Should I close a Credit Card? Will that hurt my credit score?

A question I hear often is, “Should I close out old credit cards that I don’t use anymore?” Is that a good idea? First we will talk about why closing a credit card may not ever be a good idea and then we can look at some reasons to close out a credit card.

Closing credit cards should never be taken lightly. Closing a card removes that available balance from our overall available credit. Removing these available balances by closing the cards can reduce our FICO/Credit score. 30% of your score is based upon the ratio of used vs. available credit. Reduce the ratio and reduce your FICO score.

Example: A person has $20,000 in available lines of credit and has $5,000 charged up. They are using 25% of their available credit; a 1:4 ratio of used credit to available credit. Then they close a credit card with a $5,000 available balance. This decrease in their available credit, from $20k to $15k, increases the percentage of credit they are using to 33% and takes them to a lower and less desirable 1:3 ratio in credit usage. This will lower their FICO Score.

Closing cards can be a big deal if consumer credit cards are your only form of credit. If you have other types of credit, a mortgage or car loan for example and have other credit cards, closing one card may not be a big deal. But if one has a thin or minimal credit file, it could be detrimental.Also, the history of your card usage will drop from the report after 18 months and it will no longer be a factor in your FICO score. Ouch!

Why close a card? Fees. Some cards have instituted annual fees; one must pay an annual fee just to possess the card. These annual fees can range from $25 to $100 depending on the card and its features (rewards, vacation insurance, travel services, etc.). If the fee is too much for you to afford or you just won’t pay it on principle, then it might be time to look for a new card to replace this one or close it altogether.

Interest rates can be an issue for people who carry balances. An increase in the APR of 3%, say from 15% to 18%, can cost a cardholder an extra $150 over a year on a $5,000 credit card balance. If the APR is a concern, I would recommend finding a lower rate replacement. Credit card issuers will often offer reduced rates for balance transfers. This may be an opportunity to transfer the balance to a new card with a lower rate and close the old card.

The card has been stolen or compromised by an identity thief. Good reason to close it. Often your card issuer will offer to replace the card with an entirely new account, transferring your balance to the new account.

Sometimes people get tired of making payments and are simply through with debt. They will cancel their cards to prevent further accumulation of debt. If you are ending your relationship with debt, that may be a good reason to close a card or two. That being said, keep one general purpose card such as a Visa or Master Card open for emergencies. Go to McDonalds once every six months and buy yourself a Happy Meal for lunch. Pay that bill at the end of the month and your card will remain active. Do this every six months to keep that card active. You never know when you will need it! 

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Our next Financial Education workshop will be taking place at our Sunnyvale Financial Center at 563 E. El Camino Real in Sunnyvale, next to Togo's Sandwiches. To attend, please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328.

Credit Myths and Repair - Learn how to access your credit report from all three credit bureaus and your credit score for free. How do inquiries effect your score? What happens to your credit after you pay a collection? Have a late payment? Get a divorce?

6:30PM - 7:30PM on Oct. 23rd 

Sunnyvale Financial Center

Meriwest Credit Union

CAR SALE!!!

 November 9th and 10th at the Meriwest Credit Union Main Office 

5615 Chesbro Ave, San Jose CA 95123

Come to see our wide selection of late model, gently used cars offered at bargain prices by our MCU approved dealers.

Why do prepaid cards have a bad reputation?

Prepaid cards have a bad rep due to fees. People with modest incomes, such as students, seniors, or those on public assistance have very limited funds to pay for their living expenses. If one is only making about $400-$500 a month, the cards can be very costly. Depending on how you use a typical prepaid card, you could lose up to 10% of your monthly income in fees. Often they are seen as a predatory type of transaction card due to the charges they have for loading the card with money, using it at merchants or accessing cash at an ATM. All three transactions would be free at a credit union or a bank if they were using their checking account.

What would a typical month’s worth of fees look like?

I have looked up several prepaid cards over the past several weeks in researching them for use by the clients of some of our nonprofit partners in the community.  The fees I am quoting here are averages based on several typical cards.

Here is an example list of typical fees charged on a prepaid card:

Initial Purchase 5.00 Monthly Charge 5.95 Often Monthly service charges may be waived if one maintains a minimum balance or performs several transactions to offset fee. ATM Withdrawals-participating ATM's                N/C (non-participating ATM's.) 2.50 There may be charges from the out of network ATM Teller Withdrawals 2.50 Transaction Fee (Point of Sale/PIN Purchase) 0.15 Balance Inquiry Fee 0.50 Reload cash fee 4.95

In this scenario, let’s say I bought the card, reloaded it twice during the month with my paycheck of $250. I am a student making $500 a month in a part time job. I get paid twice a month on the 1^st and the 15^th. I had five ATM transactions, three of which were out of the network. I used the card to make 12 purchases at various merchants. I made three inquiries at ATM’s.

Purchase price	5.00
Two reloads @ 4.95	9.90
Two In network ATM withdrawals	0.00
3 out of network withdrawals @ 2.50	7.50
Out network ATM Fees @ 3.00	9.00
12 point of sale transactions @ .15	1.80
3 ATM inquiries @ .50	1.50
Total	34.70

Would a checking account have been cheaper?

Generally, yes. It depends on where you bank. With a checking account at most credit unions, the only fees I would have paid would have been the out of network ATM fees. Most financial institutions do not charge you to make a deposit, take money from your account with a teller, make point of sale purchases, or inquire on your account. 

But many checking accounts today have a fee unless there is a minimum monthly balance or you use direct deposit. Be sure to verify what the requirements are for your checking account before you open it

How are people confused about Prepaid cards?

People mix these up with gift cards. Gift cards typically charge a fee to purchase the card itself, but not for transacting on the card. Prepaid cards often charge for both items.

Also, people are confused by the fee schedules. There are fees for virtually anything you do with the card. Often, people think these are similar to their bank or CU ATM cards and can be used the same way. The fees eat into their balance and limit the amount of money they can use to pay for expenses.

Is a prepaid card a viable option for an unbanked person?

Yes, with caveats! If one is careful about its use. Card owners must use network ATM’s to avoid withdrawal fees. Use the internet to inquire on their balances as that is generally free with most cards. They must also keep tabs on and limit their purchases to avoid excessive point of sale transaction fees. 

How about using these for travel? 
That might be a good idea. If the card is lost or stolen, it can easily replaced and your accounts back home are not subject to identity theft. I suppose you could consider the cost of the fees part of your vacation expense!

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The next Meriwest Credit Union workshop-

Tax Changes for 2013

Speaker: Will Slade of Slade and Associates. Mr. Slade is an IRS Enrolled Agent with many years of experience in counseling his tax clients and tax preparation.

10am February 9^th at the Meriwest Credit Union Main Office

5615 Chesbro Ave. San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com

The Mr. Slade will cover the following:

• Tax ramifications of “Obamacare”
• Alternative Minimum Tax (AMT) patch
• Permanent implementation of Bush era Tax Cuts

I hope you can join us.

 

Federally insured by NCUA. We do business in accordance with the Federal Fair Housing Law and Equal Credit Opportunity Act.
Copyright 2013 Meriwest Credit Union. All rights reserved.

Consolidating Debt with Personal Loans - Good idea?

The New Year is nearly here. A lot of us are thinking about our finances and how we can improve them in 2013. Personal loans play an important role for those who are trying to get out of debt quickly. Properly used, they can be an easy way to paying off high interest credit card debt. If they are used improperly, they are a fast ticket to a lower credit score.

Let’s keep in mind that bill consolidation, from the standpoint of a credit union, means eliminating debt, building credit scores, and creating a consumer solution that can be easily managed based on the member’s income. Depending upon the extent of the member’s debt, we will often ask that they close several of their outstanding credit cards. Why? It will do no good to consolidate their debt and have them run it back up. We will take a look at their credit and income to determine what credit can be retained by the member and what they would need to close in order to receive the loan or line of credit for the bill consolidation.

Often, CU’s will recommend a member gets credit counseling prior to their consolidation. Credit Counselors teach the member how to budget, to use their online banking to manage their finances, and help them understand the consequences of extensive debt and its effect on their credit scores. It can also be helpful if the credit union offers workshops on these subjects as Meriwest Credit Union does. For more info on personal lines of credit, click here.

Any bill consolidation should offer you a lower rate of interest than that which you are currently paying and a more affordable payment. Currently, for someone with a 740 FICO score, we can offer 15% on a personal bill consolidation loan or 10.50% on a personal line of credit. Please keep in mind the line of credit is adjustable and when rates go up, which they will, this rate could rise rather quickly.

One of the dangers of bill consolidation is irresponsible borrowers. A person can get a consolidation loan, consolidate their debts into a more reasonable and affordable alternative and then go out and acquire more debt. This completely defeats the purpose of bill consolidation and puts them on the fast track to a low credit score or worse.

We must also consider that closing out a credit card account can lower your credit score. Closing out cards that we have had for a long time will negatively effect our credit. When those credit lines are removed we lose the available line as part of our balance ratio calculation (for more info on this, see our blog “Your Fico Score, Mystery No More”) and we lose the history of managing that credit after a few months. Opening a new line can offset some of the FICO points lost to closing a line.

Don’t want to close the line of credit? You have some options. You can cut the card in half and simply not use it thus leaving the account open. If you are a disciplined person, you can lock your credit cards in a drawer and avoid using them; out of sight, out of mind.

Homeowners have another option available to them; the Home Equity Line of Credit or HELOC. The HELOC is line of credit based on your home’s equity. Typically, it has a lower rate than unsecured personal loans and may offer tax advantages for some homeowners. It is handy for home improvement, bill consolidation, and a myriad of other uses. As a matter of fact, Equity Lines of Credit are worthy of their own blog! We will have one for you on that next year.

Alternatives: There are offers from credit card vendors to transfer balances at a lower rate. They encourage borrowers to use a credit card check to pay off debt at other vendors and transfer that debt to their card. Consumers need to be mindful that the low interest rate offered on these is usually a teaser and may go up in time. Some cards may offer a lowered rate for the life of the transferred debt. These can be a pretty good deal provided the borrower is responsible and does not incur further debt during the pay off period. But don’t miss a payment! You could be subject to penalty interest and see your preferred low rate rise well above 18%.

Some things to consider before combining balances on another credit card:

-          Do you have adequate credit limit for the transfer?

-          Is the Introductory rate a temporary Teaser Rate or fixed for the term of payoff?

-          Is there a fee for the balance transfer? (this increases your cost of borrowing.)

Finally, before considering any consolidation, can you buckle down and get out of debt on your own without help? Can you rearrange your budget, be disciplined in your spending, and commit your spare dollars to paying off your debt? If one eats out for lunch everyday, it can cost over $35 a week. Bringing a lunch from home can save $100 a month. That money can go a long way toward paying off debt. On any credit card or loan, you can make larger payments and any amount you pay over your monthly interest gets credited against your principle, thus reducing the amount of interest you will pay the next month. Keep that cycle up and you will pay off your debts a lot faster.

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Reality Based Budgets for Teens and College Students – Jan. 16^th

Our next Financial Education Workshop will be Reality Based Budgets for Teens and College Students. It is a post college simulation of renting an apartment, buying a car, and developing a spending and savings plan. It is a fun and interactive session for the whole family and really opens the door to discussions about managing money. If this is something you or a member of your family needs, please feel free to join us. These workshops are open to the public.

Reality Based Budgets

6:30pm January 16^th at our Chesbro Main Office Location

5615 Chesbro Ave, San Jose CA 95123

Please RSVP with Gmeyer@meriwest.com.

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Hungry for more information on Money Management? Check out Len Penzo’s Financial Blog. Len provides excellent financial insights with a sense of humor.

Benjamin Franklin's Legacy of Money Management

Benjamin Franklin is probably the Founding Father who was most financially aware. I have assembled some of his more memorable lines here and added my own explanation to them. As you read these quips, remember the age in which these were written. Back in the late 1700’s, it was frowned upon when one borrowed. Both Shakespeare and the churches warned people against lending and borrowing money.

Let’s keep in mind, in 1785 there were no consumer lending laws to protect us from predatory lenders. As more than two hundred years have passed since Ben was publishing his thoughts on financial education, there have been numerous changes in how we borrow and how lenders work with us. Today, borrowing to purchase a home or a car is fully acceptable. When credit is granted, it is done through a very careful approval process where a borrower’s income and past credit management is put under scrutiny.

But, just like in Ben Franklin’s time, it is not a good idea to go too far into debt

Let’s consider some of his sayings:

When you run in debt; you give to another power over your liberty. -  And  - The borrower is a slave to the lender, and the debtor to the creditor.

Meaning that when we are in debt, those who hold our debt control us and take away our freedom to a certain extent. While in debt, we are slaves to the monthly payment!

Rather go to bed supperless than rise in debt.

Franklin had a great disdain for being in debt. In those days, if you were in debt, the whole town knew it. He would rather be hungry than owe money.

Tis easier to suppress the first desire than to satisfy all that follow it.

This relates directly to “Wants vs. Needs.” Essentially he is saying, fight the urges to spend money. As you fight those urges, it will be come easier and easier to suppress the desire to spend.

For age and want, save while you may; No morning sun lasts a whole day. 

Save for your retirement and for the things you want. Start now, start early. There is no time like the present to begin. You have a limited amount of time to make a good return on your retirement funds.

Get what you can, and what you get hold; ’Tis the stone that will turn all your lead into gold.  

It seems that Ben Franklin also understood time and money. Saving your money in an appropriate investment can turn a few dollars into many or “what you hold into gold!”

Beware of little expenses; a small leak will sink a great ship.

Little things add up. It’s like two sodas from the coke machine everyday. .75 cents per coke, twice a day, five days a week, for fifty two weeks = $360! Could we find a better way to spend or save $360?

Buy what thou hast no need of, and before long thou shalt sell thy necessaries.

If you buy the stuff you want you may eventually have to sell the important things you need to pay for the stuff you want.

All of these things are as true today as they were 230+ years ago. It is not a good idea to go into debt. It is still a good idea to save. It is still a good idea to invest. It is a good idea to have a budget and adhere to it. This is timeless advice that we can all use.

But let’s also remember that not all debt is bad! There is debt that can help us. A loan on a home allows us to write off the interest that is paid annually, thus saving families thousands of dollars in hosing costs making that home more affordable for them. A car is a personal asset that gets us to work on time. So, a car loan can be considered part of an investment in our personal economic development. 

And for all of you out there looking for our next financial education workshops, your summer wait is over. Our next workshop will be "Reality Based Budgets for Teens" at our Milpitas Financial Center at 6PM on Aug. 22nd. 

Our next "Credit Myths and Repair Workshop" will take place at our Milpitas Financial Center on Aug. 29th at 6PM. 

I hope I will meet you at one of our seminars! Have a great week!

Is Cash still King?

Cash is King. Or so I have been told over the years. But I have also found that cash is easily lost, burned, stolen, and can also be easily spent on impulse purchases. So, what if we completely dropped using traditional financial institutions and started paying for everything in cash? That means foregoing all checking accounts, debit cards, and credit.

The bank checking account that is free today may cost a consumer $5 to $25 per month next year if they lack direct deposit of their payroll or do not maintain a minimum savings balance. So the cash only question is a reasonable experiment; what is the process of not using a checking account or credit and going cash only for all transactions?

Sure there are some monetary advantages to using cash; you often get a discount on gasoline purchases. Some small markets and liquor stores will charge a dollar or more for using a debit card at their establishment. Using cash, one can forgo these fees. Technically, everyone accepts cash without question.

Where do we keep our cash? In a financial institution? The consumer might use only a savings account to maintain their cash and access what they need from an ATM.  They may keep a personal safe in their home. Of course, keeping cash in your home may open you up as a target for robbery.

To go “cash only,” a person will need to plan ahead and maintain a solid budget. They have to know how much they will need from day to day to cover the costs of groceries, gasoline, and whatever other sundry items they will need to purchase. I know people who currently don’t have a checking account who cash their paychecks and carry that cash with them all month long. Very few of them have any savings to speak of. Thus, the budget is critical to managing our spending cash.

There are a lot of things we won’t be able to do without a debit card or a credit card. How about renting a car? No debit or credit card, no rental car! You cannot make an online purchase with cash. You cannot reserve a room or an airline reservation over the phone or internet with cash.

Paying bills by cash creates a dilemma of time. A person would have to have all their vendors to whom they pay their bills local to their home or employment. You don’t want to mail cash! You would want to go to the bank that holds your home loan and make your payment there. Then you would have to go to a location to pay your power and gas bill, your phone bill, and your cable TV bill, etc. Do we have the personal time to run around and pay all of our bills this way? Gasoline is not getting any cheaper so running around like this is going to cost us.

I could not pay all my bills with cash and believe anyone with a few outstanding accounts would be challenged to go “cash only.”  In the situation that I have described thus far, a debit card with online banking makes the most sense.

Debit cards draw cash from your checking and, thru the merchant banking system, when we make a purchase the funds are transferred from our checking account to the merchant’s account. If a debit card is lost, it is easily replaced by the financial institution. If the consumer reports their loss immediately, they will suffer no monetary losses. If someone steals your debit card and they process transactions on it, the consumer is reimbursed by their bank for the fraudulent transactions. Not so for cash.

I don’t want to run around saying the “King is Dead!” but, it appears that there are a number of things we can do with cash in our pockets, but it seems there is more we cannot do without a debit card and only cash in our pockets. So, is going “cash only” a viable option in today’s world? Probably not.

And don’t forget our financial education workshops that we are offering here at our main office in the coming month of June:

Free Financial Education Class: Real World Budgeting for Teens (seems to be a lot of demand for this!)
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

How do I Increase my FICO Score?

We all want a higher credit or FICO score. It helps to get additional credit, usually at better rates. How do we raise our personal FICO score? That’s a question I get every week in my workshops. Here are some of the best strategies for raising your FICO score:

• The two simplest strategies are making your payments on time and paying down any outstanding balances. Each time you make a payment on time your score goes up. Don’t let any credit debt get near 30 days late. Also, whenever a balance is paid down, especially on credit cards, your ratio of used vs. available credit goes down, thus, raising your FICO score. Keeping your cards’ outstanding balances at less than 30% of the available balances on each will maximize your FICO Score.

• Another tip is not to close old credit cards. If it does not have a balance, consider using the card for a small transaction once or twice a year and pay it off immediately. This will help your credit payment history and the lack of an outstanding balance on the card will improve your capacity to borrow. This relates directly to your ratio of used vs. available credit. The higher the amount of available credit, the higher your score.

• Two things happen when we close old cards, the history they built for us over the years goes away after a short time and the available balance is removed from our overall available credit, limiting our current borrowing capacity and reducing our FICO score. Close old credit cards at your own risk.

• Avoid too many new credit inquiries. If you are trying to increase your FICO score, avoid applying for new credit cards or loans too often, especially those at a department store. Each application you sign means a hit on your score. Multiple applications mean multiple hits. Many businesses will offer you a discount for applying for their particular card. Your credit score will benefit if you just say No!

• Another strategy is to move your revolving debt to installment debt; essentially going from a variable account to a fixed rate/fixed payment account. You would be changing your variable revolving credit account to a fixed payment personal loan. The highest scores include both revolving and installment debt. This is what takes place when someone does a bill consolidation, changing variable interest debt to fixed rate fixed payment debt.

• One of the easiest and most direct ways to raise your score and your credit history is to get a secured loan from a credit union that will report your loan payments to the credit bureau. These are often referred to as share loans. As you are borrowing your own money, a high FICO score is not required. Not all CU’s report to the credit bureau on these types of loans, so you have to shop for them. Essentially, one opens a savings account and takes out a loan on their money in the account. As they pay back their own money, they will build their credit score. This can also be done with a secured credit card account with your CU. Mismanage either of these programs and you will lose your deposit and possibly do damage to your credit score.

• Banks offer savings account loans but, generally, they will not report your payment history to the credit bureau as credit unions do.

Finally, the key, the thing that will make the biggest difference for you in building your credit score -  is Time! Utilize these strategies and be patient. Rome was not built in a day, neither is your credit score. Your personal history of proper credit usage is important so take the time to do things right and make your payments on time, pay down balances, and utilize your old cards as you should to maintain them. Proper maintenance of your credit over time will result in a nice fat credit file and a high score.

Tips to understanding your FICO score

http://www.myfico.com/downloads/files/myfico_uyfs_booklet.pdf

Auto Sale at Meriwest Credit Union – Main Office

May 19th - 9AM to 5PM
May 20th - 10AM to 6PM
5615 Chesbro Ave, San Jose CA 95123

Get special dealer pricing and financing deals.

To get pre-approved for financing, call Meriwest Credit Union at 877-MERIWEST or online at Meriwest Credit Union Auto Loans.