Ask Liz Weston

Get smart with your money

Credit Cards

Q&A: How a new credit card can help your credit score

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Dear Liz: I’ve received a notice stating that a retail credit card I’ve had for more than a decade will be converted to a Mastercard. I already have an American Express charge card and a Visa rewards credit card. I don’t need another credit card. But I’m concerned. Will the conversion hurt my credit scores? Or is having a credit card versus a retail card better for my credit scores?

Answer: Congratulations! Such conversions indicate you’ve been using the card and your other credit accounts responsibly. If you continue to do so, the new credit card could help your credit scores more than the retail card.

Although getting new plastic is both good and bad for your credit score, a credit card is typically factored into more FICO scoring variables than a retail card, said Ethan Dornhelm, FICO’s vice president of scores and predictive analytics.

“So to the extent that you have positive behaviors, it’s more likely to have a broader positive impact,” Dornhelm said.

The flip side is that if you mess up by missing a payment or running up big balances, those mistakes could have a greater effect on your scores, Dornhelm said.

Closing the account probably would be one of those mistakes, since closures reduce your available credit and in general should be avoided unless there’s a compelling reason, such as a too-high annual fee. The benefits that came with the retail card, such as discounts and free shipping, probably will transfer to the credit card, so you can continue to benefit from the account without worrying that it will hurt your scores.

Q&A: Why home equity loans are a better option than credit cards

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Dear Liz: My husband is 68, I am 70, both of us are retired and on Social Security. We have little in savings. My husband wants to charge $10,000 to a low-interest credit card to pay for a new furnace and water heater. He plans to pay the minimum each month and at the end of each year transfer the balance to a different credit card with low interest. Is this a good idea?

Answer: You may have better options.

Many credit cards offer low introductory rates that expire after 12 to 21 months, but you typically won’t know before you apply what your credit limit will be.

You may not get a high enough limit to make all your purchases or you could use up so much of the limit that it causes damage to your credit scores. (Scoring formulas are sensitive to how much of your available credit you’re using, and ideally you wouldn’t use more than about 10% to 30% of your credit limits at any given time.) When you apply to transfer your balance to another low-rate card, you’ll run similar risks.

A home equity line of credit or home equity loan might be a better choice. HELOCs have variable rates, but you would have a source of funds you can tap and repay as needed (much like a credit card, but backed by the equity in your home). Home equity loans typically have fixed terms and rates, so you can borrow what you need and pay off the debt over time (often 15 to 20 years).

If paying back the money would be a hardship, a reverse mortgage might be an option. Reverse mortgages can be complicated and expensive, however, so talk to a housing counselor approved by the Department of Housing and Urban Development before proceeding with one.

Q&A: Business credit card dilemma

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Dear Liz: I am a sole proprietor and have two business credit cards. I used my Social Security number to apply for the cards and put $2,000 to $3,000 a month on these cards, yet all this credit card activity is not reported to Experian, thereby hurting my credit score, and I now have “stale credit” per Experian. Is my credit card activity not reported because my cards are considered business cards?

Answer: The short answer is yes. Although you used your personal credit history to apply for the cards, business cards typically don’t report activity to the consumer credit bureaus (although negative activity may be reported, such as if the account is delinquent).

You can remedy the situation by getting and using a personal credit card or two. If your credit report has become so stale that it can’t generate a credit score at all, you may need to start with a secured card or look into a credit builder loan.

Q&A: Why you need a credit score even if you don’t like debt

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Dear Liz: As I counsel my teenage kids about their personal finances, I am wondering if they can live without a credit score. It is puzzling that to get a good credit score, you need to have debt, or at least a credit card. Wouldn’t living debt free be best? With FICO scores becoming de rigueur, is it reasonable for anyone to get away with no credit score at all, especially if the only debt they would consider is a mortgage someday? Also, the credit reporting companies now have some adjunct services that provide reporting based on payments for rent and utilities that might be helpful. How effective are those reports?

Answer: Credit scores aren’t meant to gauge how well you manage money. They’re meant to gauge how well you handle credit. If you don’t have and use credit, you won’t have scores, and lenders will be reluctant to extend you credit when you want or need it.

You also may have to pay higher deposits for utilities, miss out on the best cellphone deals and have trouble renting an apartment. In most states, credit information helps determine property insurance premiums as well. In fact, your credit may matter more than your driving record in determining auto insurance premiums.

It’s a myth that you must be in debt to have good credit scores. You just need to have and lightly use a credit card, and you should pay it in full every month. Another option is a credit builder loan, through which the money you borrow is placed in a savings account or certificate of deposit for you to claim when you’ve finished making 12 monthly payments.

There are services that will add rent and utility payments to your credit reports. The most commonly used versions of the FICO score, however, don’t include that information in calculating scores.

Q&A: How a card switch affects your credit score

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Dear Liz: I have one American Express card and two Visa cards, all of which I have held for many years. I received notice that my American Express card was being converted to a Visa card. I do not want a third Visa card but have no choice. For credit score purposes, will this conversion appear to be a closing of my old card and an application for a new one? Obviously, closing a long-held credit card and applying for a new one will affect my excellent credit score, which is 830. If I decided to apply for a new American Express card, how would that impact my score?

Answer: Conversions from one issuer to another can have a temporary negative impact on your credit scores as one account is closed and another opened. The effect should be minor as long as you have other open, active accounts.

Within a month or two, the new account should show the same history as the old one, and your scores should recover. (You have more than one credit score, by the way, and your scores change all the time. As long as they’re generally above 760 or so, you should get lenders’ best rates and terms.)

The type of card usually matters less than the benefits associated with the card. If those benefits are useful to you and are enough to offset any annual fee, consider keeping the card. Its long history and credit limit are likely helping your scores.

That doesn’t mean you have to keep a card you really don’t want. The fewer cards you have, though, the more careful you probably need to be about closing one.

You can still add an American Express or other card to your portfolio. Adding a new card typically dings your scores less than five points. The effect is temporary, and the new account could contribute positively to your scores over time.

Q&A: Lowering credit limits

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Dear Liz: You recently answered a question about a woman who asked her credit card issuer to lower her credit limits. While it’s true that lowering your credit limit on a card can have a negative effect on your credit scores, it may be needed to leave credit room for new cards, as your total credit across cards vs. your annual income is considered. And of course your credit score won’t suffer when balances are paid down before the statement date.

Answer: Credit scoring formulas calculate your credit utilization based on the amount of credit you’re using on the day that the card issuer reports your account to the credit bureaus each month. That’s usually, but not always, the balance as of the statement closing date. Making a payment just before that date often lowers your credit utilization and can help your scores.

So yes, making a payment before the statement closing date can offset the negative impact of lowered limits. However, it would be rather foolish for an individual to request lower limits thinking that a credit card issuer might prefer them to have less credit. Typically, healthy credit limits are a sign you’re managing your credit well. Even if a credit card issuer might look askance at your available credit, you won’t know exactly where to draw that line. Credit card issuers have different policies on how they set credit limits, and they typically don’t broadcast how those decisions are made.