Ask Liz Weston

Get smart with your money

Credit Cards

Q&A: Are businesses allowed to charge me to use my credit card?

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Dear Liz: Lately, I’ve encountered businesses charging a fee to use a credit card either online or at the point of service. This practice seems to be steadily increasing, as I have been hit with fees to use my credit card at my car repair shop, gym and restaurants. Gas stations have been doing this for years. The IRS also has a fee to pay taxes online with a credit card. Is there a federal or state law that prohibits this? Is it the banks that are reaping these fees from the consumers who use their credit cards to pay for goods and services? The fees are 1.5% to 3% of the total amount paid, but it is starting to add up.

Answer: Federal law doesn’t prohibit credit card surcharges. Some states do, including California, but California’s law was found to be unconstitutional and so is not enforced.

(Visa and MasterCard used to ban surcharges in their merchant agreements, but the card networks dropped that restriction in 2013 as part of a lawsuit settlement.)

These fees aren’t a profit grab by the banks but a way for merchants to recoup the costs of accepting credit cards. Merchants have to pay interchange fees to the bank that issued the card as well as payments to the credit card network and the company processing the transaction. Those costs typically equal 1.5% to 3.5% of the transaction.

Federal law does prohibit surcharges on cash, prepaid and debit card transactions, however. If you want to avoid the fees, you can opt for one of those methods or look for businesses that don’t add such surcharges.

Q&A: What exchange rate do credit cards use?

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Dear Liz: Are the card companies required to use a certain exchange rate for foreign transactions? I’ve used two different cards for purchases abroad, and the one that charges a fee used a better exchange rate so the total cost to me, including the fee, was less. How can I find out what exchange rates are used?

Answer: Credit card issuers can choose the exchange rates they use, although many employ the rates selected by their payment networks, such as Visa or MasterCard. These rates are typically close to the wholesale interbank rate.

Issuers can also choose when to make the exchange. The issuer may use the rate in effect when the transaction is processed, for example, which may be different from the time of purchase. So even if you used the two cards the same day, you might not get comparable exchange rates.

You can find more information about how your cards process foreign transactions in the cardmember agreement you received when you got the card. If you no longer have that document, you can request the issuer mail it to you or check the Consumer Financial Protection Bureau’s credit card agreement database.

Since most issuers use near-wholesale exchange rates, travel experts typically recommend using credit cards without foreign transaction fees to save money. You should also be wary of “dynamic conversion” — the offer you often get at the point of sale to have the transaction processed in your home currency rather than the local currency. Dynamic conversion rates are typically terrible with big markups, so always choose the local currency.

Q&A: Should I close paid-off, high-rate credit cards?

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Dear Liz: I paid off my high-interest credit cards. Should I close the accounts or leave them open? I heard a long time ago that closing the accounts will affect my credit score because less credit is available to me. But I don’t want to use these credit cards anymore because they have a high interest rate.

Answer: A card’s interest rate is irrelevant if you pay off your balances in full each month, which is the best way to use credit cards.

Closing a bunch of your credit cards at once can have a negative impact on your credit scores. That’s why the general advice is to leave cards open if possible, making a small charge once in a while so the issuer doesn’t close them.

If you can’t trust yourself to use the cards responsibly, though, closing them may be the best option. Or you can ask the issuers for a “product change” to a lower interest card.

Q&A: Closing credit accounts doesn’t need to be a big deal

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Dear Liz: Your recent response to the person giving bad advice about closing credit accounts was truly a public service. Over the years, I have opened and closed many credit accounts. Only once was a credit card closed for non-usage by the issuer and there was no major degradation of my credit score. Never has one of my actions altered my score by more than a few points or for more than a few months at a time. Misinformed statements such as those made by that individual can confuse people who are new to the world of credit or unfamiliar with how it works.

Answer: Before the advent of credit scoring, your ability to get a new loan or credit card may have been affected by a notation on your credit reports that a previous account was closed by the issuer. Today, though, it doesn’t matter who closes an account and there’s no need to add a notation that you were the one requesting the closure. If you mishandled the account, that will be evident from the missed payments that would show up on your credit reports (and be incorporated into your scores). If you handled the account responsibly, that will also be evident on your reports.

As mentioned in previous columns, closing credit accounts can have a significant impact on your scores if you have a few accounts or major blemishes on your credit. Closing a card with a high limit can ding your scores more than closing one with a lower limit.

But people with multiple credit accounts and a history of managing credit responsibly aren’t likely to suffer significant or lasting damage to their scores when they close an account.

Q&A: Account closure caused long-lasting score drop

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Dear Liz: A reader mentioned recently their credit score dropped only four points after closing a credit card they had since 1981. Three years ago I closed a credit card that was over 30 years old and my credit score dropped 20 to 35 points, depending on the credit reporting bureau. My score hasn’t gone up since despite good credit and no late payments. Please remind readers that many factors go into a credit score when closing a credit card.

Answer: As mentioned in the previous column, the impact of a card closure varies depending on other information in your credit reports. If your scores are high and you have several other open credit cards in good standing, the impact is likely to be minimal. If your scores aren’t great, you have few accounts or you’re closing one of your highest-limit cards, the impact may be greater.

Also keep in mind that there are many different credit scoring formulas in use today, so you don’t have just one credit score: you have dozens. FICO and VantageScore are the two main providers, but lenders use different versions of these scores and, as you’ve noted, the results also vary according to the credit bureau they use.

Your scores constantly change because the underlying information in your credit reports changes. Even if you aren’t actively adding or closing accounts, the balances on your accounts typically change from month to month. Higher balances on credit cards can hurt your scores, while lower balances can help. Each month your accounts get a little older (which is a good thing) and more time has passed since your last account opening (also a good thing).

You can offset the impact of a closure by continuing to handle your accounts responsibly. You also might consider adding a new account to the mix if the point drop is significant enough to affect your financial life. If the score drop took you from the 800s to the high 700s, though, it probably isn’t worth the bother of trying to “fix” it since your scores will typically get you the best rates and terms on any credit you may need.

Q&A: Bad advice about closing credit accounts?

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Dear Liz: Recently, you advised someone that it was OK to cancel a credit card. When someone responded saying they did just that and got a 4-point hit on their credit rating, you again stated it was nothing more than a short-term glitch and not to worry.

And you call yourself a “certified” financial advisor? You have no idea what you are talking about. Maybe you should confine your answers to what you know. Just who are you “certified” through?

If a cardholder chooses to cancel a credit card, they have to be specific and firm with the card issuer that THEY canceled the card. The cardholder also has to demand that the card issuer send them, in writing, a letter stating that effect. Card issuers have no problem canceling cards. However, card issuers will post on credit reports that THEY canceled the card, which makes the cardholder look like a bad credit risk, whether that is the case or not. That will be posted on the cardholder credit reports for years. Which in turn, allows current and future card issuers to the cardholder to increase their interest rates and/or deny them higher credit limits or even a credit card. That makes it more challenging for cardholders to get decent rates on mortgages, auto loans and more.

You know nothing about credit cards, much less the credit reporting agencies. Stop giving people false information.

Answer: Your email address indicates you may be in the business of providing financial advice to others. If that’s the case, it’s critical that you keep up to date. Much of what you’ve written either isn’t true or hasn’t been true for decades.

The credit scoring formulas used by lenders don’t distinguish between accounts that are closed by the consumer and those that are closed by lenders. There’s no need to add a note to your credit reports explaining the decision was yours. No one would likely read it anyway, as lending decisions are highly automated.

You can learn more about credit scoring at a number of reputable financial sites, such as NerdWallet or Bankrate. Experian, one of the three major credit bureaus, also provides solid information for consumers. And you may be able to find my book “Your Credit Score” in your local library or online. Initially published in 2004 and updated four times, it was one of the first books to explain credit scoring to the public.

As for the certified financial planner designation, it’s offered by the CFP Board of Standards and is one of the more rigorous certifications financial advisors can get. You can learn more at https://www.cfp.net/.