Credit Cards: You Asked, She AnsweredFor our show "Credit Crunch" many of you submitted credit card questions for financial guru Manisha Thakor. Thakor previously shared her five tips on managing credit cards.
Thank you for writing in! Read Thakor's answers below.
Question: Is it possible to get a recommendation of the most reliable and fair credit card companies?
Manisha Thakor (MT): The best resource I've found to research credit cards is www.bankrate.com. In an ideal world you'd only have cards with no annual fees, a minimum 21 day grace period, and you would always pay your monthly balance off on time and in full thereby negating the need to worry about late charges and penalty interest rates.
Question: I have a Visa credit card, and I have a zero dollar balance on the card. Last week I opened my statement to find a notice that the membership fee would be raised from $25 a year to $88. I wrote a letter stating that I wanted the membership fee waived or reduced. If Visa ignores my request, how will it hurt my FICO score if I cancel the card?
MT: Good for you for reading your bill so carefully, many people do not. Whether or not your FICO score is impacted will depend entirely upon how old this account is. If this is your oldest credit card, canceling it could (temporarily) knock 20-30 points off your FICO score (because it shortens the length of your credit history). If it is not your oldest card, the impact will be slim to none. $88 is awfully high for an annual fee—unless you are getting some incredible credit card "perks" in return. So long as you have at least one other credit card that you can use (ideally one that has been around for a while) you will be just fine. Additionally, unless you are within six months of making a major purchase like a new home or car—a slight, temporary dip in your credit score as a result of closing a long-standing credit card with a sky-high annual fee won't materially impact your financial life.
Question: Is it true that a person's credit score is weakened if one cancels a credit card that is paid off monthly?
MT: Well... it depends. Your credit score is driven primarily by (1) the length of your credit history, (2) your history of on-time payments, and (3) how much debt you have outstanding relative to your credit limit. If this is a relatively new card with a low credit limit it will not hurt your credit rating. If it is a really old card with a very high credit limit, it will have a negative impact. That said, if you are not planning on buying a house in the next six months or making another major purchase—and your intent is to clear your financial clutter—by all means close that card.
Question: Am I better off having two cards with lesser limits than one card with a higher limit? Will it impact my credit rating of 800 if I cancel one card and combine the limits?
MT: Your question is a lot like asking if you should go see a comedy or a drama when you go to the movies this weekend. If they are both good movies, you can't go wrong—it boils down to personal preference. If you are paying both cards off in full each month, it really doesn't matter much whether you have two cards with a split limit or one card with a higher limit. Personally my motto is "less is more," so if I were you I would keep the older card,, asking them to increase the limit, and nix the newer one.
Question: I'm carrying a $6,000 balance on a home equity line credit card, the interest rate is variable and currently at 3.35%. I only have to pay an interest-only payment each month which is around $15. My wife and I pay $1,000 a month on our mortgage, $650 on a leased vehicle, and $300 on a financed vehicle. We have a healthy combined savings but I'm concerned we might need to use it this year. Should I pay off the $6,000 balance or make the payments I've been making and keep a higher balance in our savings account in case we need it?
MT: Pay off half the balance right now. You are paying at least 3.35% for that loan and probably earning next to nothing in your savings account. By paying off half right now, you will reduce your debt while still retaining a bit of a cash cushion. You are very smart to want to make sure you have a savings cushion given the tough times we are in. However, the first thing that jumps out at me as I read your question is the amount you all are spending each month on transportation. To have a "balanced" financial pie you typically want to spend no more than 10% of your monthly gross income on your total transportation costs. It sounds like some paring back in that department is in order. But to answer your primary question, when your financed vehicle is paid for, I'd suggest taking that $300 a month you were spending there and allocating it all to paying down that home equity line of credit (HELOC). There's no better feeling than being HELOC free!
Question: I request credit reports, but have not been able to find any way to find out my credit score. Is it possible to find your credit score from any group or website?
MT: Welcome to the crazy, wacky world of credit! Your credit reports do not contain your credit score—that's why you can't find it there. Your credit reports are like the files your doctor keeps on your health. They are records. Someone still has to read through those records and make an assessment to make a diagnosis if you were ill or to assign a credit score in the case of your finances. To actually get your credit score, the easiest thing to do is go to myfico.com, where, you have to pay to get it. But unlike checking your cholesterol, you don't need to do it yearly unless you are in a dire position and are struggling to raise it. It will cost around $15—and it doesn't matters which of the three credit bureaus you choose to get it from if your goal is just to take your financial pulse.
Question: In this financial climate, is it risky to contact our financial institution to negotiate better terms? Is the institution likely to lower our limit or raise our interest rate if we do so? For example, we have a credit card with bank "A" at 16.74% interest and another with credit union "B" at 8.99%. Should we call to negotiate a new rate with "A", or just move ahead and transfer the "A" balance to our "B" card?
MT: There's no black and white answer. Typically credit unions are more customer- friendly, so starting there first is a good bet—especially given they have the lowest rate. Talk to them honestly about your situation and see if they will take the balance transfer from bank "A" and make sure you understand the terms of the transfer—i.e. what fees are charged for the transfer itself, and what interest rate will be applied to the transferred balance.
Question: I have been reading lately and there seem to be two schools of thought on credit cards: 1) that it is good to have multiple cards with a zero balance because you would then have that much available credit if you needed it, and would probably not be able to get that credit now anyway; 2) that it is not good to have multiple cards with that much available credit as that is seen as potential debt. So what is the correct answer?
MT: Both schools of thought are correct. Confusing, I know! The root problem is that the creation of a credit score is a lot like the making of a hot dog—no one really knows for sure what goes in there, and even if we could know we probably wouldn't want to. While we talk about a credit score as if it were one fixed number, we all actually have multiple credit scores, calculated by different entities (e.g. the three major credit bureaus—Equifax, Experian, and TransUnion—plus individual banks often have their own scoring methodology resulting in yet another possible score). My preference is to see people carry no more than two credit cards—the one they have had the longest and the one they have the highest credit limit on... and very importantly to never carry a balance on either card. That gives you the best of both worlds.
Question: I recently received notice that the terms of a credit account on which I have been paying off a balance transfer for some time may be changing. I have the option of notifying them that I do not wish to accept the changes, in which case the account will be closed but the terms will remain the same until paid off. I am seriously considering refusing to accept the new terms but would like to know if that would affect my risk profile or over-all credit rating which other card companies and credit granting institutions use.
MT: There are many quagmires that live in the fine print of a credit card agreement. Your best course of action is to call each of your existing credit card companies to confirm with them that closing this account will not affect the terms of your current relationship. Most "universal default clauses" are triggered by late payments—not the closing of accounts—but in today's environment it's best to reconfirm with your particular card carriers.
Question: Do consolidated credit agencies work and what should one know about them? Are you actually going for a "soft bankruptcy" when you use them?
MT: By and large, these organizations are replicating a process that with some discipline you can do yourself. They are not "repairing your credit" (only time and a history of on time payments can do that). In plain English they are like pre-packaged foods—giving you convenience, but at a price. They are in business to make a profit and unfortunately, not all of the for-profit ones are reputable. "Soft bankruptcy" is not a technical term but if you are referring to creating a blemish on your credit score that will take time and diligence to recover from, then the answer is sadly... yes.
Question: If someone is unable to meet their minimum monthly payments on the credit cards due to extremely high credit card debt and low income. What would be the best course of action in terms of minimizing the long term effects? (Given that even if all of the cards could be renegotiated to the lowest possible interest, the monthly payments still could not be met)
1) Stop paying on all of them and declare bankruptcy (either kind).
2) Stop paying on all of them and don't declare bankruptcy.
3) Stop paying on some of them and continue paying on the ones that the person can afford to pay.
What are the likely long term effects of just not paying the card companies versus declaring bankruptcy?
MT: There is no free lunch. If you just stop paying the credit card companies, period, you'll get thrown into collections—and that noose around your neck is no fun to wear. Bankruptcy isn't a picnic either, and it will affect your credit rating for years to come but at least you've come clean. The stress that comes from "dodging the collectors" is no way to live. But before making any extreme decision, please sit down with a reputable credit-counseling agency registered with National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
Question: Whatever happened to the usury laws? I remember 20 or more years ago, Sears' was fined for charging more than 12% interest. When and how did those laws fall by the wayside?
MT: Alas, there are no across-the-board black and white federal caps on credit card interest rates at present. According to the Truth in Lending Act, the primary requirement is that issuers fully disclose rates and terms. Congress is likely to re-examine this issue in 2009 but for now, it's more or less a buyer beware situation. So be sure to read the fine print—and encourage your Congressperson to dig into this situation.
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