How to Ditch Debt, Boost Credit Scores
The webinar "How to Ditch Debt and Boost Your Credit Score" featured USAA financial expert June Walbert, a certified financial planner practitioner with USAA Financial Planning Services, one of the USAA family of companies. Here are the top member questions and answers.
** Credit Score
I have several credit cards that are paid off. Will it help or hurt my credit score to close them?
It depends on how much debt you are carrying on all your credit cards combined. Each credit card provides a line of credit to offset any debt carried on the others. By closing one, you reduce the total line of credit to help your overall ratio of credit used, to credit available to use. Ensure that your total credit card debt does not exceed 35% of your total credit available. For example, if you have $10,000 in credit available make sure you owe $3,500 or less.
The ideal would be to pay off all of your debt and then keep two or three major credit cards including one that shows the longest credit history. Make a list of all other cards you want to close. Keeping that debt to credit limit ratio in mind, close them in order of newest to oldest, at a rate of one to two per year, and never within six months of a major purchase like a car or home. Obtain a free credit report once a year at annualcreditreport.com.
While in the process of closing your credit card accounts, use any non-merchant cards such as Visa, MasterCard, Discover or American Express to make one purchase each month and then pay the balances off in full. This will keep the cards active, and good payment histories accumulating on your credit report. Payment history accounts for a whopping 35% of your credit score.
Stop saying "yes" to store credit cards for promotional discounts. They undermine the percentage of your score that is attributed to the length of time you have had accounts plus new inquiries also negatively impact your score. Finally, most merchant cards have high interest rates. If you don't pay the balances off in full those promotional discounts cost you in the long run.
** Identity Theft
How do I protect my credit report from identity theft?
Your best line of defense is to follow the recommendations of the Federal Trade Commission. Use annualcreditreport.com to obtain free copies of your credit reports from all three credit reporting agencies once per year. You can utilize the reports strategically in that you can order one report every four months to keep tabs on activity. Review your reports carefully to ensure all entries on the report belong to you. If not, dispute them. If it appears you are a victim of identity theft, report it immediately.USAA also offers a special member-only rate with Experian to provide you with CreditCheck Monitoring Service. It allows you unlimited access to your Experian credit score and personal credit report online for a low monthly payment.
Remember, a credit monitoring service is only as good as the lenders reporting the information. If the lender reports information every 60-90 days, this is how frequently it will show up on the credit monitor service. More lenders are moving to monthly, if not weekly, reporting.
To learn more about how you can guard against fraud and protect your personal information visit our Security Center.
** Credit Reports
I am currently deployed and can't get my credit reports electronically through annualcreditreport.com. What should I do?
When you are stationed overseas or deployed, the website may recognize the foreign URL and prevent you from receiving the reports electronically. This is a safeguard for your security and protection to prevent foreign identity theft. In that case, follow the steps outlined to obtain your credit reports by mail. Also, be sure to check your reports carefully before deploying as this will give you a baseline.
In addition, the Federal Trade Commission now allows you to request an "active duty" alert for your credit report as a member of the U.S. military. This is a good idea as it requires businesses to verify your identity before extending credit. You will also receive a copy of your credit score, and your name is removed from prescreen offer lists for credit cards or loans. An alert is effective for one year, and another alert may be placed if your deployment extends beyond this timeframe.
** Debt Consolidation
I heard that I could pay my debt off faster if I consolidate it. What is the best way to do this?
Generally, consolidating debt into one payment does not work out in your favor. It may strike you as a magic bullet, but remember this: You must qualify for a loan big enough to roll all of your existing debts into a new loan. Most individuals who consolidate debt do so using home equity, because it is difficult to obtain an unsecured loan for more than 1.5% of their annual income.
If you have more than 20% equity in your home you could choose this option, but realize negative equity in your home is a possibility (owing more than your home is worth) should home prices become unstable in your area.
The second issue with debt consolidation is that statistically, people who consolidate tend to go deeper into debt. History has shown us that the vast majority of individuals and families will start using the newly paid off credit lines and credit cards again. It is a behavior pattern that is hard for many to break. In that case, you may end up in worse shape than when you started.
Remember, you can actually improve your credit score by keeping your existing debts and paying them off one by one. This is because it extends the payment history, lowers the percentage of credit used to credit available for use and avoids the inquiry/new account associated with the consolidation loan. A total of 65% of your credit score is influenced by payment history and credit utilization. This is why closing out old accounts can hurt and paying off existing ones can help.
Creating a budget can help you find money available to put toward wiping out debt. After establishing a budget, organize your debts. Work on putting the most money toward the card that has the highest interest rate. Our Debt Analyzer tool can help organize this payoff strategy.
As much as USAA would like to help resolve all debt issues for our members, there are times when it makes sense to work with specialists in this area. For professional help with debt management plans, budgeting and more, we recommend working with the National Foundation for Credit Counseling.
** Bad Credit
How does the bad credit my husband incurred prior to our marriage affect my credit now?
Credit reports are unique to individuals, and a credit report is a history of how credit was used in the past. So, your husband's past credit history will not be moved onto your credit report. However, his credit issues can affect yours should the two of you apply for credit together like for a home or car. His lower score may mean that you do not get the best rate available. Also, once you have borrowed together, that joint loan or revolving line will appear on both credit reports.
Legislation is in place in some states where the debt accumulated by your spouse during the marriage could potentially impact your credit report should they default. Learn more about individual and joint credit.
** Credit Card Debt
I keep hearing about ways that people can save their mortgage and wipe out credit card debt without any money. How do I do that?
If it sounds too good to be true, it probably is. The Federal Trade Commission has put together a list of the different types of scams and what to look for in a legitimate program.
** Credit Counseling
I have tried paying off my debts on my own and can't get anywhere. The interest rates are just too high. I have one at 29% now, but I'm afraid to work with credit counseling. I've heard that it can hurt your credit.
It can be discouraging and difficult to make headway when your payments seem to be covering only the interest expense. One of the benefits of working with Consumer Credit Counseling is their ability to potentially negotiate lower interest rates with your lenders.
The first step to reducing your debt is creating a budget that will free up the most cash to put toward your debt. Budget counseling will not impact your credit score. However, some financial institutions do view working with a credit counseling service during an overall review of your creditworthiness as a negative indicator that you may not be able to manage your debt on your own.
If a debt management plan is appropriate for you, it may impact your credit. Each lender may choose how they will report your payments under the plan. You will need to weigh the potential negative with the potential positive of reducing your debt in less time than you could on your own. Ask your credit counselor how utilizing their service may be reported, if at all.
We recommend that you find a reputable counselor through the National Foundation for Credit Counseling and you can also check with the local Better Business Bureau. For military members deployed or overseas, the NFCC has a special website available.
** Building Credit
I need to build credit. I'm only 22 and don't have any credit history. How do I get a credit card or build credit when I can't without history?
Seems like a Catch-22, doesn't it? Building a credit history will take time, but it definitely can be done.
The Federal Trade Commission has created a website: Getting Credit (http://www.ftc.gov/gettingcredit/). It provides useful information about how to build a strong credit history.
You may purchase a CD with the USAA Federal Savings Bank for at least $2,500, and then take a loan against your money up to 100% of the value. The CD must be open 15 days before you are allowed to take the loan, and the annual percentage rate will be 2.25% above the rate of the CD. Therefore, the net result between what you are earning and what you are paying is 2.25%. You must remember that your CD balance is not available for your use.
Although you can choose to borrow for a shorter term, to build good payment history for the purpose of establishing credit history we consider nine to 12 months or more. Get current CD rates.
One of the best things about a CD loan is that at the end of repaying it, you have the extra $2,500 from the maturing CD to boost your emergency fund or consider investing in a Roth IRA.
-- Courtesy of USAA