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

On Monday–the day the final portions of credit card reform go into effect–CreditCards.com is hosting a live town hall meeting with White House economic adviser Austan Goolsbee about the sweeping changes authorized by the new law.

You can ask questions during the event, which starts at 2 p.m. Eastern, or submit them in advance at www.creditcards.com/askthewhitehouse. You can also submit questions via Twitter using the hashtag #cardlaw.

I hope you’ll tune into this event. I also hope Goolsbee or someone else at the event will dispute the widespread notion that credit card reform somehow triggered the Great Credit Slamdown we’ve been seeing lately, with issuers raising interest rates, lowering limits and closing accounts. That was well underway before Congress even began considering the CARD Act, as you can read in my February 2008 column, “The credit card party is officially over.”

Dear Liz: If I’m given a 10-day grace period for making a payment and pay the bill on the last day of the grace period, will it still be treated as an on-time payment on my credit reports?

Answer: Typically, yes. In fact, most creditors won’t report you to the credit bureaus as overdue until your payment is 30 days or more overdue.

That’s not to say you should treat due dates casually. Missing the due date (or the end of the grace period, if that’s different) will typically trigger a late fee and could lead to higher interest rates.

You would be smart to make sure your payment reaches your creditor a day or two before the end of the grace period. Using electronic payments rather than the mail can help you time your transactions more precisely. Online or automatic payments also leave an electronic trail that can prove when you paid.

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.

Credit card rates are going back to the future.

Instead of a wide range of rates based on the borrower’s risk profile, credit card companies will move to toward a single-rate system for all their customers, Discover CEO David Nelms told the Salt Lake City Tribune recently.

The Credit Card Accountability, Responsibility and Disclosure Act will benefit some people and hurt others, said Nelms, who was in Utah visiting the company’s largest call center operation Tuesday, in West Valley. For those with good credit, “the ultra-low rates of the past 10 years aren’t going to be available anymore.”

That’s how credit card rates used to work, back in the days before credit scoring. One rate, usually around 18%, for all customers–and folks with bad credit need not apply at all.

In February 2008, I warned that “The credit card party is officially over” as rising defaults and the credit crunch led issuers to start raising rates and lowering credit limits. That trend only accelerated after credit card reform passed. Balance transfer offers have gotten much less generous and rewards programs are about to suffer, as well. (I’ll be writing about that next week for MSN Money.)

All told, it’s a good time to get that credit card debt paid off. If you still have a low rate after Feb. 22, when the last of the CARD Act reforms kick in, you should be able to keep it unless you’re late paying by 60 days. Otherwise, you might want to consider locking in a lower rate with a personal loan from a credit union. With good credit, you could get a three-year loan with a fixed rate around 10%.

Balance transfer fees used to be a minor annoyance: typically less than 3% and generally capped at $50 to $75. Now they’re as high as 5% of the transferred balance, with no caps, and issuers may well continue to boost them in their never-ending quest for profits to replace what they lost to credit card reform.

Bill Hardekopf of LowCards.com recently did a round-up of current balance transfer fees by issuer, and here’s what he found:

Chase: 5%
Discover: 5%
Bank of America: 4%
Citi: 3%
American Express: 3%
Capital One: most do not have balance transfer fee, but the Platinum
Prestige card charges 3%

As before, you have to do the math to make sure a balance transfer makes sense, since the fees will offset and could outweigh any interest rate savings. Hardekopf advises that if you need longer than a year to pay off your debt, you should consider a card with a low on-going rate rather than one with an ultra-low teaser rate that will expire.

Hardekopf’s additional advice:

You must pay on time, every time. If you have a late payment, your
introductory period will likely end and you will be assessed the APR
on the transferred balance.

There is no grace period with balance transfers. Interest charges begin at
the time the check is issued to your credit card institution.

You can’t transfer your balance to another card with the same issuer.

It takes about four weeks for the balance to be transferred. Continue to
make all required payments until you confirm that the balance transfers were
made. Multiple balance transfers will process in the order they are
requested on the application.

The new issuer pays the amount of the balance directly to the old issuer
and the amount you owe them will be reduced by the amount you transferred.
The available credit on your new account will be reduced, as if you had made
a purchase.

Transferring a balance does not automatically close your old account. If
you want to close the account, contact the issuer directly.

Issuers have the right to decline balance transfer requests or transfer
less than you requested.

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.

If you’re tempted to feel sorry for credit card companies, what with all the new restrictions kicking in Feb. 22, read on.

Capital One was recently sued by West Virginia’s attorney general for a variety of alleged misdeeds, including sending customers a debt repayment plan disguised as an offer of new credit. (Hat tip to Bill Hardekopf at LowCards.com for bringing the suit to my attention.)

Capital One sent the solicitations to people whose balances had already been charged off as bad debt, West Virginia Attorney General Darrell McGraw alleged in his complaint. Although it looked like a new credit card offer, what Capital One was really offering was $1 of new credit in exchange for the customer agreeing to have the charged-off balance transferred to the new card, McGraw said.

The agreement allowed Capital One to charge interest, late fees and over-the-limit fees on debt that otherwise would have been beyond its reach, the complaint alleges. The agreement also allowed Capital One to re-age the debt, restarting the statute of limitations.

According to a Legal Newsline article by Nick Rees:

“Capital One’s practice of offering nominal extension of credit, if and only if, the consumer agreed to pay off a debt too old to be sued on is tantamount to loan sharking,” McGraw said.

The complaint alleges Capital One also:

• issued multiple low-limit credit cards, each charging exorbitant fees, rather than raising credit limits on consumers’ existing accounts
• unconscionably imposed over-the-limit fees on consumers’ accounts
• sold services to consumers who could not benefit from the services
• billed and attempted to collect for credit card accounts that were never activated.

I’ve made a big fuss about the difference between fair play and foul play, and how often credit card companies crossed the line. But this little scheme may have crossed another line: the one between foul play and pure evil.