Extra credit question: How can your rates, score improve?
Q: I thought I read one time that when you cancel credit card accounts it actually hurts your credit rating. Is this true? My wife and I paid off some accounts and we do not want to use these again. We already cut the cards up so we would not use them again. So my question is, is it better for us to leave the account open and not use the cards or cancel the account completely?
A: OK, this is a subject of some debate. If you close credit card accounts, just make sure that you get your credit report and it says "closed at the request of customer." Actually the store/company must report it that way to the bureaus. So when you "cut up" your cards, call the company to cancel the credit -- IF you think you'll never use it again.
So, if you have too much "open" credit, not being used, it could lower your score. And if you have too little "open" credit it could lower your score! If you're just trying to work yourself out of debt, I suggest closing unneeded accounts so you won't be tempted. But do leave at least two cards on your record, in case you need to apply for a mortgage, car loan, etc. in the future.
If you manage your outstanding balances properly -- paying regularly and on time -- your credit score will improve!
Q: What is the secret to putting on the brakes on the raising credit card rates that are hammering families that are trying to pay them down? For example,the rates on many of our cards have jumped from 15 percent to 29 percent even though the payments were never late. Please give me an answer that won't put my credit rating at risk.
A: This is clearly a problem. Most of the latest credit card agreements - -the fine print -- allow the card issuer to raise rates, even though you don't do anything "wrong" -- such as a late payment or over-limit payment. Thus the issuers monitor your credit report, and have algorithms (programs) that figure out when you're overloaded with debt on other cards as well as theirs -- or when they see you actually stop making new charges and start trying to pay down the cards. Realizing that it won't be easy for you to switch cards, since you already have so much debt, they then try to "milk" you for all the interest they can get -- by raising your rates.
You can try to switch to another lower-rate card -- but know that the low teaser rate will last for only as long as promised before you're hooked again. The only solution is the most difficult -- to pay off that debt and close the card. It's so much harder with those higher rates. I wish I had an easier answer for you!
Terry Savage is a registered investment advisor and the author of the newly published The Savage Number: How Much Money Do You Need To Retire? (256 pages, Wiley, $24.95).
