Ask The Money Coach

Posts Tagged ‘charge cards’

Q: I am a Student at Southeast Missouri State University. About 10 Months Ago I Opened My First Student Credit Card. I Eventually Got My Credit Score to 728. In October, I Opened an Account with a Jewelry Store in Order to Buy an Engagement Ring. I’ve Noticed a Huge Dive in My Credit Score – Nearly a 50-Point Decrease! Should I Cancel the Credit Card From the Jewelry Store After I Pay the Ring off in 15 Months, and Just Keep My Student Credit Card?

A: As disheartening as it has been to see your credit score decline, don’t close out your jewelry store account. Your score probably dropped — after opening that new account and charging the engagement ring — because you have a relatively thin credit file, and not much information in your credit reports on which you can be evaluated. By opening that jewelry account, you generated an inquiry on your credit report, which undoubtedly impacted your credit rating. Inquiries account for 10% of your FICO credit scores. Inquiries stay on your credit files for two years and they count against your FICO score for 1 year. So just concentrate on paying down your debts and making all payments on time on both cards, as you have been doing. These two strategies will definitely boost your credit scores over time. But if you cancel the jewelry store card – now, or in another 15 months or so — you risk doing further damage to your credit. Read on to discover why.

How Your FICO Scores are Calculated

There is a lot of misinformation about what goes into your credit score. However, Fair Isaac officials have said many times that this is the heart of what happens: Your credit files – currently those from Equifax and TransUnion – are reviewed. Certain information (roughly 22 items) about how you’ve managed your credit is statistically analyzed. Ultimately, five different categories are weighted to produce your FICO score. Here is the breakdown of those five areas that contribute to your FICO score:

The Formula That Governs Your FICO Score

1.    Payment History: Approximately 35% of your score is based on this category.
2.    Amounts Owed: About 30% of your score is based on this category. (Mainly, you’re evaluated based on how much credit card debt you have).
3.    Length of Credit History: Roughly 15% of your score is based on this category.
4.    New Credit or Inquiries: Around 10% of your score is based on this category.
5.    Types of Credit in Use: About 10% of your credit score is based on this category. (Having a good mix of credit in your credit files is viewed favorably, although some forms of debt, such as mortgage debt, is scored more positively than other forms of debt, like department store cards or furniture store cards).

Based on this information, as well as other advice FICO freely disseminates on its website (http://www.myfico.com) and elsewhere, you can draw some good general conclusions about what actions can help your credit – and what could hurt it. For example, to increase your credit scores:

Pay Your Bills on Time

• Payment track record is the largest component of your FICO score
• Even if you must make “minimum” payments, do it!
• One late payment can drop your FICO score by 60 to 110 points

Maintain Low Credit Card Balances

• Don’t “max out” any cards
• Try to not to use up too much of your available credit limit
• Spread out debt over several cards instead of carrying big balances

Keep Your Older, Established Accounts Open

• Longer credit history is scored favorably
• Resist the urge to close an account when you pay it off
• Closing accounts can sometimes lower your FICO credit scores

Related Questions:

• running your credit at jewelry store hurt
• store credit cards credit score
• does opening a store credit card hurt your credit
• thin file credit report
• 728 credit score
• fixing thin credit
• how to close an open jewelry account
• best way to fix a thin credit file
• how to fix a thin credit file
• does opening a department store credit card ruin your credit rating
• does opening a department store credit card account lower my credit score
• What does it mean if you have a thin credit file

Q: I Owe $15,000 in Credit Card Debt, all on 1 Card. I Just Switched to 1 Credit Card With a 2.99% Rate Until May 2011. The Contract on My Job is Ending Soon. Should I Take a Loan From My Whole Life Insurance to Pay Off My Debt?

A: If it was just a matter of evaluating the wisdom of using your life insurance to pay off your charge card debt, I would be inclined to tell you that it would probably be a smart move. However, there is a big wrinkle in the whole equation: namely, you stated that your job is ending soon. Normally, I would have counseled you to seriously consider paying off the debt quickly while you can – especially since taking a loan from your whole life insurance policy should have no tax consequences to you. However, the bigger issue is your looming unemployment status.

Use Insurance as a Cash Cushion in the Future

If you don’t find another job or a replacement contract, you will have to consider how you will pay all your normal monthly obligations – housing, food, utilities, transportation, and so forth. I assume you have little to no savings (or some of that likely would have paid the debt already). Unfortunately, it is taking people longer than ever to find jobs. And with 10% unemployment, 1 out of 3 job-hunters has joined the ranks of the “long-term unemployed.” This means they have been out of work for at least six months. So given the current economic environment, and the fact that your credit card debt is carrying an extremely low interest rate right now, I would suggest continuing to pay on that debt as aggressively as you can, but don’t yet tap the cash value of your whole life insurance policy. Keep it untouched for now, as a standby cash cushion that you can access in the future if things get especially tight and you can’t easily replace your income.

Related Questions:

• whole life insurance policy loan tax consequences
• taxed for taking money out of life insurance
• taking a loan from whole life
• can i use my life ins to pay off student loans
• can you take a loan from a life insurance policy
• can i take a loan from my life insurance
• can i get money out of my life insurance
• can i take out a loan on my life insurance policy
• should i take a loan on my whole life insurance
• whole life loan
• taking money out of whole life insurance
• paying off a life insurance loan