Old credit lines still useful
Those credit cards stashed snugly in your wallet probably aren’t the only ones you own. So what should you do with lines of credit past?
It’s reasonable to think that closing some of those open lines of unused credit will improve your credit score. But that’s not how it works. According to Fair Isaac & Co., once you acquire more than seven revolving debt accounts, your FICO credit score – which lenders take very seriously – begins to suffer a little.
Lenders are apt to penalize you for having too much available credit, fearing you’ll one day snap and go on a spending binge well beyond your means.
However, all is not automatically forgiven by simply closing accounts to get below seven. Once you’ve opened the accounts, the damage is done. In fact, closing open accounts may actually hurt your FICO score. Lenders look at the ratio between the balances on your revolving accounts and your total available credit. When you close open accounts, those credit lines are no longer factored into your ratio. Thus the percentage of debt/available credit will increase. (If you do have debt, try to keep it to less than 30 percent of your available credit. Zero percent is best, of course.)
Removing old accounts that are in good standing is also a bad idea simply because those accounts help you establish a long and solid credit history. (About 15 percent of your credit score is determined by how long you’ve been borrowing.) Why deny the good?
If you don’t know which cards are open and which are closed, check your credit report. Right now, TrueCredit is offering Fool readers a special discount on a combined three-report/three-score report, which includes data from all three major credit bureaus and the overall credit scores they’ve assigned to you. (Visit www.truecredit.com/fool for details.)
If you decide to streamline, carefully consider which cards should go on the chopping block. (We offer tips on how to evaluate your cards at www.Fool.com/ccc.) You might sleep more soundly knowing that the only credit in your name is what’s snugly in the wallet on your nightstand.
Ask the Fool
Q: Are reverse mortgages worth considering? – D.M., Columbia, S.C.
A: With a reverse mortgage, a homeowner receives a lump sum or regular payments, based on the equity of his or her home, usually to help fund retirement.
They’re not always a good deal. The points and fees they charge can be fairly high, and their interest rates tend to be considerably higher than those for regular mortgages. The cash flow you can expect from a reverse mortgage is determined by your home’s value, your age and interest rates. Those 62 years old or older, with little or no debt, stand to benefit the most from reverse mortgages. Loan programs vary widely in what they offer, so shopping around is critical. Retiring the debt usually means selling the home – often upon the death of the borrower.
The bottom line is that reverse mortgages are generally not the best way to finance a retirement. Look into alternatives, such as home equity loans, instead. Or consider selling your home, moving to a less expensive dwelling, and investing and living off the difference.
Learn more at www.hud.gov/buying/rvrsmort.cfm, www.consumersunion.org/finance/revconwc899. htm and www.fool.com/homecenter. Or read “Mortgages for Dummies” by Eric Tyson and Ray Brown (Hungry Minds, $17).
Q: Should I pay off my college loans as soon as possible, or just let them ride the 10-year payback schedule and focus on saving and investing? – M.M., Carbondale, Ill.
A: It all boils down to interest rates. If you’re paying 7 percent on your loans, but you expect to earn 10 percent annually on your investments, then you’ll likely take in more than you pay out, if you pay on schedule. If your debt is costing you more than you expect to earn, pay it off fast.
My dumbest investment
In the fall of 1964, I moved to Tennessee, where the local credit union offered a special deal. I invested $2,000 for me and $2,000 for my wife in a special savings account – that money would have bought a nice new car, with some dollars left over. Upon my death or my wife’s, the $2,000 was to double and pay for a funeral. A few years ago, the credit union canceled the insurance plan. How much of a new car can I buy for $4,000? – Richard Stanley, Collegedale, Tenn.
The Fool Responds: If you want to look into whether you were had, consider contacting your state’s attorney general’s office. It’s surprising that the savings account didn’t pay any interest or offer more protection. Instead of signing up, you might have just invested the $4,000 in stocks or elsewhere, figuring that the amount would grow over time and could be tapped for funeral expenses whenever they were needed. The average funeral today, not to mention a new car, costs more than $4,000. Learn more about savings options at www.fool.com/savings and www.bankrate.com.