10 crucial credit questions answered
By Maryalene LaPonsie/MoneyTalksNews
Judging from our inbox, there seems to be a lot of credit confusion out there.
You've got questions: How many credit cards should you carry? When should Junior get his own card?
Luckily for you, we've got answers.
1. How many credit cards should I have?
Ah, this would be the $64,000 question. Some well-known financial gurus would tell you the answer is none. Meanwhile, other card experts say you can have a lot more. Brian Kelly, the "Points Guy," says he has up to 20 active accounts open at any given time so he can rack up hotel and airline credits.
However, Adam Levin, founder of our partner site Credit.com, suggests a more middle-of-the-road approach. He suggests having two cards -- a rewards credit card for everyday use and a low-interest card to be used for emergencies.
Why not have just one good all-purpose card? Mainly because you'll want to earn rewards from your purchases, but airline, gas and cash-back cards tend to have higher interest rates. That's fine as long as you're paying off your balance each month.
But when the water heater says "No more" and your savings account says "Yeah, right," you'll want a low-interest credit card waiting in the wings. You don't want to carry a balance on a high-interest rewards card.
Should I carry a balance?
Heck, no!
Unless you're self-financing a purchase or dealing with an emergency situation, paying credit card interest is just plain dumb.
Some people believe you need to carry a balance for your credit score to benefit, but that's not really the case.
What exactly is my credit score and how is it calculated?
Speaking of credit scores, some people are a little hazy on what they are and how they are calculated.
While several different companies create credit scores, the one most likely to influence your access to credit and interest rates is your FICO score.
Your main FICO score runs from 300 to 850, and companies use it to decide how well you manage credit and how likely you are to pay them back after borrowing. The higher the score, the more trustworthy you appear to creditors.
The score is created and weighted with this information:
- Payment history - 35 percent.
- Amounts owed - 30 percent.
- Length of credit history - 15 percent.
- New credit - 10 percent.
- Types of credit used - 10 percent.
FICO doesn't say what constitutes a good or bad credit score. However, typically, if your score is below 600, you're probably viewed as risky business. A score above 800 will generally get you the best interest rates and terms.
How often should I check my credit score?
Credit.com's Adam Levin suggests looking at your credit score frequently.
Some credit card companies and banks now provide credit scores free as part of their customers' monthly statement.
If your bank or card isn't providing scores for free, you may have to wait until either a creditor denies you or you pay FICO for the information.
(Once you get a look at that magic number, you may want to take this advice on how to raise your score quickly.)
Do I pay off the card with higher interest or a higher balance first?
The answer to this question also rests largely on which financial guru you ask.
Some argue you should start with the smallest balance. Quickly paying off that account can give you the momentum needed to keep on a debt diet.
However, if you look at it from a purely financial standpoint, it is better to start with the highest-interest card. Paying off the high-interest card first usually saves the most money.
Should I co-sign a card for a friend or family member?
Absolutely not.
Co-signing for a card or loan puts you on the hook for the balance in the event a friend or family member stops paying. Or if the borrower makes late payments -- which you may never know -- it could also negatively affect your credit score.
You may protest: "But I know that wouldn't happen. They are really good people!"
I'm sure they are, but sometimes even good people make poor money decisions. Or life takes a turn you didn't expect.
Bottom line: You shouldn't co-sign unless you're ready and able to assume the debt as your own in the event your co-signer -- for whatever reason -- can't pay.
When should my child get her or his first credit card?
Probably not until he or she has a real job and some emergency savings.
Children must have their own money before they start using someone else's cash, so a steady job is a must. A work-study gig in the campus cafeteria for three months doesn't cut it either.
Emergency savings help ensure that the child doesn't get sucked into using a credit card for every minor crisis or shopping whim. Students need to get into the habit of saving before they perfect the habit of spending.
Educate your children on smart credit habits, hope it sinks in and refuse to co-sign any applications for them.
Should I close the account on a credit card I no longer use?
If you are concerned about your credit score, Stacy Johnson suggests it may be best to keep your credit card account open.
You also may be interested to hear what FICO says on the subject: "We never recommend closing a credit card for the sole purpose of raising your FICO score."
Is it ever smart to pay an annual fee?
For most people, the answer is no, although you may need to do a little math to figure out what's best for you.
There are plenty of great credit cards that are fee-free. That means typical cardholders probably shouldn't be paying for the privilege of charging their purchases.
However, if you're a heavy user, it may make sense to splurge on a card with a fee. A few years back, I interviewed a frequent flier who told me he happily paid somewhere in the ballpark of $400 annually for his premier airline card. To the frequent flier, it was money well-spent because it included a lounge membership valued at somewhere around $700 per year.
He would have bought that membership anyway, which meant he was saving money before he spent a single cent on the card.
Look at the rewards you earn versus the annual fee and see if the card pays off. Be realistic, though. Don't calculate in the value of perks you'll never use when deciding if the annual fee is worthwhile.
I made mistakes and destroyed my good credit -- should I get a credit card to rebuild it?
Maybe.
If you've ruined your credit, you need to do a little soul searching before filling out a credit card application.
Yes, using a card responsibly may help you improve your credit. At the same time, it could just dig you a deeper hole if having plastic makes you lose all spending self-discipline.
A secured credit card is one way to test the waters. Or there are other ways to rebuild credit without a card.