Q&A: Credit scores and card limits

Dear Liz: I have a 780 credit score but noted that one of my cards doesn’t count in the percent of credit used. I have had this card for 44 years and I could charge a couple hundred thousand dollars on a single purchase if I chose to, yet credit scoring formulas don’t figure in the “credit I have available” from Amex. Seems unfair?

Answer: As credit cards with six-figure limits are rare, what you’re describing is probably a charge card. Unlike credit cards, charge cards don’t have preset spending limits. They also don’t allow you to carry a balance from month to month, typically.

The “percent of credit used” you mention is called credit utilization, and it’s a large factor in credit scoring formulas. Credit utilization measures how much of your available credit you’re using, and the bigger the gap between your credit limits and your balances, the better.

But the credit utilization calculation can’t be made if one of the numbers — the credit limit — is missing. The only way the formulas would be able to calculate credit utilization in that case would be to assume that whatever amount you charged is equal to your credit limit, and that would be disastrous for your scores.

Q&A: Paying taxes with plastic

Dear Liz: I am selling a rental property that I have owned for several years. I know I could do a 1031 exchange, which would allow me to put off the tax bill by investing in another commercial property. But I just want out. I’ll pay the capital gains tax and invest the rest of the proceeds. I am considering paying the taxes by credit card and taking on the 3% premium to get rewards points offered through the card issuer. Is this a dumb idea, or does it have some merit?

Answer: The companies that process federal tax payments have processing fees of just under 2%, not 3%. You’ll still want to make sure you get more value from your rewards than you pay in fees, and that’s not a given. If your card offers only 1.5% cash back, for example, charging your taxes doesn’t make a lot of sense. But the math changes if you can get more than 2% in rewards, or if you could use the charge to help you meet the minimum spending requirements for a new credit card with a generous sign-up bonus.

If you do charge your taxes, you’ll obviously want to pay the balance in full before incurring any interest.

Q&A: Refreshing an old credit card

Dear Liz: I have and use three credit cards, two of which offer cash-back rewards. The third has no rewards program, so I would like to get rid of it and replace it with a new card that offers cash back or miles. But I’m afraid if I cancel this card my credit score will take a hit, especially since the card has a big chunk of my overall credit limit. What do you suggest?

Answer: You can ask the issuer for a “product change,” which allows you to swap one card for another without closing your account. Typically, your history with the old card is simply transferred to the new one, as is your credit limit.

The new card must be from the same issuer and you usually won’t qualify for any sign-up bonuses. But you won’t risk damaging your scores by closing one account and applying for another.

Research the issuer’s offerings and know which card you want before you call. This is usually a fairly routine process, but if you encounter any resistance, just mention that your other option is to cancel the card. If you’ve been a good customer, the issuer probably will want to keep your business.

A product change also can be a good idea if you want to switch from a rewards card with a high annual fee to one with a lower fee, or no fee. Any rewards you’ve already earned may not be transferable, so be sure to ask.

Q&A: How to keep your lightly used credit cards from closing

Dear Liz: I had a credit card that didn’t expire until 2024 but the issuer closed my account because it hadn’t been used in a few years. During these difficult times, I didn’t want to get into a lot of debt by using too many cards. The issuer should have let me know this could happen so that I could have used it at least once a year.

Answer: You’re smart not to want to charge your way into debt. If you want to keep a credit card from being closed for inactivity, though, you need to use it — and probably more than once a year.

One way to do so is to charge a recurring cost, such as a streaming video subscription, to the card. You can set up the payment to be automatic as well. You should still review the account’s transactions every month to ensure everything is working as planned and no fraudulent charges have been made. But otherwise, this approach is a low-effort way to keep open your access to credit.

Q&A: Downside of unused credit cards

Dear Liz: In the past, you have recommended not canceling credit cards because doing so can hurt credit scores. Over the years, my husband has signed up for at least a dozen credit cards, eight of which we never use and have not used for as long as 10 years. He signed up for another card recently because it offered attractive cash rewards. Is having so many credit cards advisable and safe? Does it make us more vulnerable to identity theft? Without hurting our credit scores, may we discontinue the older cards we have stopped using? Is there any drawback to having multiple, perhaps dozens, of credit cards, especially if some are older and never used?

Answer: The biggest downside to having a bunch of unused credit cards is having to monitor all those accounts for fraudulent transactions, and perhaps paying unnecessary annual fees. The unused accounts add to the amount of available credit you have, which is a positive factor for credit scores.

If you’re concerned about identity theft, your best move would be to freeze your credit reports at all three bureaus. Such freezes are now free, and you can easily “thaw” the freeze temporarily if you want to apply for credit.

Credit freezes make it harder for criminals to open new accounts in your name. If a criminal uses one of your existing accounts, you’re typically protected. The vast majority of credit cards offer “zero liability,” which means you won’t be held responsible for fraudulent charges. Even without zero liability, federal law limits your liability to $50.

If monitoring multiple accounts is too much hassle, though, then he should consider closing some of the cards. If he’s paying fees for cards he’s not using, another option is to ask the issuer for a “product change” to a card that doesn’t charge fees.

Q&A: Here’s why you shouldn’t put that huge hospital bill on a credit card

Dear Liz: Because of COVID, my 27-year-old son lost his job and health insurance. He was unable to afford continued health insurance and did not qualify for Medicaid. He contracted spinal meningitis and was hospitalized 12 days. The hospital reduced his bill to $28,000 from the original $80,000, but he is still unable to pay. He remains unemployed and without any savings. What would you suggest he do?

Answer: Your son should first call the hospital and ask about applying for financial assistance. Federal law requires nonprofit hospitals to offer this help to low-income patients, and many for-profit hospitals also offer programs that can reduce or even eliminate the charges.

He also should ask about a payment plan geared to what’s left of his income. He should resist any hospital pressure to put the bill on a credit card, because hospital payment plans typically don’t charge interest while credit cards do.

If he’s still left with a bill he can’t pay, he should consult a bankruptcy attorney, and do so as soon as possible. Bankruptcy experts are predicting a big uptick in filings as people and businesses struggle with fallout from the pandemic.

Q&A: Too many credit cards? Protect your credit scores while closing accounts

Dear Liz: Over the years, my husband and I have accumulated a number of credit cards. All have had a zero balance for years. I want to start canceling these cards, but I’m concerned that will hurt our great credit scores. How should I go about this, or should I?

Answer: As you probably know, closing credit accounts won’t help your scores and may hurt them. That doesn’t mean you can never close a credit card, but you shouldn’t close a bunch of them at once or close any if you’ll be in the market for a major loan, such as a mortgage or auto loan.

If you’re not planning to borrow money in the near future, then you can start closing accounts one at a time. You’ll probably want to keep the cards with the highest credit limits, and perhaps your oldest card as well. Monitor your scores to see how long they take to recover from each closure. You may need to wait a few months before shutting the next account.

Be sure to use your remaining cards occasionally by charging small amounts and paying the balance in full. That will keep the cards active and help prevent the issuer from canceling them.

Q&A: Adding a child as a credit card user

Dear Liz: I’ve read that adding a child as an authorized user on your credit card could help build his or her credit history. But I was specifically told that this was not the case, as the child’s Social Security number was not primary.

Answer: Whoever told you may not have understood how authorized user activity typically is reported, or may have been talking about a specific issuer’s policy.

Adding someone as an authorized user to a credit card typically results in the history for that card being added to the authorized user’s credit report. That in turn can help the authorized user build credit history and improve his or her credit scores.

Some smaller issuers, such as credit unions or regional banks, may not report authorized user activity to the three credit bureaus, but all of the major credit card companies do. Some of these big issuers, however, don’t report the information if the authorized user is younger than a certain age or if the information is negative. The age cutoff varies by issuer. For American Express and Wells Fargo, for example, it’s 18; for Barclays, it’s 16 and for Discover, it’s 15. Other major issuers don’t have an age cutoff. American Express and U.S. Bank also won’t report to the authorized user’s credit file if the account is delinquent.

The credit bureaus, in turn, have their own policies. TransUnion includes whatever the issuers report. Equifax adds the information to the credit report if the authorized user is at least 16. Experian adds the information supplied by the issuers, regardless of age, but will remove it if the original account becomes “derogatory” — which typically means payments are skipped or the account is charged off.

If you want to help a child build credit by adding the child as an authorized user, you’ll want to make sure you’re adding him or her to a card that will actually do some good. A quick call to the issuer can help you find out its policy on reporting authorized user activity.

Q&A: What to do when you’re mad at your credit card company

Dear Liz: This past summer I was traveling in a foreign country and the email alert that a credit card payment was due did not reach me. Upon returning to the U.S. and attempting to use the card, I was verbally assaulted over the phone by a credit card company representative demanding payment. I’m 80 and have never missed paying off any credit card charge at the end of the billing cycle or paid a penny in credit card interest. The card company reported the missed payment, lowering my credit score 133 points.

This is no way to run a business! I’ve cut up both cards and closed all accounts I had with this company. I had no problem getting a card from another issuer. I’d think that best practice in my case would have been a flag raised on their computers that the missed payment was unusual. A polite contact could have been made, the check would have been in the mail the next day and the company would still have a customer.

Answer: Being verbally assaulted after a one-time lapse suggests either a poorly trained representative or a company that doesn’t care much about customer service. Unfortunately, your leverage to get the missed payment taken off your credit reports pretty much disappeared when you closed your accounts. Some card issuers will make such “goodwill” adjustments to keep longtime customers, but others won’t. It’s always worth asking before you take your business elsewhere.

Now that you have your new card, please consider setting up some kind of automatic payment so this doesn’t happen again. Credit card companies typically offer the option to have your minimum payment, your full balance or a dollar amount in between pulled from your checking account. Making sure that at least the minimum is paid can prevent further damage to your credit scores.

Q&A: Why you should keep credit use low

Dear Liz: You recently said you don’t need debt to have good credit, but I was told that “credit utilization” — the amount of credit you use compared with your credit limits — is important. Paying off the cards each month means zero balances are reported to the credit bureaus and result in no utilization. Also, older credit accounts help scores, and my older accounts dropped off after a period of time, lowering my average age of credit accounts to four years. How can I fix this? Good credit doesn’t stay on forever.

Answer: It’s not true that paying off your cards results in zero credit utilization. The balance that the card issuers report to the credit bureaus is typically the balance on your statement date. You could pay it off in full the very next day, and the statement date balance would still show up on your credit reports and get calculated into your credit scores.

That’s why it’s important to keep your credit utilization down, even if you pay in full (as you should). It’s good to keep charges below about 30% of your credit limit. Below 20% is even better, and below 10% is best.

Accounts typically won’t drop off your credit reports unless they’re closed. Even then, the closed accounts can remain on your credit reports for many years, contributing to the average age of your accounts. The key to having good scores is to keep a few accounts open and in use, not to carry debt.