Connect with us

Market Insider

Does Closing A Credit Card Really Hurt Your Credit History? Nope.

Published

on

[ad_1]

There are a ton of myths about credit. But one in particular just won’t seem to go away, especially because even so-called experts keep perpetuating it: Don’t close your oldest credit card because you’ll lose all the positive credit history associated with it.

According to Rod Griffin, that’s baloney. And he should know. Griffin is the director of consumer education and awareness at Experian, one of the three major credit reporting agencies.

Here’s the truth about closing cards and what it does to your credit.

How Closing Accounts Affects Your Credit History

Your credit score takes into account several factors, one of which is your credit history. It makes up 15 percent of your credit score, so it’s important to show you have a track record of borrowing and paying back money. The longer your credit history, the better.

Contrary to popular belief, you don’t immediately lose the history for a credit card when you close it, said Griffin. He explained that when you close an account that’s in good standing (that is, it has a $0 balance and you’ve never been late with a payment), credit bureaus keep that account on your credit report for 10 years from the date it’s reported closed.

Compare that with negative items — such as missed payments, accounts in collection and bankruptcies — which generally stay on your report for seven years.

“We keep the good stuff longer than the bad stuff,” he said. So unless you took out one credit card many years ago and haven’t borrowed money since, closing a credit card should have no impact on your credit history.

When Closing A Credit Card Does Affect Your Credit Score

That’s not to say you should begin closing credit cards with abandon. It is possible to harm your credit by closing an account, but it has nothing to do with your credit history.

Lenders want to make sure you aren’t too reliant on credit to cover your expenses. They like to see that you’re carrying a small balance relative to the total amount of credit available to you. This is often referred to as your credit utilization ratio, which you can calculate by dividing your total balance owed by the total amount of credit you have available.

For example, say you have three credit cards:

  • Credit card A: $1,000 limit, $500 balance
  • Credit card B: $2,000 limit, $1,200 balance
  • Credit card C: $5,000 limit, $0 balance

If you add up all your balances ($1,700) and then divide by your total credit limit ($8,000), you’ll get a credit utilization ratio of about 21 percent.

How much you owe is one of the biggest factors that affect your credit; it accounts for 30 percent of your score. If your utilization ratio gets too high, your score can drop. Though there is no magic number, most experts recommend maintaining a credit utilization ratio of less than 30 percent to avoid any negative impact on your credit. All types of credit are considered, but revolving credit (namely, credit cards) is weighted much more heavily.

So how does this relate to closing an account? “The reason that closing a credit card account affects scores is because when you close it, you lose the available credit on that account,” said Griffin. “As a result, your utilization rate increases.”

Let’s take our example from above. Say you close credit card C because you don’t owe money on it and don’t plan to use it. Your total outstanding balance remains $1,700, but your total available credit drops to $3,000. That immediately causes your utilization ratio to jump to nearly 57 percent.

“So it looks like you have more debt as compared to your credit limits, and that causes your score to drop,” said Griffin. Typically, however, you’ll see your score rebound in a month or two. “Your utilization rate increased because you closed an account, not because you took on a lot of new debt.”

The other way closing an account can negatively affect your credit is by disrupting your credit activity. Basically, the algorithms used by credit scoring companies aren’t great at interpreting changes to your credit report right away. So a change in status from open to closed can cause a minimal and temporary drop in your score while they sort out what’s going on. Again, your score should return to normal in a month or two.

Although the negative effects of closing a credit card are usually not too severe, it’s a good idea be cautious if you plan to apply for another credit card or a loan in the near future.

“If you’re planning to apply for credit in, say, the next three to six months, it’s probably best to leave that account open,” said Griffin. “You don’t want your score to drop before you’ve completed that application.”

When Should You Close A Credit Card?

Closing a credit card isn’t ever going to help your credit score, so you should think twice before you do it. However, there are a few instances when you should go ahead and cancel a card:

You’re paying an annual fee. If the card charges an annual fee and you’re not reaping enough rewards to make the fee worth it, go ahead and close the account.

You’re struggling to stay out of debt. If you’re working hard to pay off debt and you’re worried about racking up a bigger credit card balance, it’s better to close accounts than to leave yourself open to temptation. In fact, it’s possible to close credit cards that still have balances; you just have to work out payment plans with your card issuers.

You have too many cards to keep track of. Just one charge that goes unnoticed can spiral into a mess of late fees and calls from collectors. Though there are tools you can use to keep tabs on all your accounts, if you don’t trust yourself to stay on top of all your cards, it’s probably best to get rid of any unnecessary accounts.

Choosing whether to close a credit card is up to you. Often it makes more sense to just leave it open rather than risk any hits to your credit score. But as Griffin pointed out, it’s always best to base your decisions on what makes the most sense for you financially rather than what might happen to your credit score.

[ad_2]

Source link

قالب وردپرس

Market Insider

4 things kids need to know about money

Published

on

By

(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

Continue Reading

Market Insider

20 Percent Of Americans In Relationships Are Committing Financial Infidelity

Published

on

By

Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

Source link

قالب وردپرس

Continue Reading

Market Insider

7 Examples Of Terrible Financial Advice We’ve Heard

Published

on

By

Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

Source link

قالب وردپرس

Continue Reading

Chat

Trending