Don’t let 0% offers result in maxed-out cards

Dear Liz: I’m trying to transfer some credit card balances to existing accounts that are now offering 0% for 12 to 18 months. If I come close to maxing out the credit limit using one of those offers, will that affect my credit score adversely? Or, should I open up a new card, since I’ve gotten several 0% offers recently?

Answer: Using all or even most of your credit line on any revolving account can hurt your credit scores.

Although opening a new card may ding your scores a few points, it’s usually preferable to spread your debt over several accounts rather than pile it all on one card. This advice assumes you plan to use these offers to pay off your debt as rapidly as possible, rather than as an excuse to continue carrying balances.

If you can’t pay off your balances before the teaser rates expire, consider getting a three-year personal loan from your local credit union and using that to get free of debt. The interest rate you pay may be somewhat higher initially but you’ll likely save money in the long run.

Will risky refi hurt credit scores?

Dear Liz: I need to refinance my home. My credit score has slipped a bit over the last year (still pretty good) and my wife has lost her job. I’m concerned that if we get denied, that will impact my credit score. Some have told me that inquiries from potential lenders can hurt the score but being denied doesn’t show up. What are the facts?

Answer: The credit scoring formula used by most mortgage lenders, the FICO, combines all mortgage-related inquiries made within a certain period and counts them as a single inquiry. (The period is generally 45 days.) Single inquiries typically knock less than 5 points off your scores. The scoring formula also ignores any inquiries made within the previous 30 days. That allows you to shop for a mortgage without unduly damaging your scores.

Being denied credit doesn’t knock any further points off your scores. Given your situation, though — lower income and lower scores — it would make sense to talk to a few lenders before submitting any applications so you’ll have a better idea of whether you’re wasting your time. Also, consider talking with a housing counselor approved by the Department of Housing and Urban Development. (You’ll find a link at http://www.hud.gov.) These counselors keep up with various refinancing programs and may be able to guide you to one that works in your situation.

Debit cards can be riskier than credit cards

Dear Liz: I’m in my early 30s and never carry cash. I charge everything on my debit card. This seems to be a topic of discussion in my office. My co-worker keeps getting his identity stolen and says that using debit cards to pay for everything wreaks havoc on your finances. He says I should use my credit card instead. I just finished paying off all the expenses that creep up when buying a house and really don’t want to start using credit cards again. I don’t think I’d be as good as keeping track of where my money goes when it’s not coming automatically out of my account. But I don’t want to end up losing it all now that identity theft is running rampant. What’s the best solution here?

Answer: What you like most about your debit card — that the charges come directly out of your checking account — is also its greatest flaw. A bad guy who gets access to your account can drain it, and you’re left fighting to get your money back.

Contrast that with fraud on a credit card: You’re not required to pay the disputed charges while the credit card issuer investigates.

That doesn’t mean you should never use a debit card, but you should avoid using it in higher-risk situations. Using a debit card for online purchases isn’t smart, because your computer could be compromised with malware and because merchants often store purchase information in less-than-secure databases.

You also shouldn’t hand your debit card to anyone who could take it out of your sight, such as a waiter at a restaurant, since that person can swipe it through a device called a skimmer to steal the card’s relevant information before handing it back to you. Gas stations and outdoor ATMs can be risky as well, since criminals can more easily install devices to swipe your information than at more protected, better supervised locations.

Even at trusted merchants, though, things can go wrong. Tampered debit card terminals at Michaels craft stores allowed thieves to access customers’ bank accounts.

Using a credit card clearly has advantages, and doesn’t have to be an invitation to debt. Most issuers allow you to set up text and email alerts that let you know when balances exceed limits you set. Apps on your smartphone can help you keep track of charges as well.

Vigilance is the key to limiting the damage caused by identity theft. You should review transactions regularly on all your credit and bank accounts, regardless of what method you choose to pay.

Finally, keep in mind that debit cards do nothing to improve your credit scores, since debit cards are not attached to credit accounts. Light but regular use of credit cards can help achieve good scores, which in turn will save you money on mortgages, auto loans, utility deposits and, in most states, insurance premiums. You don’t need to carry a balance to have good scores, so exercising a little discipline in tracking your balances and paying them in full each month can save you money.

Credit denial: a corporate trick or cause for alarm?

Dear Liz: A few years ago when buying my son his college laptop computer, I applied for the store card at a big, well-known electronics store (at the encouragement of the sales associate). I was denied. I have never been denied a credit card before. I have eight cards that are always paid off monthly, own my own home and have a satisfactory retirement income and a top credit score. By receiving the card, I would have had a substantial savings on the computer. The denial has bothered me ever since. Was this a ploy on the company’s part to deny me the savings?

Answer: That kind of bait-and-switch happens sometimes, but there may be other reasons you were denied.

When you were turned down, the company should have provided you with the name, address and phone number of the credit agency it used to evaluate you. You should have immediately requested your report from the agency to see if the information was accurate. Someone may have stolen your identity, and credit denials are often the first sign many victims have that there’s a problem.

A collections account also could have torpedoed your scores. Many people discover that a medical bill, library fine or parking ticket went unpaid only when they find the resulting collections on their credit reports.

Will loan payoff help or hurt credit scores?

Dear Liz: Two years ago, my husband was denied a revolving $12,000 line of credit. The credit reporting agency indicated that denial was based on “little revolving usage, insufficient or no bank lines, and insufficient open accounts with zero balances.” Nine months ago, however, he was approved for a car loan and received a FICO Auto V2 Score of 808 from the same credit reporting agency. Another credit reporting agency gave him a FICO Auto 04 Score 836. We had wanted to pay cash for this car but thought it would be wise for my husband to improve his credit, so he got an interest-free loan. My husband was recently approved for and obtained a credit card with a $20,000 revolving credit limit. He previously had a card with a $2,000 limit. He will pay off the balances each month. Our question: How long should he wait to pay off the car loan so that the payoff helps his credit and doesn’t hurt it? We don’t like having outstanding debt and have no other loan obligations.

Answer: Occasionally there’s a conflict between doing what’s best for your finances and doing what’s best for your credit scores.

Paying off an installment loan early, for example, normally is good for your wallet since you’re saving money on interest. But this payoff may come with a cost. While the closed account can remain on your credit report for years, contributing positively to your scores, you’ll get somewhat more of a positive impact if you don’t rush to pay it off. The open account will do more good for your scores than a closed account.

In your case, however, there is no conflict. This is an interest-free loan, so you’re paying absolutely nothing for the option of keeping the account open as long as possible. If your primary concern is supporting your husband’s excellent credit scores, consider getting over your aversion to debt and enjoy the free use of the lender’s money.

(OK, it may not be totally free. Buyers who get zero-interest loans often pay more for their cars than those who get market interest rates, according to Edmunds.com. But we’ll assume you thrifty folks bargained hard and really did get free money.)

If your husband can’t tolerate having any debt, he can keep good scores simply by using those credit cards lightly but regularly. The less he uses of his credit limit on the cards each month, the better: 30% or less is good, 20% or less is better, 10% or less is best. Paying the balances in full will ensure he doesn’t have to pay a dime in interest to keep his scores in good standing.

In case you missed it: credit score myths, zero waste and baby dilemmas

YCS4 coverToo many people believe too many lies about credit scores, and it’s costing them money. Read the real scoop in my MSN Money column “Credit score myths that need to die.”

Our family may never achieve “zero waste,” but we’ve started some easy ways to reduce the amount of garbage we generate. More in “Are you ready for a zero-waste lifestyle?

Kyle has a good job, and better health care coverage than her husband. He thinks those are reasons to keep working and create a more flexible schedule. But daycare is eating up most of her paycheck and she’s wondering if she should quit to stay home with their baby. Read my assessment, plus what you need to do if you’re considering becoming a stay-at-home parent, in Marketplace Money’s new feature “Financial Feud.”

Some financial missteps may not show up on your credit reports, but they’re big red flags that you’re headed for trouble. Read more in CardRatings.com’s “Danger ahead: 5 warning signs that won’t show up on your credit report.”

In case you missed it: the youth edition

Cut up cardsSpurning credit cards means younger people have less toxic debt but they may be doing inadvertent damage to their credit scores and costing themselves money. Learn more in “Why young people hate credit cards.

Read some smart answers to the awkward questions your kids may ask about family finances in “One way money is a lot like sex.

You’ve probably read that student loan rates doubled on Monday, but that’s not quite true. Read “Student loan rates: Facts amid the fictions” for the straight scoop.

Have a great weekend!

Wednesday’s need-to-know money news

creditThe mystery behind credit scores, why buy a dress when you can rent one, and what turns Americans off about haggling.

What Really Influences Your Credit Score?
The creators of the VantageScore, a rival to the leading FICO, discuss the formula behind the numbers.

Taking Control of Your Personal Debt

While the math may be simple, the choices can be difficult.

Should You Rent Your Next Dress?
Why pay thousands for a designer dress you’ll wear only a few times?

The Secrets of Super Travelers
How to travel like the pros.

Haggling Can Pay, But Many Americans Refuse to Bargain
Why Americans are wary of this worldwide custom.

Our #CreditChat is about to begin!

liz-westonIn a few minutes I’ll be answering your questions about how to deal with your debt on Experian’s #CreditChat, which starts at 3 p.m. Eastern/noon Pacific today. Topics include how to balance savings and paying off debt, which debts to tackle first, how to handle student loans and what to do if you’re drowning in debt. Easy ways to follow the conversation include Twubs or tchat.

Please join us!

Please join me today for a #CreditChat on Twitter

liz-westonI’ll be featured as the guest expert on Experian’s #CreditChat at 3 p.m. Eastern today. I’ll be tweeting advice and tips about a bunch of important issues, including:

·         When to focus on savings and when to pay down debt

·         What debts to tackle first and which can wait

·         What to do about your student loans

·         What you should know before applying for a mortgage or auto loan

·         What to do if you’re drowning in debt

So come chat with me! Easy ways to follow the conversation include Twubs or tchat. I’ll look forward to hearing from you.