Ask Liz Weston

Get smart with your money

Liz Weston

Carrying a balance won’t help your scores

By

Dear Liz: I question your advice to the father whose son was turned down for a car loan. You told the father: “Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.”

Recently I was on the phone with a credit bureau questioning an item on my credit report. I have always paid off my credit card balance every month. The credit bureau representative told me that my credit score would be higher if I paid less than the full balance owed on my credit card every month. I asked her how it could possibly hurt my credit score by paying what I owe each month on a timely basis. She assured me that it does hurt my score. I still don’t understand it, but after I read your piece I thought I would pass on to you the advice I received from this credit bureau representative.

Answer: Just because someone works at a credit bureau’s customer service center does not mean she understands how credit scores work.

The information she gave you was dead wrong. She’s not only incorrect about how credit scoring works, but she seems unclear about how credit information is actually reported to her bureau.

The credit card balances that lenders report to the bureaus don’t reflect whether you pay your debt in full. The credit card issuers report the balance on a given day each month. Typically, but not always, it’s the balance from your last statement. You could pay the full amount the day you get your bill, or pay only the minimum. The credit bureaus would never know.

The leading credit scoring formula, the FICO, uses the balances that are reported to the bureaus to calculate your credit utilization. Since neither the bureaus nor the scoring formula “know” whether you pay that balance in full or not, there’s no advantage to carrying a balance. It doesn’t help your credit; it just costs you money. That’s also why it’s important to limit how much of your credit you use at any given time, since maxing out your cards can hurt your scores, even if you pay the balance in full.

“There is no reason to carry a balance to improve your score,” said Anthony A. Sprauve, public relations director for myFico.com, the only place where people can buy their FICO scores. “If someone is paying all of their bills on time; keeping their credit card balances low or at zero; and not opening new lines of credit, they are doing the three most important things they can to have a good credit score.”

The best used cars, from Edmunds.com

By

If you’re in the market to replace a vehicle, check out Edmunds.com’s list of 2012 Used Car Best Bets, which include:

Compact Sedan: 2005-2010 Hyundai Elantra
Midsize Sedan: 2005-2010 Nissan Altima

Large Sedan: 2006-2010 Hyundai Azera
Coupe: 2005-2010 BMW 3 Series
Convertible: 2005-2010 Mazda Miata
Wagon: 2005-2010 Pontiac Vibe
Compact SUV/Crossover: 2005-2010 Honda CR-V
Midsize SUV/Crossover: 2005-2010 Ford Explorer
Large SUV/Crossover: 2005-2010 Chevrolet Tahoe
Minivan/Van: 2005-2010 Honda Odyssey
Compact Truck: 2005-2010 Toyota Tacoma
Large Truck: 2005-2010 Ford F-150
Luxury: 2005-2010 Infiniti G35/G37
Hybrid: 2005-2010 Toyota Prius

Sport Compact: 2005-2010 Subaru Impreza WRX

Edmunds.com editors picked the cars based on reliability, safety, value and availability. The editors considered cars that were two to seven years old, which is pretty much the sweet spot for used car purchases.

Since all cars are used cars as soon as you drive them off the lot, you might as well let someone else take the depreciation hit. You can tens of thousands of dollars over your driving lifetime by buying slightly used cars. Save even more by paying cash and keeping them for 10 years or so.

For more details on Edmunds.com’s list, visit http://www.edmunds.com/car-reviews/best-used-cars.html.

Don’t put college savings into custodial accounts

By

Dear Liz: I opened Uniform Transfers to Minors Act savings accounts for my two boys (now 7 and 10) when they were newborns. I chose not to go with the 529 college savings accounts because I didn’t like the restriction that the money had to be used for education. It has always been my intention to use these funds for college, but if they choose not to go to college, then it could be used to help them purchase their first homes, for example.

I’ve been squirreling away a couple hundred dollars each month in each account, but I read a few of your previous pieces and think maybe the UTMA accounts were not the best vehicle for this. Could they one day just demand the money and do with it whatever they want?

Answer: The short answer is yes. In most states, the money will become theirs at age 21 to spend however they want, although a few states let them have it at 18.

The other big disadvantage to custodial accounts such as UTMA and UGMA (Uniform Gifts to Minors Act) accounts is that they’re counted as the child’s asset in financial aid calculations. That can substantially reduce the amount of aid they get.

But even more important than the financial details is your attitude. You need to give up this notion that not going to college is a reasonable option for your kids. In the 21st century, some kind of post-secondary education is all but a necessity for a person to remain in the middle class, labor economists tell us. Your sons don’t have to study at a four-year school, but they are likely to need at least some vocational training beyond high school.

If you want to reduce the effect of these accounts on any future financial aid packages, you have a couple of options. One is to spend the money before they get to college, although that’s probably not the route you’ll want to take, given how much money you’ve already saved. If the accounts were smaller, you might just use them to buy a computer, pay for summer camp or cover the cost of tutoring. Such expenditures are allowed as long as the money is spent for the benefit of the child and doesn’t pay for expenses that are your obligation as a parent (food, shelter, clothing, medical care).

Another option is to liquidate the accounts and invest the cash in 529 plans. This would dramatically reduce the money’s effect on financial aid calculations, since it would be considered your asset rather than your child’s. The money could be withdrawn tax free to pay for qualified higher education expenses. If it’s not used for higher education, the contribution portion of the withdrawal won’t be taxed as income, but any earnings will be, plus there will be a 10% federal tax penalty on those earnings.

If you decide to transfer the money, the 529 account should be titled the same way as your UTMA accounts, said Mark Kantrowitz, publisher of the college planning website FinAid. Ownership of the account shifts to the child when he reaches the age the UTMA account would have terminated. That gives him control of the money if it’s not spent on education, but he would have had that anyway. You can read more about the details at http://www.finaid.org/savings/ugma.phtml.

“Authorized user” info may not be enough

By

Dear Liz: You recently answered a question about a young man who was turned down for a car loan because he graduated from college debt free and had no credit history. This is the same scenario my daughter encountered this past year.

Despite having a solid job for three years at a good salary, plenty of money in the bank (more than $10,000) and no expenses to speak of, she was turned down repeatedly for credit cards because of “no credit history.” She had been an “authorized user” of our cards for several years. (We have excellent credit scores.) She was told that she needed to be a responsible party on the cards for them to be counted in her application.

I would tell parents to have their child obtain a credit card through the bank or credit union that has her college checking account. That’s what we did with our youngest, who is just completing college and now has a credit history.

Answer: You bring up an excellent point. Although authorized user information can enhance someone’s credit scores, lenders usually have additional criteria they want applicants to meet, such as minimum income levels, job stability and a certain “thickness” to their credit files (which might include other types of credit accounts besides authorized-user accounts).

New credit regulations make it somewhat more difficult than it used to be to qualify for a credit card while in college, but it still can be easier to get a card while in school than afterward.

How to get free summer travel

By

My daughter hasn’t seen her cousins in the Northwest for awhile, so I just finished booking us a late-summer trip to see them. The net cost so far? Less than $30.

Here’s how I did it:

Amtrak roomette. We both love train travel, and the points I earn using my Starwood American Express card transfer directly to my Amtrak Guest Rewards program. Fifteen thousand points buys us a roomette, or double-bunk room, and all our meals for the 30-hour trip. Paying cash would have cost $411. (NerdWallet has a review of the Starwood card here.) I did have to buy a few extra points from Amtrak to make the purchase, since I recently depleted our Starwood points to book a hotel room for five nights in Hawaii. The good news is that Amtrak is offering a 30% bonus when you buy points, so I got 1,300 points for $27.50.

Hotel rooms. I’m a Hilton HHonors member, so I checked online for affordable hotels in Portland. Fortunately, the Hilton chain includes options from inexpensive (Hampton Inn, a great value) to astronomical (Waldorf-Astoria). I could have used 30,000 points to get us a free room, but that wouldn’t have been a great exchange rate, since rooms with two queen beds were available for less than $100 a night at the Doubletree. Here’s the beauty part: I’ll get 15 points per dollar spent for this stay, but it won’t actually cost me anything. That’s because the room is charged to our Capital One Venture card, which reimburses us for travel. We earn two points for every dollar we spend with the card, and we can use those points to offset the cost of travel. We book any flight, hotel or rental car we want, click on a button at the Capital One website to request a travel credit, and the rebate quickly appears on our account. Easy peasy. (CreditCardForum.com has a review of the Capital One Venture cards here.)

Flight home. We didn’t have a lot of flexibility on our return date, and I wanted to fly Alaska Airlines, where I’m (usually) an elite flier. I had enough Alaska miles to do a miles-and-cash deal—20,000 miles and $190 got us our flights home. And once again, Capital One will reimburse us for the cost of the flight.

I’ll still be shelling out for meals and museum admissions; Dear Daughter will pay for her own souvenirs and treats from her allowance and savings. All in all though, it promises to be a pretty cheap getaway.

Travel rewards programs don’t make sense for everyone. If you don’t pay off your credit card balances in full every month, for example, you should look for cards with low interest rates and skip the rewards versions, which tend to have higher rates. But if you spend a fair amount and travel a fair amount, as we do, you can wrest quite a bit of value out of your rewards programs.

 

 

How young ‘uns can build credit scores

By

Dear Liz: Our son was recently turned down for a car loan even though my wife and I were willing to co-sign and we have excellent credit scores. The reason for the denial was “no credit history.” Because we had paid some college expenses and he had basketball athletic scholarships, our son graduated from college debt free.

My wife and I have always tried to live within our means. Other than a mortgage and the occasional car loan that we almost always paid off early, we have had no other debt. We encouraged our children to live the same way.

Did we give them bad advice? What advice can we give our daughter so she does not wind up in the same circumstances? Through a combination of work, academic merit scholarships and our savings, she is on track to graduate in 2013 without any student loans. Should she take one out in her name just so she can pay it back and have a credit history?

Answer: Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.

You may be able to give their credit histories a jump-start by adding them as authorized users to your credit cards, if you have any. Find out first whether the credit card issuer is willing to export your good history with the card to the children’s credit reports, because not all issuers will do this transfer. You may have heard that some credit-scoring formulas ignore authorized user information, but the formula used by most lenders, the FICO, still would incorporate this data in calculating your children’s scores.

Another option is for your kids to apply for secured credit cards. They would make a deposit to the issuing bank and get a credit line in the same amount. A secured card that reports to all three credit bureaus can help build credit scores over time. A number of websites highlight secured-card offers, including CreditCards.com, CardRatings.com and NerdWallet.

Tell the kids to charge no more than 30% of their credit limits (10% or less is even better), and certainly no more than they can afford to pay off in full each month.

If your daughter wants to build up her scores faster, she might want to consider a small installment loan. Having both installment and revolving accounts can lead to higher scores. Installment loans include auto loans, mortgages, personal loans and, yes, student loans. If she does decide to apply for a small student loan, make sure she fills out the Free Application for Federal Student Aid and takes out federal student loans only. Federal student loans have fixed interest rates, flexible repayment terms and plenty of consumer protections. Private student loans have none of those attributes.