Ask Liz Weston

Get smart with your money

Credit Cards

Q&A: Closing credit cards with annual fees

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Dear Liz: When I opened my airline-branded credit card almost 10 years ago, it was well worth the $50 annual fee. I was able to book many flights for free because of the miles I earned and the airline’s generous rewards program. However, I moved a few years ago to a location that is not serviced by the airline. Now the airline’s reward card is my “last ditch emergency” card since I have two other cash-back rewards cards that offer a better return (I pay all my cards in full every month).

I know that annual fees on credit cards are not good, but I’m struggling with the decision on whether to keep it or not. It is the second-oldest credit account I have and about a third of the amount of credit I can use, and I am concerned about my credit score dropping if I close it. My credit score is excellent, but I am concerned about how much of a drop in my score this would cause. I did try to “convert it” to a cash-back credit card with no annual fee, but the bank wouldn’t do it. So now I’m stuck on what to do. Should I continue to pay the $50 annual fee to keep my credit score intact, or should I close it and see if I can increase my credit on my other cards?

Answer: Most good travel rewards cards these days charge annual fees, and those fees aren’t a big deal if you’re getting airline tickets or lodging that more than offset the cost. Your card may pay for itself with a single trip if it waives baggage check fees (as many airline-branded cards do).

If you can’t even wring that much value from the card, consider closing it. Given how much of your available credit the card represents, though, you might want to open another card first. Available credit matters far more to your credit scores than the age of your accounts. And even if you close this account, your history with it will continue to be reported for many years, so you shouldn’t hold off just because it’s your second-oldest card.

Does Paying Off Old Debts Help Your Credit Score?

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Dear Liz: How can I get a clear and complete picture of the debts that are hurting my credit score? I have my credit report already. I’m a bit lost and I need to get my credit cleared up to buy a home.

Answer: You actually have three credit reports, one at each of the major credit bureaus: Experian, Equifax and TransUnion. Your mortgage lender is likely to request FICO credit scores from each of the three, so you need to check all three reports.

You get your reports for free at one site: http://www.annualcreditreport.com. There are many sites masquerading as this free, federally mandated site, so make sure that you enter the URL correctly. You may be pitched credit scores or other products by the credit bureaus while you’re on this site, but you won’t be required to give a credit card number to get your free reports. (If the site is demanding that you give your credit card number, you’re at the wrong site.)

You should understand that old, unpaid bills may be depressing your scores, but paying them off may not improve those scores. In other words, the damage has been done. You may be able to reduce the impact if you can persuade the collectors to remove the accounts from your reports in exchange for payment, something known in the collections industry as “pay for delete.” But you probably can’t erase the late payments and charge-offs reported by the original creditor before the accounts were turned over to collections, and those earlier marks against you are even more negative than the collection accounts.

That’s not to say you should despair. Over time, your credit scores will improve as you handle credit responsibly. But you shouldn’t expect overnight miracles.

Keep Credit Cards Active Without Slipping Into Debt

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Dear Liz: Recently I’ve paid off almost $20,000 in credit card debt and am determined not to go down that path again. Because I haven’t used these cards in a while, though, I’m starting to get notifications from the credit card companies that they’re closing my accounts because of inactivity. I know having long-standing accounts on your credit report is a good thing, but I don’t want to be tempted to use these cards just to keep the account open. Is it a bad thing if almost all of my credit card accounts get closed?

Answer: Your good histories with these cards should remain on your credit reports for years. But if you stop using credit entirely, eventually your credit reports won’t generate credit scores. That could cause you problems if you later want to borrow money (say, to buy a home) and could even affect your insurance premiums, since insurers use credit information as well.

It’s not too hard to keep accounts active without slipping into debt again. Simply set up a bill to be charged automatically to each account, then set up automatic payments with the credit card issuer so the full balance is taken out of your checking account each month.

 

How to pay off your credit card debt

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Dear Liz: I’m confused about paying down credit card debt. Some say to pay the lowest-balance cards first and others say the highest balance or the one with the highest interest. I have almost $16,000 on credit cards ranging from a $4,930 balance on a card with an 8.24% interest rate to $660 on a card with an 18% rate.

Answer: Actually, the first question you should ask is “How much credit card debt do I have compared to my income?” If your balances equal half or more of your annual earnings, you may not be able to pay it all off. You should make appointments with a legitimate credit counselor (such as one affiliated with the National Foundation for Credit Counseling at http://www.nfcc.org) and a bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org).

If your situation isn’t that dire, the fastest way out of debt is to pay the minimums on your lower-rate cards and send as much money as possible to your highest-rate card. Once that’s paid off, concentrate on paying off the next-highest-rate card, and so on. Some people instead like to target balances from smallest to largest to get a quicker feeling of victory, but you typically pay more in interest with that approach.

Credit card fraud alerts: don’t be too impressed

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Dear Liz: My wife and I have had our bank’s airline cards a long time, but we want to change because it’s become almost impossible to cash in the miles. What I don’t see in various card-comparison articles are ratings of the card issuers for customer service and fraud protection. Our bank has been quite good at both, but what about the other issuers?

Answer: People are often unduly impressed when their credit card issuers contact them frequently about possibly fraudulent charges. The issuers are the only ones at risk in these situations, since under “zero liability” policies you can’t be held responsible for bogus charges. Also, if their software were better, they might do a better job of separating legitimate from fraudulent transactions and have to bother you less.

In any case, it’s tough to tell as a customer how good the issuer’s fraud prevention measures are. So perhaps a better metric to use is customer service, and J.D. Power publishes an annual credit card satisfaction study that tries to gauge six factors: interaction; credit card terms; billing and payment; rewards; benefits and services; and problem resolution. American Express has ranked at the top of the survey every year since it started seven years ago. Discover ranked second for 2013 and Chase ranked third.

Find a better credit card

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Dear Liz: One of my credit cards offers mediocre rewards — mainly an online store where I can use points to buy products I don’t really need. I would like a card from the same company that offers better rewards, but this is my oldest credit card and I don’t want to hurt my credit score by closing it. Should I just open a new card and use this one sparingly? Can I call the company to seek better rewards without closing the account? Thanks for any help you can offer.

Answer: If you have plenty of other open accounts, don’t be afraid of closing one occasionally. Most credit issuers continue to report the details of closed accounts to the credit bureaus for years, so your good history with this card will continue to contribute positively to your scores even if you close the account.

With that in mind, you can call the issuer and ask for a better deal, which will usually mean opening a new card. You also can shop for new cards at one of the many card comparison sites, such as NerdWallet, Cardratings.com or Creditcards.com.