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: You recently wrote that adding a child as an authorized user on the parent’s credit card can help your children with their credit scores.

This didn’t work for my daughter. She has been an authorized user for a few years and is trying to get her own credit card and can’t, because she has no credit reports or credit scores.

It is a shame that the honest people suffer for what has happened recently in the financial world and now young people who will pay their bills don’t even have a chance! She even has her own checking account and that doesn’t help. She is now 19.

Any advice on where to go or what to do?

Answer: The financial crisis and credit crunch have made it tougher for many people to get credit, but your daughter still has plenty of options.

You first should call the credit card company and ask if it will export your good history with the credit card to your daughter’s credit bureau files. Not all issuers will do so, but it doesn’t hurt to ask. If this issuer won’t export the data, check with your other card issuers to see if they will.

If that doesn’t work, your daughter can get a secured credit card to help build her credit history. Borrowers make a deposit with the issuing bank of $200 to $1,000 and get a card with that much credit. She can find secured card offers at www.cardratings.com and www.creditcards.com.

She should use no more than 30% of her credit limit at any given time and pay off her balances in full and on time every month.

She also might consider getting a personal loan to help build her credit. Credit unions tend to be more flexible about helping their members get started with loans, so encourage her to look into joining one of those if she’s not already a member. (To find credit unions to join, visit www.joinacu.org.)

Dear Liz: My credit scores are good (over 800 when I refinanced my mortgage last year). I was thinking of listing my son, who is 14, as an authorized user of my credit cards to start establishing his credit history. Will it work? Is there any other way to help him? If it is too early, when is a good time to start?

Answer: As long as you handle your credit cards responsibly — using 30% or less of your credit limits and paying on time — adding your son as an authorized user could indeed help him build his credit history.

This is important, because under the credit card reform law that goes into effect in February, people younger than 21 will have a much harder time getting credit cards and thus building credit on their own. Yet they will need good scores to get apartments, good insurance rates and decent loan rates when they leave the nest.

Adding a child as an authorized user to a card is a low-risk way to build his credit since you don’t have to give him the card or access to the account. Instead, your history with the card is simply added to his credit reports, assuming your credit card issuer agrees (call and make sure first; some issuers report authorized-user information only for spouses). All versions of the leading FICO credit scoring formula factor authorized-user information into their scores, although the latest iteration — FICO 08 — limits how many authorized-user accounts are included.

When you decide to do this is up to you. A longer credit history is generally better, but you should add him only when and if you’re comfortable doing so.

If you decide to do this, discuss with your son the reasons why and also take the opportunity to talk about responsible use of credit. Make sure he knows the importance of paying all balances in full every month and how carrying credit card debt is foolish and expensive. He may not be using the card now, but he’ll have his own credit soon enough, and it’s never too early to instill the importance of using cards as a convenience rather than a crutch.

photo credit: wickedboy_007

Last week BofA promised no more rate hikes between now and February, when the bulk of the credit card reform act’s changes take effect. But now the bank reveals it plans to impose annual fees of $29 to $99 on about 1% of its credit card accounts starting in February.

We can presume that BofA is testing to the waters to see how much its customers howl. If there’s not significant pushback, expect more accounts to be slapped with the fees.

If you have good credit scores (FICOs of 740+), you have plenty of options if your bank imposes an annual fee you don’t want to pay. You can threaten to take your business elsewhere, and the threat has some weight, since other issuers would love your business. If your issuer insists on imposing the fee, you can simply close your account. As long as you keep other cards open, the hit shouldn’t be too bad. If this is your oldest or highest-limit account, you make take a larger hit on your score. But again, the more accounts you have, the less one closure is likely to matter.

If you don’t have good scores, your options are more limited. Other issuers might not be as eager for your business and your scores could take a greater hit from a closure. Paying the fee might be the better option, at least until your scores improve.

For more on recent credit card changes, visit LowCards.com page “Credit card changes by issuer and date.“

Dear Liz: I have no idea what my credit score is, because as my father said, “You never get rich paying someone else interest.” The only reason to borrow money is for a house or a car or for a home improvement for which a home-equity loan would be best. Credit cards, consumer loans and home-equity loans for non-house expenses are folly.

However, you and many other financial columnists are always advising people on how to keep their credit scores high. The implication is that your readers should be borrowing money when they should not. I use credit cards (for most of my purchases, in fact), but I always pay off my balance, so my credit scores are of no interest to me and I don’t know them.

Answer: You’re laboring under two common misconceptions: that credit scores aren’t important and that you have to have debt to have good scores.

It’s precisely because you don’t get rich by paying others unnecessary interest that you should care about your scores. The reality is that good scores have become critically important if you want the best rates and terms on mortgages, auto loans and other lending.

Credit scores are also used by landlords to evaluate applicants and by insurance companies to determine premiums.

But you don’t need to carry credit card balances to have great scores. In fact, the only smart way to use credit cards is to pay your balances in full each month. You also need to pay attention to your credit limits, since maxing out cards, even if you pay in full, can hurt your scores.

Dear Liz: I have $175,000 in credit card debt. Almost all of this debt was due to balance transfer offers over the years which I managed quite well to make sure I had no balances with high interest rates. Now with credit being so tight, one of my issuers has reduced my credit limits and I can’t find any balance transfer offers to extend my low rates. Will the issuers allow me to settle this debt for less than I owe? I always get offers from credit consolidation companies that tell me banks are willing to accept 50% or less of your balance if you pay the reduced balance amount in full. Can I simply call up the credit card company and offer a reduced amount? If I cash out on my stocks and other investments, I could actually pay the debt off in full so I do have the ability to pay. I just never did so since the interest rates were so low.

Answer: The recession has made credit card issuers more willing to accept debt settlement offers, but your savings will come at your credit scores’ expense.

Card issuers really don’t like it when people don’t pay what they owe. When the notation of a debt settlement hits your credit reports, expect your scores to dive.

Some people have little choice but to accept this price. They can’t pay their debt and, for whatever reason, can’t wipe it out in bankruptcy court. In those cases, debt settlement can be the best of bad options.
You, however, have a choice. Don’t make one you’ll regret.

Despite concerns that credit card limit cuts would devastate consumers’ credit, scores nationwide seem to be holding steady, according to Credit Karma, a score-tracking site.

Credit Karma’s latest survey found 34% of consumers saw their credit score stay the same in June compared to 32% in May. Nationally, 28% of consumers saw their credit score decline in June, which is slightly lower than May. And 38% of credit scores increased.

Now, while Credit Karma doesn’t use the FICO scoring formula that most lenders use, the trend is interesting because it seems to confirm what FICO has said: Limit cuts are not hurting consumers as much as some have expected, because consumers are reining in their spending, reducing their balance and new purchases.
Some of Karma’s other findings:

• The South as a region had the highest percentage of increasing credit scores, ending the Midwest’s four-month run at the top. In June, 39% of consumers in the South saw their credit scores increase; 28% of credit scores decreased; and 33% of credit scores stayed the same.
• Michigan had the highest percentage of increasing credit scores during June at 41%; 27% of credit scores declined; and 32% stayed the same.
• Texas saw the highest percentage of decreasing credit scores with 29%; 39% of Texas consumers credit scores increased; and 32% stayed the same.

Want to learn more about boosting your credit score? Check out my latest columns:

• 7 fast fixes for your credit score
• Raise your credit score to 740
• New threats to your credit score

Dear Liz: My credit card issuer has informed me that it is closing my account due to inactivity. I’ve been a customer since 1993 and used the account extensively until two years ago, when I decided to get my financial life in better order and stopped charging purchases to this card.

I don’t want to lose this financial resource or have my credit score affected. I talked to an account manager about reopening the account and offered to make a balance transfer with a guaranteed monthly charge for my health club fees, but he said he could do nothing — the bank had made the decision to eliminate inactive accounts.

What can I do to reverse this decision? Whom should I contact at the bank and what should I say?

Answer: Credit card issuers don’t seem to be interested in reopening closed accounts, even for formerly loyal customers.

In the past, issuers were willing to keep these accounts open, hoping you would return. These days, however, credit card companies are trying to reel in lines of credit wherever possible, and inactive accounts are an easy place to do so.

If you have several other credit card accounts, the damage to your credit score is likely to be minimal. If you’re concerned about not having enough access to credit, though, consider opening another account. This, too, can put a ding on your score, but the damage is likely to fade quickly.

If you have any other cards you’re not using, consider keeping them active by using them to pay those health club fees and other monthly costs. Pay the balance in full every month: You don’t need to pay interest to have access to credit and healthy scores.

Dear Liz: I have paid off my credit card bills each month for years, and I am becoming increasingly frustrated with credit card requirements. I canceled an American Express card because a fee was about to be imposed.

Yet most articles on credit cards say that one should never cancel a card. In a recent column in my local paper, you wrote that applying for a new card could ding my credit. So now I can’t cancel a card or get a new one without harming my credit rating? Where is the logic in this? Should I just cancel all of my cards and go back to paying by debit card and checks?

Answer: Probably not, because another thing that can hurt your credit is not using credit. In order to judge your creditworthiness, the scoring formulas need to see how you’ve handled credit in the past. If you stop using credit entirely, eventually your credit reports will stop generating credit scores.

That doesn’t mean you have to carry credit card balances. Using cards as you have been, as a convenience only, is a great way to keep your credit scores in shape without paying unnecessary interest.

You need to keep in mind that credit scoring formulas were designed for lenders, not consumers. Credit scores’ primary purpose is to predict a borrower’s risk of default, and their logic is based on identifying the behaviors that increase that risk.

Because both opening and closing accounts are associated with a higher risk of default, both actions may hurt your scores.

That doesn’t mean you should never open or close an account, but you should do both sparingly and not when you’re in the market for a major loan.

Dear Liz: I know closing accounts can hurt my credit scores, but I want to cancel one of my reward credit cards that has a high annual fee and open a different reward card with no annual fee. Will opening the second credit card restore the drop in my credit score that will occur if I cancel the first card?

Answer: No. Both closing and opening accounts can ding your scores. But the damage is likely to be minimal if you have plenty of other credit.