The hazards of asking for a lower rate

Dear Liz: I would like to get my interest rate reduced on a couple of my credit cards. I’ve never been late on a payment and have decent credit scores. But the last time I called to ask for a reduction, the credit card company raised my rate and lowered my limit. I’m hesitant to call and try again. Any suggestions?

Answer: Unless your credit scores are excellent (typically FICO credit scores of 740 or above), these days you probably shouldn’t waste your time trying to negotiate a lower rate with your current issuers.

People with great credit have some leverage, because they can easily transfer their balances to competitors offering low rates. People with only “decent” credit usually can’t qualify for those offers.

You may be able to get a better deal by transferring your balance to a three-year, fixed-rate personal loan. Check with your local credit union first, as these member-owned organizations often have better rates and terms.

How to use credit cards to improve your scores

Dear Liz: I’m working off credit card debt. I have two cards down to a zero balance. Which will improve my FICO credit scores the most: leaving the cards open but not using them or using them minimally and paying the bills off in full each month?

Answer: Congratulations on your progress paying off your debt. Erasing your debt on those two cards is doubtless already helping your scores. You can continue to improve your numbers by using the cards lightly but regularly, paying the balances in full each month.

Credit scoring formulas want to see you actively, and responsibly, using credit. Shutting the cards in a drawer won’t demonstrate that you can do that. You’re also running the risk that a card issuer will shut down your account because of inactivity.

If you discover you can’t use the cards responsibly, however, then locking them in that drawer (or freezing them in ice) is better than running up credit card debt again.

How to find an advisor you can trust

Dear Liz: I’m 56 and have never had a clue about money matters although I have money. Over time, from your column, I have gleaned that one should go to a fee-based financial planner, but I have a hard time trusting people. I’ve had more of these professionals contact me than there are stars in the sky. I’m pretty scared and in “ostrich mode.” I would truly appreciate it if you could give me a nudge toward the right man or woman to chart my path.

Answer: Ultimately you’ll be charting your own path, but it can help to have a trusted advisor point the way.

“Trusted” is the key word, obviously. Many people prefer “fee-only” (not “fee-based”) arrangements because the planner is compensated only by the fees you pay, not by commissions he or she might earn on investment products. A fee-only planner doesn’t accept commissions, while a fee-based planner might.

Something else you’ll want to determine is whether the planner is willing to say in writing that he or she is willing to act as a fiduciary. What that means is that the planner is willing to put your interests ahead of his or her own. This is a much higher standard than most advisors must adhere to by law. Typically advisors only have to recommend “suitable” investments and strategies, rather than the ones that may best serve your needs.

It’s likely that many of the professionals contacting you are not fee-only financial planners but are instead investment salespeople of some kind. If you want a good financial planner, you typically have to seek one out.

Since you have money, you can start by asking for referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org. NAPFA holds its members to high educational, experience and ethics requirements. Many of its members specialize in financial planning for high-net-worth individuals and typically charge a percentage of your assets or a retainer fee. You also could get referrals from the Garrett network mentioned above if you want to pay for advice by the hour. Both organizations’ websites have additional tips for choosing a planner.

Borrowing to invest: risky for you, profitable to investment salesman

Dear Liz: We are getting coaching from a finance advisor. He suggests using a home equity line of credit as investment capital. Your opinion on this?

Answer: You’re not dealing with a financial advisor who has your best interests at heart. You’re dealing with a salesman who is mostly, if not solely, concerned about the commission he’s going to earn from selling you an insurance or investment product should you take his unsound advice.

Borrowing to invest is a risky strategy. Putting your home on the line to do so is particularly unwise. The interest rates on your home equity loan may be low now, but the rate is variable and can rise substantially. If you can’t make the payments, you could lose your home.

If he were honest, this is the pitch he would have made to you: “You don’t make enough money to afford the product I want to sell to you. Therefore, I want you to put your home at risk so I can make this commission. Your borrowing costs and the costs of this investment will likely eat up most of your returns, but at least I’ll have my money.”

If he’s selling insurance, you should report him to your state’s insurance commissioner. If he’s selling stocks or other investments, report him to the Securities and Exchange Commission.

If he has any professional investment credentials — which isn’t likely, but anything is possible — you should report him to the organizations that granted those.

Remember that anyone can call himself or herself a financial advisor. There are no education, experience or ethics requirements. If you want someone who meets higher standards, look for a certified financial planner or a personal financial specialist (a designation given to certified public accountants with financial planning training).

And pay attention to how the planner is paid. A fee-only planner accepts only the fees you pay, while a “fee-based” planner may accept commissions from the products he or she sells. If you don’t want commissions to affect the advice you get, consider a fee-only planner.

Shop hard before you refinance

Dear Liz: In February 2007 we put down $75,000 on our $274,000 home purchase. In July 2010, our home appraised for $261,000. We wanted to refinance with the bank that holds our mortgage. Recently they sent an appraiser who appraised our home at $235,000. So our choices are pay almost $200 a month in mortgage insurance, bring about $6,000 to closing or withdraw the loan. I feel we tried to do the right thing: We put down more than 25% on our home, always pay on time and have FICO scores over 800. But the bank that can help us save on our loan is hurting us, not helping. What can we do?

Answer: Your lender isn’t under any obligation to help you save money. As a result — and as you’ve discovered — there’s often little advantage in sticking with the lender you have.

Whenever you refinance, you should shop and shop hard. Applying with at least two lenders will allow you to compare refinancing deals. It’s possible that another lender would have given you a low appraisal as well, but at least you wouldn’t be held captive in the way you are now.

If you want to continue with this lender and expect to remain in the home for more than a few years, bring the cash to the closing so you can pay down your loan balance to the point where you won’t need mortgage insurance.