Ask Liz Weston

Get smart with your money

Credit Cards

When “the basics” eat up too much of your income

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Dear Liz: My husband and I are recovering from a job loss four years ago. We used up all our savings and home equity. My husband is now employed, but we are struggling to keep ahead even with a salary of about $100,000. I was a stay-at-home mom for the first 10 years of our kids’ lives and now I work two part-time jobs to help with our expenses. We are trying to follow the 50/30/20 budget plan you recommend, but can’t seem to get our “must haves” — which are supposed to be no more than 50% of our after-tax income — down from 80% to 90%. Most of the rest goes for “wants,” such as the kids’ dance classes and soccer teams and for cellphones. We’re not saving anything although we’re trying to whittle down our credit card debt. I have tried several times to refinance our first and second mortgages and home equity line of credit but have found we don’t qualify because too much is owed on our modest three-bedroom, one-bath house, which has gone down significantly in value. We also have two car loans that are worth more than the cars, and the insurance is killing us. Amazingly enough, we have never been late on a payment. We just can’t get ahead. Did I mention that both kids need braces?

Answer: You clearly can’t afford your life, and things will only get worse if you don’t get your spending in line with your income.

Your first step should be to consult with a HUD-approved housing counselor, who can advise you of your mortgage options. You can get referrals from http://www.hud.gov. If your first mortgage is held by Fannie Mae or Freddie Mac, you may be able to refinance it through the federal government’s Home Affordable Refinance Program. Recent changes in the program have helped more underwater homeowners refinance. Even if you’ve been turned down by one lender, you can try with another. One way to search for HARP quotes is through Zillow’s online mortgage quote service at http://www.zillow.com/mortgage-rates/.

The Federal Housing Administration and the Veterans Administration also have streamlined refinancing programs for their underwater loans.

Government programs usually define an “affordable” payment as one that’s 31% or less of your gross income, but that may be too high for many families to comfortably handle. Ideally, your housing costs — including mortgage, property taxes and insurance — would consume no more than about 25% of your gross (pre-tax) income.

If you exhaust your options and can’t get your mortgage payments down to an affordable level, you should consider a short sale of your home. Moving is terribly disruptive and expensive but it’s better than letting a house sink your finances.

Then take a look at your cars. The average annual cost of owning a car is $8,946, according to AAA. You can make the argument that one car is a necessity, but having two is typically more of a convenience than a “must have.” Getting rid of one could dramatically lower your insurance and transportation costs.

Since you’re underwater on both, you’ll need to look at which is cheapest to operate and which is closest to being paid off. If they’re the same, then your choice is easier — you can work toward paying that car off faster so you can sell it. Otherwise, you’ll have to weigh which loan to target first.

Another way to get your budget balanced is to make more money. That may mean asking for more hours at your jobs or looking for opportunities that pay better.

When it’s okay to close credit cards

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Dear Liz: We have four credit cards that generate airline miles, each of which has a yearly fee. We also have a Capital One card with no fee that we use for travel to avoid currency conversion fees. We pay all cards off every month. Since it is getting so hard to use miles, we are thinking of closing all but the Capital One account, which also accrues points toward air travel. I have read that closing credit cards is not a good thing to do. I am 73, my husband 79, so I doubt we will need to incur debt in the future.

Answer: You may want to preserve your good credit scores even if you don’t anticipate taking out any loans. Insurers in many states use credit information to set premiums (although not in California).

If you do still care about your scores, you could consider asking your credit card issuers if you could switch to one of their no-fee cards. The closures of your current accounts may still affect your scores, but having several open, active accounts probably will offset the damage over time.

Or you could just take your chances and close card accounts rather than pay unnecessary fees. But consider having at least one additional credit card, in case your Capital One card is compromised or lost and you need a temporary backup.

Should you pay to boost your credit scores?

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Dear Liz: I’ve seen advertisements for services that promise to help you raise your credit score by the exact number of points you need to qualify for a good mortgage rate. Are these services worth the money?

Answer: There’s one thing you need to know about these services: They don’t have access to the actual FICO formula, which is proprietary. So what they’re doing is essentially guesswork.

They may suggest that you can raise your score a certain number of points in a certain time frame, but the FICO formula isn’t that predictable. Any given action can have different results, depending on the details of your individual credit reports.

Rather than pay money to a firm making such promises, use that cash to pay down any credit card debt you have. Widening the gap between your available credit and your balances can really boost your scores. Other steps you should take include paying your bills on time, disputing serious errors on your credit reports and refraining from opening or closing accounts.

Don’t close accounts; pay off debt instead

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Dear Liz: I’m 22 and a graduate student with only one year left before I enter the “real world.” I have four credit cards — one store card, two Visa cards and one MasterCard — only one of which carries a balance. I want to make the best decisions regarding my financial health. Which would be better for my credit: closing the account that’s the oldest (opened when I was 18) but that will no longer be used because of its small credit limit and high interest rate, or leaving the line open?

Answer: Closing accounts can’t help your credit scores and may hurt them. If you had a long credit history and many accounts, the impact of closing a low-limit account shouldn’t be that great. With such a short history and relatively few accounts, though, you could be doing unnecessary damage to your scores.

The best thing you can do for your financial health, now and in the future, is to pay off your credit card balance. Credit cards should be used as a convenience, not as a way to live beyond your means. Resolve to charge no more than you can pay off in full each and every month. You’ll save yourself a fortune in interest and help protect yourself against bankruptcy.

You don’t have to be in debt to have good scores

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Dear Liz: How deep in debt must a person get before he or she is able to get a mortgage on a home? My grandson, age 26, has been steadily employed by the same company for nearly six years. He rents a place he can afford, buys used cars for cash, has a nice savings account and basically avoids debt by not buying things he can’t afford with cash. Now he would like to begin investing in a home. When applying, however, all he hears is that because he doesn’t have a credit rating, he can’t get a loan. Does he really have to create debt in order to get a loan?

Answer: The idea that you have to be in debt to have a good credit score is a persistent and destructive myth. It’s just as wrong as the idea that all you have to do to have good scores is manage your finances responsibly.

To have good credit scores, you must have and use credit accounts. This does not mean you have to be in debt or carry credit card balances. Simply using a couple of credit cards lightly but regularly and paying them off in full is enough to build good scores over time.

Your grandson may need to start by getting a secured card, which offers a line of credit equal to the amount of cash the applicant deposits at the issuing bank. Websites such as NerdWallet, CreditCards.com, CardRatings.com and LowCards.com highlight current secured card deals.

He also could consider “piggybacking” onto someone else’s good credit by being added as an authorized user to that person’s credit card. In some cases, the other person’s history with the card can be imported to your grandson’s credit bureau files. The person considering adding your grandson should check with the issuer to see whether such an import is possible.