Ask Liz Weston

Dear Liz: Help! In the last year, my credit scores have dropped 30 points. I don’t know why except that my credit reports noted that I used 10 credit cards recently. (I’ve had many dire emergencies lately, but I paid off all my balances as usual.) I’m terrified of more drops. What can I do?

Answer: Build up your emergency fund.

Because you charged your emergencies, you used up more of your available credit. The more of your credit you use, the more negatively your scores tend to react. It doesn’t matter that you paid your balances off each month. What counts is the balances that your credit card issuers report to the credit bureaus, which are typically the balances on your latest statements.

Now, the good news is that your scores probably will recover as soon as you start charging less. But you should take this as a sign that credit cards are a poor substitute for savings. An emergency fund could help you survive life’s inevitable setbacks without having to run to your cards.

Dear Liz: I have $16,000 in the bank as an emergency fund. I’m trying to get serious about paying off my debt, including a $7,500 credit card balance. I was thinking of getting a fixed-rate loan from my credit union to pay off the credit card balance in 36 months.

I have another loan (for my son’s private school tuition) with an original balance of $4,950. I’m supposed to make 12 payments interest-free, which will leave a balance of $3,020, which then reverts to 12.5% interest for the next 14 payments until it is paid off.

What should I do?

Answer: Getting a fixed-rate loan from a credit union to pay off credit card debt is often a good idea — if you don’t already have cash sitting around to pay off the debt, which you do.

Unless you’re in real danger of losing your job, using your savings to pay off the cards is a virtual no-brainer. Clinging to cash that’s earning less than 2% doesn’t make sense when your debt is probably costing you a double-digit interest rate.

When the card debt is paid off, you can focus on rebuilding your emergency fund — until the interest-free period on the school loan is up. At that point you should pay off the rest of the debt.

It should go without saying, but you also need to fix whatever issue caused you to rack up the debt in the first place.

If you can’t afford to pay in full when the bill comes, you shouldn’t buy it. That’s as true for private school tuition as it is for credit card purchases.

photo credit: quaglia

Targeted accounts are the best thing to happen to savers since compound interest. But too few people use them, or understand how much easier they can make the budgeting process.

A targeted account is simply a savings account that you designate for a single purpose. You can set up different targeted accounts for specific goals, such as vacations and home improvements, as well as for recurring expenses such as car repairs, holiday spending, quarterly tax payments and insurance premiums.

These individual “buckets” of savings can help you track your progress to your goals and make sure you have the money you need, when you need it. When all your savings are jumbled together in one account, it’s too easy to overspend–you’ll think you have enough for that vacation to Disney World only to find out you just spent the money you’d been saving for Christmas.

The easiest (and least expensive) way to set up targeted accounts is usually through an online bank such as ING Direct, Emigrant Direct or FNBO Direct. Online banks allow you to set up multiple savings accounts for free, with no minimum balance requirements or account fees, plus you can name them anything you want.

For example, I named our main savings account at our online bank “Emergency Fund” and use that to store the cash we’d need to get through several months of unemployment.

But I also have accounts for “vacation” and “sabbatical.” The vacation fund gets a monthly infusion to cover any weekend trips as well as the longer family getaways we take each year. The sabbatical fund, which will pay for a much longer trip several years in the future, also gets regular contributions.

I use other savings buckets for taxes, car repairs, home repairs, insurance payments and the holidays.

Those buckets ensure that we’ll have the money, in advance, to have fun and follow our dreams.

For more, read:

• How to plan your “emergencies”
• How to open multiple accounts at ING Direct (from Get Rich Slowly)

Fidelity Investments is offering a program called Guide to Personal Savings – a series of free seminars and online tools to help consumers with their budgets, saving plans and investing goals.

A survey conducted by Fidelity Feb. 12-17 found that 83% of the 1,472 respondents said they had not sought financial help in the past 12 months because they thought they could not afford it.

The survey also found that 87% said the economic crisis had made them realize they needed to have an emergency fund. However, only 46% said they had such a fund. Fifty-one percent said they planned to start one in the next six months.

“We want everyone to know that financial help is available to them, at no cost, whether you’re a Fidelity customer or not,” said Kathleen A. Murphy, president of Fidelity Personal Investing, in a release.

Here are some of the free programs Fidelity is offering:

• More than 500 seminars at its investment centers by the end of March.
• New tools and calculators at the company’s Web site, www.fidelity.com/gps, including a Savings Planner (to help meet your savings goals); Portfolio Review (investment strategies);  and Budget Snapshot (find out where you’re spending your money)
• For those with Fidelity workplace savings plans, a series of weekly Webinars.

For more information, go to www.fidelity.com/gps

Also, see my related columns on savings:

• How to survive the next depression

• Could you stop spending for a month?

• A survival guide for the unemployed