Lightning Round: Credit cards, how to improve your FICO and more
Here at Marketplace Money, we get more questions than we can answer, but we love answering them — that's why we created the lightning round. Five minutes of personal finance fun, and for the start of 2014, we're tackling all of your questions about credit cards.
- Melanie in Los Angeles has some credit cards that she hadn't used since 2001. If she calls and cancels them, what will that do to her FICO score?
Carmen says: “She’ll get dinged, she’ll lose some points. Here’s why: It won’t be on her report as active, and she won’t have access to that credit. So, she’s carrying a balance on anything else, she’ll basically a higher debt-utilization ratio. Basically, if she’s carrying a balance of $5,000, and she has open four cards with a total of $50,000 [credit limit], her debt ratio is very small. If she closes a couple of those, all of a sudden that percentage gets bigger. I would say this Melanie, use those cards and then just keep them in rotation in your wallet. It’s not so much about dings, as access to the credit. You want to keep open credit lines.”
- Another wrinkle to that question, Alex from Austin, TX, wants to know, is it smart to let your credit score die? And I mean pay all your debts, car note and everything, wait those months until your FICO vanishes if you are up to the challenge of finding a manual underwriting company for your mortgage and save cash for everything you want to buy?
Carmen says: “Alex, credit scores don’t die. They don’t die until you die until you die — not to be macabre. What he’s really asking here is, 'Can I use an alternative way of borrowing money?' Alex, I would really prefer that you make sure that you pay your debts on time every time, but you just make sure you have your credit score and it’s in really good shape. I’m not exactly sure why you want to go into alternative credit, because frankly if you’re talking about your mortgage, with low-interest rates right now, why? Let your credit score live!”
- Laura from Berkeley pays her balance off monthly and when she got her free credit score report … she was shocked to learn that her score wasn't as high as she thought. One of the explanations to her: Her credit balance was too high compared to the limit on the card? Is that fair?
Carmen says: “Credit scoring is just what it is. Going back to Melanie, same thing here. She’s got too much, she’s using too much of her credit. So she’s got a balance of $10,000, and she only has two cards with a combined limit of $20,000. She’s using 50 percent of the credit available to her. One-third of your FICO scores is made up of how much debt you’re actually using. The only way to get that FICO up is to lower the amount of debt you have outstanding.
- Rosamarie, from Suffolk, VA, asks how can her husband build his credit score? He moved from Sweden and has no debt. He owns his home in Sweden. He has credit cards from banks in Sweden, but is unable to get a credit card from other banks except USAA. USAA is where we both have accounts. Help! We want to buy a house in the USA and he has no credit history?
Carmen says: "Like Lazarus, you must rise and make his credit alive and live! Franken-credit! If you do not have a credit history, whether you are not an American citizen, or do not have access to American credit, you need to get a secured card. Two things you can do. Get a secured card that reports to the credit agencies, you put money down as a security deposit, then you use it like a credit card. Or with his wife Rosemarie, he can open a joint card, the two of them can open it together, and use the credit wisely."