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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.”

Read more about the effects of closing credit cards

  • 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.

Read more about how to improve credit scores

  • 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."

What to do if your credit history is 'thin'

Have your own question about credit cards? Let us know in the comments, or on our Facebook or Twitter.

About the author

Carmen Wong Ulrich is the former host of Marketplace Money, APM’s weekend personal finance program.
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Hi Carmen, Thanks for your work on the show!

This is in regards to Laura in Berkeley. The issue is not how much credit she uses during each month, as she pays her balances in full. I was in her same position. Wondering what was wrong.

My wife, and I raised our credit scores from an long term average of around 730 to an average of 800 and above. We did this when we were getting ready to buy a house, as the majority of our income is from an alternative source which makes us a higher risk borrower. We wanted to qualify to get as good of loan terms as possible. I am sure it was due to multiple factors, but there was one major change which helped a lot since you indicate that credit utilization is around 1/3 of Fico. We were paying our credit cards off every month, but had a high utilization shown on them.

Laura could time the date which she pays her cards off each month to post before the accounts are reported to have a statement balance. She can still spend 10,000 or whatever, but her utilization on her report will only be effected by the amount she might leave unpaid.

I am not an expert, this is just what my experience was once I figured out that it was not the amount I was paying off each month, but the timing. On the on line accounts for each of our credit cards, the statement date is clearly shown. If one pays off the balance prior to that date, they have zero credit utilization on that card for Fico. If she pays off the balance each month after the statement balance is calculated, she has a credit utilization, even if she takes that account to having a zero balance.

I hope this makes sense.

Thanks,

Denis.

Carmen, credit scores do in fact die even if you are still very much alive. To have a credit score you must be actively borrowing or/and repaying money to a reporting institution. If you stop for six months, your credit score goes by-by. I am one of those insane individuals that has let a perfectly healthy credit score die and am still physically alive and healthy to tell the tell. It’s not easy, you have to pay off the house, the student loans, EVERYTHING, and close the accounts; but it is not as fatal you reported.

It is not easy, but my advice to Alex is if you really want to win financially, letting the credit score die is the healthiest thing you can do. If you are planning on getting a mortgage, don’t kill the score without serious consideration, paying off our mortgage killed our score. Alex, if you are strong enough for the challenge to live without debt, it is a great way to live, and I wish you the best!

My wife (US citizen) had the same problem getting a credit card due to not having any credit history. We ended up getting her a card which had a $40 annual fee and a <$1000 limit for the fort year. At the same time I added her as joint owner (needs to be joint account holder, not just card holder) to two of my cards. Now her score is really good.

When I first got to the US and didn't have any credit history Discover Card was the only bank which approved me for a card. Not sure if it's still "easy" to get a card with them.

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