Is it a Good Idea to Close Credit Cards I don't Use?

by Rebecca Eve Selkowe, J.D

3 myths about your credit score:

I never really talked much about credit scores before, but that is starting to change now as I’m realizing how much unnecessary worry, concern, and confusion swirls around them.

So first things first. Your credit score is one credit bureau’s opinion of how likely you are to be able to repay the money you borrow.

Annnd… we’re done here!

[drops mic.]

Heh.

Of course, there’s a lot more to it than that – what factors go into it, what it means, how to have a good one – and based on what I hear from my very smart, very educated clients, a lot of mystery, too!  Here are the top three myths about your credit score, debunked.

Myth #1: If I never use my credit card, I’ll have good credit. WRONG. Your credit score is based on large part on how good you are with credit.  If you don’t actually use credit, no one will know if you’re good at it.  So if you don’t use a credit card, you won’t have bad credit, but your score definitely won’t be as high as it could (and, if you’re financially responsible enough to respect credit cards enough to fear them, as high as it should) probably be.

Myth #2: I should close any credit cards I don’t use. I hear this all the time. I scream “NOOOOOOOOOOOO!!!!!!” and start lifting things up and smashing them.  Okay I don’t really do this… but I want to.  Unlike in, ahem, other areas of our lives, when it comes to your credit score, size matters! Your score is based on part on how much credit you have available to you AND on the length of your credit history (how long you’ve been using a particular account). Closing cards reduces the amount of credit you have.  Closing your oldest card shortens your credit history.  New accounts, bad.  Old accounts, good.  HULK SMASH!

Myth #3: My credit score is the same as my credit report.  NOPE.  Your score is BASED on your report.  You can get your credit report for free each year, but it will not include your credit score.  You definitely want to make sure you’re on top of that report to make sure everything in it is accurate.  You can get your score for free, too, but you may have to do some finagling.  Your score is useful, but the report is even more useful.

There you go. Three myths about your credit score. Pop quiz next week! :)

If you have your head buried in the sand about YOUR credit score, it’s time to get it out. Good, bad, ugly, you have to know that number.  You may be surprised, you may be devastated, but you know that saying “start where you are?”  That’s you and your credit score.

So go check it.

Did these surprise you? Did you know these already? Are you all, tell me something I don’t know? What other questions did this raise for you?

Should I be zeroing out my credit card every month?

by Rebecca Eve Selkowe, J.D

The best way to use your credit card is to pay the balance in full every month – that way, you don’t have credit card debt and you don’t pay interest. However, if you are using your credit card all the time, the balance will never be $0.

(It’s very confusing.)

Credit cards work on a “statement cycle” and a “grace period.” The easiest way to understand what this means is to use an example. Let’s say your Visa bill is due on the 20th of every month, and your statement cycle ends on the 23rd. Let’s say it’s February. How do you know what to pay this month?

Everything you charged from December 24 to January 23 (and anything you hadn’t completely paid off up to that point) makes up your January statement balance. That January statement balance will be due on or before February 20. If you pay the entire January statement balance sometime between January 23 and February 20, you won’t pay any interest. WOO HOO!

BUT! If you used the card in February, you’re still going to see a balance on the card when you pay it on the 20th. Not to fear… on February 23 that statement cycle will close and everything you charged from January 24 to February 23 will be due on or before March 20!

The Key to Handling Credit Card Trouble: Don't Procrastinate!

by Elliot Raphaelson

Consumers can find themselves with insurmountable debt for any number of reasons. Unwise use of credit cards ranks near the top. As a Florida certified county mediator for the last 12 years, I have seen cases involving failure to pay credit-card debt increase markedly over time.

It is not unusual for an account with a limit of $2,000 to rack up a balance of, say, $4,000 within a few years. How does this happen?

Many, if not most, consumers fail to read the initial agreement when they sign for a credit card; they assume they will always be able to make sufficient payments. When they cannot make the required minimum payments, or when they charge more than the limit on their card, bad things happen. Failure to make minimum payments results in an increase in the interest rate and a monthly charge for not making a minimum payment. Exceeding the card's credit limit brings additional charges.

When faced with hard times, many people naturally pay mortgage and car payments first, putting off paying their credit card debt. Given the high interest rates and fees this triggers, their debt can quickly spiral out of control.

Once you stop making minimum payments on your credit card bill, your card issuer will send you statements showing additional fees and higher interest rates. If you do nothing, these fees and charges will continue to accumulate.

If you do nothing and procrastinate until faced with a lawsuit, your options become limited. The credit-card issuer, or its representative, is entitled to legal expenses as well as court costs, if it can demonstrate that you owe the amount in question.

Along the way, however, you may have options you are not aware of to get a resolution more in your favor.

For example, once you have failed to make minimum payments for several months, the creditor recognizes that it is unlikely that you will be able to pay off the account in full. If it is forced to sell this account to a collection company, it will do so at substantial loss, so it may be willing to negotiate with you. If you offer to pay off some portion of the balance over a short time frame, such as two to three months, you may be able to receive a substantial discount.

If you are unable to negotiate successfully with your creditor, you can get help from a local nonprofit counseling agency. Contact the National Foundation for Credit Counseling (www.nfcc.org, or call 800-388-2227) to help you find one.

If the issuer has increased the interest rate on your account because of missed payments, try to renegotiate the rate. (When you call the creditor's customer service line, you can ask to speak with a supervisor.) Indicate you are now able to make minimum payments -- if the company is willing to reduce the interest rate. You have nothing to lose.

What can you do once you have been sued by a debt collection firm for an account on which you have not made payments for several years? If you do not believe you owe the money, or if you believe the amount is incorrect, send a certified letter (requiring acknowledgement of receipt) asking for documented proof.

When an account is purchased by a debt collection firm, especially if it has been sold many times, the firm may not have sufficient documentation. This helps your bargaining position. If the case is heard by a judge, the plaintiff will have to provide proof to the judge that the debt is owed. Once you request such proof from the debt collection firm, they know they are dealing with an educated consumer.

State and local laws and procedures vary. Your case may be heard by a mediator initially, who cannot offer you advice. If you believe your case is strong, you should insist on an appearance before a judge. If you do not want to appear before a judge, you should negotiate with the collection firm; there is no downside in asking for favorable terms for repayment and lower and/or no future interest charges. The collection firm may not want to appear before the judge either, especially if it has insufficient documentation. If you have requested documentation, and it hasn't provided it, it probably doesn't have it.

If you have credit card debt you can't handle, don't procrastinate. Find ways to pay off the debt at a discount, or have the interest rate reduced. Otherwise, the debt will increase quickly, and it will become even more difficult for you to resolve the problem.

 

Elliot Raphaelson welcomes your questions and comments at elliotraph@gmail.com

(c) 2012 ELLIOT RAPHAELSON. DISTRIBUTED BY TRIBUNE MEDIA SERVICES, INC.

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Elliot Raphaelson

A retired executive of Chase Manhattan Bank, Elliot Raphaelson joined The Savings Game after decades of experience as an advisor, teacher and author in the field of personal finance. He has taught courses in personal financial planning at The New School for Social Research and at the Military Academy at West Point, as well conducting seminars for Chase, Dow Jones & Co. and other corporations.

Past publications include Planning Your Financial Future (Wiley, 1982), and his writing has appeared in The New York Times, Town & Country, Vogue, Self, Savvy and Working Woman magazines. For ten years he has worked as a certified mediator and trainer in a Florida county court, where he helps resolve personal financial problems of every description.

Shopping Triggers and How to Curb Them: Depression

by Stacy Francis, CFP®, CDFA

At a seminar today, a woman desperate to take control over her finances confessed that her worst shopping trigger was depression. Whether she was feeling lonely, overworked, fat, poor, or just blue in general, the only way she could cheer herself up was through shopping. While this may sound ludicrous to some, her problem is far from uncommon.

When everything else goes wrong, we reason, can I at least have a Dior lipstick? And for many of us, shopping does create a buzz not all that different from a glass of wine or a divine bar of chocolate. We do feel better, as owners of that gorgeous lipstick that makes us look so special. But just as with any short term high, the problem is, when the warm fuzzy feeling disappears we are worse off than we were before. Because the next time we are feeling lonely/overworked/far/poor/blue, we need to add to the equation that we are also in debt.

In a way, shopping to cure depression can be compared to drinking to cure depression. Sure, our chances for liver failure are significantly smaller, but credit card debt can be a major hassle – and make you feel a whole lot worse. There are other ways to cheer up and lose those gloomy feelings: exercise, spending time with friends, meditation, choosing better foods, etc., etc. – and these are things that will help you in the long term as well. Next time, opt for one of those.

Check out all the articles of our Shopping Triggers series.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.

Shopping Triggers and How to Curb Them: Plastic Instead of Paper

by Stacy Francis, CFP®, CDFA

Yesterday, a dear friend invited me to a pre-sale event in a major department store. There would be free champagne, she told me, excellent service, fun music, wonderful people and above all – of course – some killer outfits, just off the catwalk. Now, the thing is, this has been quite an expensive month for me, with vacation times along with some unforeseen expenses. So I told her that unfortunately, I’d have to pass because of money.

“Why,” she asked, “don’t you just charge it?” I nearly gulped out loud! Doesn’t she remember that I am a financial planner? That is like telling a dietician to start living only on a diet of McDonalds!

This leads us to our next shopping trigger: those wonderful, glistening, magic little cards that are sometimes able to bring us so much pleasure. Because, we reason, why would we pass up fabulous deals and pay more for the things we want later, when we can just seal the deal by charging them, and then pay them off when we do have the money?

The answer goes a little deeper than the obvious one of the financing charges that make most personal finance experts recommend that we double the sum of each purchase we charge but do not intend to pay off the same month, to get an idea of the actual cost. It is also this very behavior-- to seal the deal fast by putting up the plastic -- that gets so many of us in debt, severely damaging our financial futures. Instead, think about how much better of a deal it is to pay cash when you actually have the money, and stay clear of the murky depths of credit card debt.

Check out the other articles in our series on Shopping Triggers.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.