Nov. 16, 2009 -- This week, as I often do, I am answering questions from readers. Correction: I am answering questions and comments from readers. A month ago I started writing about ways to SAVE BIG, the title and topic of my upcoming book. The premise is that there are lots of ways to save more than $1,000 in less than a year by focusing on our top 5 costs instead of on what I call "Small Stuff Savings' -- like giving up your daily latte. I'm happy to say that my first few columns have generated an interesting dialogue. So below, I answer the comments -- and also criticisms -- you've posted or e-mailed me. Hey, I can take it! I was a rhetoric major in college -- the art of argument. I think vigorous debate is a pathway to good decisions and great ideas.
Credit Score Do's and Don'ts
Question: I would like to get my credit score without having to pay for it since I'm a senior. Can you tell me how to obtain my score? Thank you.
~BB, San Pablo, CA
Answer: BB is probably thinking of credit reports, which are now available for free. You can get one freebie from each of the big three credit bureaus each year, by going to www.annualcreditreport.com. There are ways to get free credit scores, but I don't recommend trying it unless you want to subject yourself to a blizzard of sales pitches. Fortunately, ordering your credit score is not expensive. It costs $16. Get it directly from Fair Isaac, inventor of the credit score by clicking here.
Comment:People, you can work for years to build your credit score, it goes up very slowly. But miss a payment and it will drop like a rock. So she could have saved a lot of time by just making the headline say "Pay your bills on time."
Answer: This comment came in response to my article on the "Don'ts" of having a good credit score. Rh2199 didn't bother to read the previous week's article on the "Do's" of credit scoring. In that article, "Pay on Time" was one of the top tips. So rh2199 is right -- just not very thorough!
Question: "You said in "Don'ts of credit score" that one's FICO score will be affected even if the person has a small balance like $25 on an account and it was not paid and went into collection. Well, I just read in Consumer Reports Web site a few weeks ago that FICO2009 does not take into consideration any balance smaller than $100. Who is right? You or the Consumer Reports Web site?"
~PH, Two Rivers, WI
Answer: We're both right. Older versions of the FICO scoring system count any unpaid balance against you. It's true that FICO revised its 2009 scoring model to ignore small, unpaid balances, however you cannot count on lenders using FICO 2009. Many lenders have not bothered to buy the latest scoring software or they use multiple versions to assess your creditworthiness. So don't ignore small balances! Pay them off in full, on time.
Paper or Plastic?
Comment: Having plastic is total BS and a huge money making scam. I have been plastic free. I feel lots more secure having my emergency fund and using cash for everything. The system can keep their precious credit scores. Paying cash hasn't stopped me from buying what I want.
Comment: I agree. Everyone should pay cash and let this "credit score" BS go. If you have cash to pay for everything, why do we want to be slaves to the credit card companies. If everyone would close their accounts, they might be crying the blues for our business one day, and my reply will be "stick it." Pay cash and let 'em go will make for a much happier population. I have canceled all mine with a balance and could care less about my "credit score" and if I cannot pay cash, house car whatever, then I simply cannot afford it. It is all a game and consumers have no control, except to pay cash and be on our own. This puts us in the driver's seat. PAY CASH OR YOU CAN'T AFFORD IT!
Comment: "This "pay cash for everything advice" does NOTHING for a person's credit score because cash payers do not get any brownie points with credit bureaus. People with NO DEBT, who pay cash for everything, are certainly "debt-free", but that doesn't mean that the credit bureaus hand them great credit scores."
Answer: My two columns on how to raise your credit score generated a lively thread in which people were debating whether to even use credit cards. As I said in my original columns, there are two ways to save on credit: by using less of it or getting it for less. Having a high credit score is how you get credit for less. Canceling your cards is a way to use less credit. The third commenter was right that canceling your cards will not help your credit score. A good credit score depends on having credit and using it responsibly. If you were a multimillionaire and paid cash for everything, you would have a poor credit score because there is no record of how you handle credit. That record is the key to future credit offers. We could all live without credit cards, but most of us cannot manage to buy a home without a mortgage. When it comes time to apply for a mortgage, the biggest loan of your lifetime, you will want to have a good credit score. (I'm aware that my consumer colleague Dave Ramsey counsels people to pay cash for a home, and if you can pull that off, fantastic. Many people can't -- or won't.)
Comment: Has this happened to you??? Work to obtain and maintain an excellent credit score -- only to find out that credit scores really don't mean squat?! Case in point, my credit score hovers around the 800 mark. A good credit score is supposed to provide better rates on loans -- my personal experience tells me that this doesn't occur. With our excellent credit, two house loans were at the average rate -- no discounts there, not even a .01 percentage point -- same with several car loans. I personally think it's all a hoax -- my excellent credit score has not provided any deals on loans.
Answer: Lenders look at credit score ranges, not each point in a score. To get the best mortgage rate, you need a score over 720 these days. (The cutoff was 680 in the bubble days.) Having an even higher score of 800 doesn't get you anything extra. But trust me, BackHomeCO would notice the difference with a score below 720. People in that range pay substantially higher interest rates. These days, if your score is below 620, you probably can't even get a mortgage. On a related note, I just learned this past week that most credit card companies are now requiring a higher score before they will even issue you a credit card. Equifax tells me that most cards are going to people with scores of 760 and above.
Helpful suggestions from readers
Comment: Who can afford to "just let the cards go dormant" when banks are starting to charge annual fees? You'll really be paying something for nothing! I just canceled my Bank of America card for that reason, even though I never carry a balance. ~plet39
Comment: Most of this information is very good, very timely, and very necessary to save some money, but I do have to disagree with one point: Transferring balances between accounts can be a very costly tip. Most banks charge a transaction fee for making the transaction, and then charge a cash rate, a much higher rate than for that of purchases. If you're going to use this trick, it would be advisable to find one of your lower balance cards and make sure it has a balance transfer offer. Many offer 0% on balance transfers, usually for a very limited amount of time, like 6 months or 12 months. This can be very helpful when attempting to pay down balances on accounts with higher rates. Thanks for the good information!
Answer: Thank you for these two well considered comments. These writers make great points. The first comment was in response to my suggestion that canceling credit cards can hurt your credit score, so it's better to let them go dormant by cutting them up and not using them. The second was about the tactic of moving money around among your credit cards so that no card is too near the limit. Regarding transfers, the idea is to do this just once, but, yes, you should be careful. Regarding dormancy, of course, you will want to consider what to do with each account on a case-by-case basis.
Rising Rates, Lower Limits
Comment: She's obviously not up with reality these days. I've had full credit accounts closed by my bank because of the "economic climate" and not through any fault of my own. In addition, they SLASHED my available credit on my remaining card. So now my utilization ratio is ruining my once excellent credit. The credit scoring industry needs to be cleaned up. There should only be ONE score and it should be transparent in how it's figured. I'm currently doing everything in my power to pay off my credit card balance so my score will go back up, but I'm very frustrated to be so powerless with my credit score. I've never paid late or been in default with any loan/credit card, so why should my score plummet because of a decision by the credit card industry?
Answer: I understand "anonne's" frustration, but -- come on now -- do your homework! I have been covering the issue of credit card companies lowering limits and how that affects people's credit score for months now. To see one of those stories click here. http://abcnews.go.com/GMA/story?id=6993495&page=1
Comment: Good credit score equals slavery and bondage. The credit card companies just upped their rates on people who have been great customers for years and years. Mine went from 8 to 16 percent. they're trying to beat the new regulations -- thanks guys. Every time the government tries to help me -- I pay for it. ~putneyvermont
Answer: I continue to cover the issue of higher rates and lower limits, including a story on ABC News' "World News" just last week. As part of that story, I posted helpful hints for fighting back, including how to find a credit union you are eligible for. Click here.