People who use most of their available credit are statistically more likely to default. That’s why it’s prudent to use as little of your credit as possible — less than 30% of each limit is good; less than 10% is better. (That’s true even if you pay off your balances in full because what gets reported to the credit bureaus, and used to calculate your credit scores, is typically the balance from your last credit card statement.)

It’s impossible to predict the effect of this account closure on your credit score, but typically it isn’t good. Closures reduce your available credit, making your existing debt loom larger in credit-scoring formulas.

You can complain to the issuing bank’s regulator if you’d like, although you’ll need to do some research to find the appropriate agency. Large banks are often regulated by the Federal Reserve or the Office of the Comptroller of the Currency (the OCC regulates banks with “National” or the initials N.A. in their names). The Office of Thrift Supervision oversees thrifts, savings and loan associations and federally chartered savings banks, and the National Credit Union Assn. supervises credit unions.

Once you’ve fired off your complaint, though, focus your energy on repaying your debt and using your cards only as a convenience rather than as a way to live beyond your means. Carrying credit card debt has never been prudent, but these days it can be particularly hazardous to your financial health.

Will slashed limit ruin great scores?

Dear Liz: I have three credit cards. In 1996 I got a platinum MasterCard affiliated with my alma mater. Over the years, the issuing bank raised my credit limit from $10,000 to $36,200.

Now it has lowered my limit to $18,000 and I’m upset because that might also lower my FICO score from 816 to whatever. I e-mailed the bank asking why it did that, and it said I don’t need all that credit because I haven’t ever used that much. What can or should I do? I have worked very hard to build good credit, and I don’t want to lose it because of this.

Answer: Whether you should be upset depends on how much of your available credit you regularly use.

If you only ever use a fraction of your available credit, even a large reduction in your credit limit shouldn’t send your scores plummeting. For example, if you don’t charge more than 10% of the new limit, or $1,800 a month, your scores are unlikely to suffer much, if at all.

That said, you don’t have to passively accept the bank’s decision. Your high credit scores mean that you would be a desirable customer for any lender. If you call your issuer and (politely) threaten to take your business elsewhere, you might find at least some of your old credit line restored.

Don’t open a credit card if you’re just going to close it

Dear Liz: I have only one credit card which I pay off every month, and don’t really need another one. I recently received an offer of many frequent flier miles—enough to pay for a nice vacation—if I would open another account. If I accepted the new card, used it occasionally and always paid in full, then canceled it after about a year, would that hurt my credit score? It’s currently pretty decent, about 750.

Answer: Opening and closing accounts can hurt your more-than-decent score. That’s why the company that created the leading FICO credit scoring formula recommends we apply for credit sparingly.

At the same time, it’s a good idea to have more than one credit card. Having a “spare” card can be handy if your other card needs to be closed temporarily because of fraud, or if your issuer decides to change your terms for the worse.

Opening a card just to get an introductory benefit, such as a pile of miles, isn’t the best idea—particularly if you would have to pay a substantial annual fee, which is typically of frequent flyer cards, to keep the account open. Instead, look for a card you can live with for a good long time. Many rewards cards offer cash back or other benefits and don’t have an annual fee. You can find current card offers at CreditCards.com, CardRatings.com and Bankrate.com, among other sites.