Marketplace

A Credit Freeze

Question: I want to protect my identity, and I've heard individuals are now able to put a credit freeze with the credit bureaus. But it appears that it can get very difficult and expensive as I may need to lift this freeze for car loans or even simple things like getting a new cell phone plan. Is getting a credit freeze worth the cost and hassle for the protection or is there a better way? Tatenda

Answer: Before I give you my answer, here's an email I got the other day from John. He's unhappy with my favorable comments about putting on a credit freeze with the major reporting bureaus:

"I followed Chris Farrell's advice to freeze my credit report to avoid identity theft. Worst idea ever!!! I needed to refinance recently but could not get Experian to lift the freeze in a timely manner (Equifax and TransUnion were fine) and the mortgage company required all three credit reports. Could not contact anyone at Experian (which has made a fine art of avoiding any direct contact with a person at their company via phone, mail or e-mail). Lost my great re-finance rate. Cost me $45,000 over the life of the loan. Please caution listeners to think about all the implications of doing this."

So there's a cautionary note about freezing your credit. But I remain a fan of a credit freeze, and in recent months the credit reporting bureaus have made it a bit easier on their customers to create a freeze.

Still, John's email emphasizes that a credit freeze only works if you aren't doing much on the credit side. In other words, if you're satisfied with your cell phone contract, credit cards, mortgage and auto loan, and you don't see any need for new credit for the foreseeable future, then a credit freeze and the $30 total it will cost you seems like a good move to me. (It's $10 for each bureau to initiate a freeze.) When you need a new loan, make sure you act on the early side to lift the freeze. (Again, $10 for each bureau to temporarily lift the freeze.) But if John's experience gives you pause--don't do it.

02/08/08 by Chris Farrell

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Another Credit Reporting Bureau

Question: While I was checking my credit reports, I came across the name of a fourth credit reporting agency, Innovis. I was told they are not included in the "one free credit report a year". My understanding is that Fannie Mae and Freddie Mac are required by the government to report to them. Is this true? Who are they and why aren't they required to furnish a free report like the other agencies? Should I be concerned about checking this report as well? Judi

A: You're right--Ugh. There is another credit reporting bureau and, yes, Freddie Mac and Fannie Mae require that mortgage servicers report payment histories to Innovis. The federal government does the same. If you go to the Innovis website at www.innovis.com you can learn how to order a credit report, put on a fraud or security alert, freeze your credit report, and so forth. Problem is, few people realize it even exists.

Its basic business model is different from the Big Three credit bureaus. As I understand it, its main business is helping creditors put together mailing lists--the solicitations you get in the mail. If there's a black mark on your credit record with Innovis--whether it should be there or not--you won't get credit offers in the mail. Personally speaking, being free of mail solicitations isn't a bad thing. On the other hand, it's bad if you're denied a chance at a deal because of a mistake on a credit report that few people realize exists. And you don't want credit mistakes to linger anywhere.

I don't understand why Innovis isn't part of the yearly one-free-credit-report requirement. It's an oversight that should be corrected.

02/26/08 by Chris Farrell

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Boosting Credit Score

Question: I am looking for a way to boost my credit score. My fiancé and I plan on buying a house in about a year. My credit score is considered poor or medium-high risk. I had tried to get a credit card a few months ago and I was turned down.

My bills are all current and I've paid off any old debt I had accrued. But I do not have any credit cards right now- only a car loan and a student loan. Would you recommend getting a credit card and staying current and keeping a low balance for better credit? If so, is there a certain type of credit card that's more "forgiving" of a lower credit score? If not, are there any other ways? Could I pay one of those people who "repair" credit? I would really appreciate any advice. Thank you very much. Michelle, San Diego CA

Answer: Time is on your side. You've paid off your old debts, and you're current on your car loan and student loan. The longer you make your loan payments on time the better your credit score will become.

That said, it can make sense for you to get a credit card, assuming you use it and pay off the bill in full at the end of the billing period. (Technically, it doesn't matter if you carry a balance so long as you pay the bill on time. Your credit score will improve whether or not you're carrying a balance. I just don't want you to take on any credit card debt.)

One common maneuver for getting a credit card is to apply for a retailer's card. Retail credit cards aren't that attractive since they usually come with high rates. But if you use it and build a good credit history with it you can always get rid of it later on and apply for a better card. (And this time you'll qualify.) Another option is a "secured" credit card. With secured plastic, you open up a savings account with a bank that issues you a card that looks like any other credit card. Your credit is equal to or somewhat less than the amount you deposit. Eventually, after showing a pattern of paying off your bills on time, you can usually switch to a traditional "unsecured" credit card.

03/25/08 by Chris Farrell

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Co-signing a Loan

Question: I have a very good credit rating and am considering co-signing on a loan for a family member who has a very poor credit rating. Will her poor credit rating affect my credit rating in any way, if I co-sign the loan? Thank you, Bette, Richfield, MN

Answer: Her poor credit rating won't immediately affect you on co-signing--assuming that she then pays her bills on time. But if she defaults you're on the hook to make good on the debt. The lender will go after you for the money she owes. Your good credit rating could be ruined. It's understandable that you want to help out a family member, but co-signing a loan is very risky.

03/27/08 by Chris Farrell

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Free Credit Score?

Question: Hello Chris, I thoroughly enjoy your segments, keep up the great work.

I tried to get my free credit score at the sight that you referred to but it only provides a "report" from each company who then want to sell you access to your own score?

I still have never seen this magic number for myself or my wife.... Do you know of any way to get my actual credit score for free? It seems like this should be info that is available to each of us with out a for fee subscription but i am not finding it. Any help here? Cheers Joe. Talkeetna, AK

Answer: Thanks to a breaking story on May 30th, I need to change my answer to this question. Here's the top of the LA Times story:

More than 160 million Americans would be able to learn their all-important credit scores at no charge -- and with no strings attached -- under a settlement by credit reporting giant TransUnion Corp. of a long-running class-action lawsuit.

The agreement would entitle consumers to at least six months of a TransUnion monitoring service, giving them access to the latest information in their credit reports as well as their current scores at any time.

The service also would notify consumers by e-mail of significant changes to their files, including reports of late payments or accounts opened in their names. The latter information could help thwart attempted identity theft.

Of course, it's only for 6 months and at the moment it only includes one of the credit reporting bureaus. My guess is that this deal is a precursor to making credit scores more easily--and cheaply--available to the average consumers.

Answer: You can't get your credit score for free. It's annoying. These days, it's easy to get a free "credit report". Check out how at www.annualcreditreport.com.

But you have to pay for that all important "credit score"--the number that largely determines your interest rate on a loan. Even when I see ads promoting a "free" credit score it turns out you first need to buy a long-term contract. Now, I don't consider that "free" by any commonsense definition of the world.

05/29/08 by Chris Farrell

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Credit Score?

Question: My husband and I are planning for our next car purchase -- a late model used car. We are able to pay cash for the car, but are wondering if it would be better for our credit score if we got a car loan and then paid it off within a couple of months. Our only other debt at the moment is our mortgage. We'd like the satisfaction of paying cash for the car, but don't want to pass up the opportunity to help our credit score. What would you recommend? Tracy. Palatine, IL

Answer: I would pay cash for the car. My guess is that you already have a good credit history and score by making your mortgage payments on time. Credit scores matter, but it shouldn't get in the way of sound money management.

07/21/08 by Chris Farrell

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Credit Score: Carry A Balance or Not?

Question: My 23 year old son applied for a credit card and was turned down because of "lack of credit history." We had held a joint credit card with us but apparently that didn't matter. He had a history of both utilities and rent in his name. His bank suggested a guaranteed credit card. He has applied for one of those. Now he wants to establish his credit. My understanding is that he needs to use the card and pay off in payments. Our family has always paid in full. He is very reluctant to not pay off the total every month. Am I correct in having him pay off in payments? If that is right, what is the minimum amount he needs to carry over each month and how long does he have to do this. He really doesn't want to carry a balance at all. Nancy, Scotts Valley, CA

Answer: No, your son should regularly use the credit card to build up a history, but then he should go ahead and pay off the monthly bill in full. It's a good financial habit to get into, and when it comes to his credit score there's no need (or extra benefit) to carry a balance. He should be able to get a traditional unsecured credit card fairly quickly, too.

By the way, when it comes to creating and improving his credit score, he should keep his credit use to less than 30% of his credit limit--and preferably closer to the 10% mark. Again, it's a sound habit both from the financial and credit score perspective.

09/04/08 by Chris Farrell

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Closed credit card account

Question: I just received a letter from Chase informing me that they had closed one of my credit card accounts (I have two Chase cards) due to lack of use. I had this account for almost six years (in fact, the first credit card I ever had) and I have not used it for quite some time. The only reason I didn't ask for it to be closed sooner was my understanding that keeping it open was more beneficial to my credit rating than closing it. Taking that into account, doesn't this amount to Chase damaging my credit rating with no cause? Solon, Albany, NY.

Answer: It's remarkable how fast we've gone from a credit card world defined by billions in solicitations and offers of 0% financing to one defined by slashed credit limits and closed accounts. Yes, your credit score has been dinged somewhat. It doesn't really matter if you close an account or it's closed by your creditor. The main impact typically comes if closing the account affects your ratio of total credit balances to total credit limits. Closing an account lowers your overall credit limit and raises the ratio. But with good credit card habits--such as paying off the balance every month--your credit score will bounce back. It reads that you manage your money well.

I believe that consumers should control their own credit habits and not follow the formulas of Fair Isaac, the main credit scoring company. I know that's a bit naive, but in an era of identity theft and too-easy-credit it's better for most people to close unused accounts than keep them open. (I realize in your case it wasn't a choice. This is as a general approach.) The big exception is if a major purchase, such as a home or car, lies in your immediate future. In that case, it pays to wait to close the accounts until after the deal is done. But I would still close them.

11/25/08 by Chris Farrell

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More cell phone thoughts...

This weekend I answered a question from Nicolas in the Bronx, New York. He wrote: "I am done with Sprint!:" The gist of his question was wanted s to cancel his contract and pay their $200 early termination fee to be rid of them. He wondered if this would affect his credit score. Was it worth sticking with an unsatisfactory contract for another 2 years to prevent any penalty?

I said, no. If he paid the $200 early termination fee there would be no nick on his credit report or credit score. He lived up to the terms of the contract.

I'm at work today, and an alternative answer from a listener in Nederland, CO came in by email. It relays an intriguing experience, and a different approach. I thought I'd share:

An alternative answer to a broadcast question I heard on KCNC, Sat. 1/10/09, 12;30pm concerning Sprint cellular.

Someone asked you your thoughts regarding Sprint. They were fed up with the service, wanted to drop the contract, pay the $200.00 early termination fee, and were worried about their credit score. I agreed with your advice, but I have some other info that might be helpful.

I don't know how similar their situation is was to mine, but the first thing that almost anyone can do these days (I've heard this advertised by several cell companies, its probably available by all of them) is : they're offering to pay the $200.00 penalty/contract termination fee; if you switch to them. (Just like the regular landlines used to ). The next thing I found out, is, when I wanted to terminate my Sprint contract, it was because I was having all kinds of trouble with the service, fed up, sounds like the person who asked.

When I called Sprint for the umteenth time, technical (after failing to correct problem for 6 months) sent me to sales, sales credited me the 6 months of service I had paid for that didn't work. Upon further problems, talking with technical, I said I was gonna drop their service (as sales had told me I could with out termination fee, and since I was technically in their "roaming area" I had never been bound by contract in first place).

Technical said, "I shouldn't tell you this, but if you you tell sales you're going to drop service, they have authority to offer you all kinds of discounts, and will do whatever they can to make you stay. Just tell them "...all the problems you've had, you want to drop (but wish you didn't have to).. can't afford their monthly fee anymore, etc."

Initially, I had a package that included 200 anytime minutes, free unlimited nights and weekends from 7pm to 7am, free 7pm Friday to 7 am monday, free long distance and free roaming, for 29.99 + tax. (You can't get this package anywhere anymore, I don't think.) My monthly bill was around $34/month. (I don't text or use phone to do any Inet stuff, and I was given a free camera phone when I enrolled. After threatening to cancel & talking with tech (the discounts I was given were ongoing) the same service magically cost $23/month including tax.

Some time, maybe 8 months later, I noticed a few 25 cent roaming calls charged on my bill, and was told roaming was no longer free. Same with free nights & weekends. I never agreed to this plan change, and canceled immediately. (this change would have also negated contract).

Long story short, depending on why your so fed up with them, you may be able to get a refund of many months of bad service (and then in a subsequent call) there may be many ways to get out of contract without paying the $200.00. Talk to technical first (they know nothing about sales amounts) but sales knows nothing about tech (and tech keeps records of all complaints, every time you've called them. Tech told me about asking sales for refunds of bad months, sales told me about canceling w/out fees cause I was in roaming area...even when I was getting free roaming.

The company switch (like to ATT or Verizon...) that offers to buy out your contract, are ads I've seen lately....and there's a zillion services where you don't have to promise or sign any contract anymore. Please pass this along to your frustrated sprint questioner. (As far as credit, I have been unemployed since a disabling medical condition, get a whopping $500.00/month, have collections all over the place, medical billls I can't pay,(and I don't get any additional aid because my husband nets around 24K a year.) And I still get 0% credit cards offers in the mail. Go figure? (Please withhold my name and number)

01/10/09 by Chris Farrell

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Borrow to boost credit score?

Question: Hi Chris: Thanks to you and Tess for your informative show. It's appointment radio for me on weekends. :)

Here's my question: I've worked to get my finances in order and bring my credit score up over the past several years. Currently I have only one credit card with a very low limit, which I can and do pay off in full each month. I have no student loans or other debts and no mortgage. I've been contemplating trying to buy a house for the first time this year and have been watching my credit score through Equifax. This month when I pulled the report, the summary told me that one of the factors that could work against me was that I had had no new credit or loans in several years.

I had intended to put off buying a car for another year or so, but could afford it now, though it would mean saving a little less each month. I want to get the best interest rate possible when I finally get a mortgage, so I've been paranoid about adding any new debt. Has being prudent held me back? Could taking out a small loan (less than 10k,) for something like a car, and making on-time payments actually help my score in advance of trying to get a mortgage? And if it lowers my score initially, how much of a penalty would it be? And at what point in the loan is it actually helpful? 3 months in? 6? a year? Thanks, Kerri, Washington, DC

Answer: When it comes to question like this my starting place is good savings and debt management practices. The peculiar dynamics of the credit scoring business comes second (or third or even farther down the list). My basic belief is good savings and debt habits will pay off in all economic and financial seasons, and those sound principles will pay off in a good credit score. Not everyone agrees with me, and their personal finance advice is more tailored toward manipulating credit score higher. I don't agree. What's good for the profits of the credit reporting and credit scoring industries is not necessarily good for your personal fiscal health.

We're in a recession. It's unclear how deep the recession will go and how long it will last. You've already gone through the tough slog of getting your personal finances in order. You pay off your credit card bill in full every month. Bravo. I would not take out on unnecessary debt and create a more fragile balance sheet in an attempt to boost your credit score. My fear is that the strategy could backfire on you badly.

What's more, my educated guess is that you'll be fine when it comes to buying a home. Remember, there is a range to credit scores and if you keep paying off your bills on time you'll be pretty high up. Take this example drawn from the FICO website. The key assumptions: The mortgage loan is for $150,000 and the borrower is making a 20% down payment on the home

FICO Score Mortgage Rate

720-850 4.760 %
700-719 4.885 %
675-699 5.423 %
620-674 6.573 %
560-619 N/A
500-559 N/A

The reason for the "NA" or Not Available for the two lowest score levels is that borrowers with such a low score and damaged credit can't qualify for better loan terms.

It would be much better for you to spend the time researching the home you might buy, and the neighborhood you want to live in. Remember, you have a lot of negotiating power in this market. You should visit with a bank loan officer or credit union lender to see what rate you qualify for currently.

Let us know how it goes for you.

03/25/09 by Chris Farrell

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Credit counseling

Question: I have, unfortunately, managed to rack up about $30,000 in credit card debt. Financially I'm okay and working to pay off the debt and not in danger of bankruptcy or anything right now. I am considering using a credit counseling service to help me negotiate a lower interest rate on some of my cards, and am wondering how it works if you have a balance on a card but close the account? How does it reflect on your credit report? Thank you, Mark, Ashburn, VA

Answer: The answer lies in a world of "sometimes," "maybe" and "not always." Fair Isaac, the 800-pound gorilla of the credit scoring industry, explicitly states that participating in credit counseling doesn't factor into your credit score. That's the right approach. Problem is, there are other credit scoring companies and it could show up elsewhere. Closing a credit card account will usually nick your credit score.

Of course, my reaction is "so what"? The real concern is getting rid of the debt, and congratulations on working so hard to pay off your credit card bill. Your credit report and your credit score will rebound with good debt habits.

One last thing: Be careful when you look for a credit counseling service. It's an area ripe with fraud, malfeasance and fly-by-night operators. The nonprofit affiliates of the National Foundation for Credit Counseling are legitimate. The quality of the service can vary, but it's a good organization and a good place to start. The United Way and a number of churches also offer honest services.

By the way, they may tell you you're doing fine on your own. But it's always good to talk to someone knowledgeable and have them review your situation and go through your options.

04/01/09 by Chris Farrell

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Credit freeze

Question: My question involves job applications and my social security number. When I fill out a job application, I need to submit my social security number. If I place a credit freeze with the credit companies, would this still allow an employer to access my credit report to see that I am financially responsible, but also prevent an unscrupulous person from abusing my credit? Jeff, Portage, MI

Answer: A "credit freeze" or "security freeze" lets you block the disclosure of your credit report by the credit bureaus. It's standard practice for anyone that is a victim of identity theft, and more and more consumers are embracing the tactic these day.

You're right, a credit freeze can be an issue depending on where you live. About a third of the states allow landlords and employers to check out a frozen credit report. That said, even if you live in a state that doesn't permit employers to take a look freezing may be a sensible strategy. It just means you'll have to plan ahead if you're in the market for a new job, apartment, credit card, mortgage, refinancing or other large financial transaction. The thaw typically takes several days. In most cases the thaw fee is in the $10 range for each bureau, and you'll pay another fee to put it back in the freezer.

You can look at the different state rules about credit freezes here. The web sites of state attorney generals also have good information about a credit freeze. In Michigan there is no state credit freeze law so you'll follow the rules established by the three credit reporting bureaus, Equifax, TransUnion and Experian.

04/30/09 by Chris Farrell

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Fico score for free

Question: My credit union advertises a free service that provides members with their FICO score each month. Will signing up for this service negatively affect my FICO score? Is there any other reason why I should hesitate to register for this service? Jason, Indiana, PA

Answer: It will not have a negative impact on your credit score. Indeed, my guess is that you're with the Pennsylvania State Employees Credit Union which has negotiated a deal with Fair Isaac, the creator of FICO score, to offer its online checking customers free FICO scores monthly. "The Fair Isaac Scores on Statements program not only benefits our members by giving them a free view into their financial health, but it also helps PSECU by educating our members on the positive impact of responsible credit behaviors," said Gregory Smith, President and CEO of the Pennsylvania State Employees Credit Union.

The free credit score is a service other financial institutions are offering their customers, too. It looks like a new line of business expansion for Fair Isaac, and I expect it will become more commonplace with time. With this kind of program the customer of the bank or credit union not only gets their FICO score but the factors that went into the score. Customers can then see where they may need to make improvements in their credit habits to boost their score.

I don't see any downside to participating in a program like this other than my general stance that people are paying too much attention to credit scores. Simply put, being conservative with your household finances will pay off in a more secure lifestyle and a better credit score with time. I don't really see any need to look at it monthly. Not everyone agrees with me, and their personal finance advice is tailored toward manipulating credit scores higher. I don't agree. The goal should be to break the tyranny of the credit score.

06/04/09 by Chris Farrell

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Closed credit card accounts and your credit score

Question: I have repeatedly heard what you confirmed last week: Closing a credit card can negatively impact your credit score. The obvious question is Why? Better: Why in the world? Brenda, Newtonville, MA

Answer: Why indeed? I'm with you. The reason has to do with this table. The figures come from Fair Isaac, the creator of the FICO credit score, the 800-pound gorilla of the industry.

A Credit Score Comes From:

Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Types of credit use: 10%

The "Amounts owed" category, which makes up almost a third of the credit score calculation, takes into account the amount of debt you owe relative to your total credit limits. It's called your "utilization ratio." In the short run, when you close a credit card account or it is closed by the issuer the total credit available to you falls but the debt remains the same. In other words, your ratio of debt to credit limits is immediately worse. Of course, you can improve that ratio by paying down the debt. That's why the negative impact usually doesn't last long.

There is another reason that can come into play over the long haul. However, I doubt if it actually hurts many credit scores in the real world. If you had the closed credit card for a long time, it showed a good credit history and there is a $0 balance after 10 years the good credit news is deleted from your credit reports or history.

Want to learn more about the commonsense-less world of credit scoring? This article by bankrate.com is a good tutorial on credit scoring from Fair Isaac's perspective.

06/11/09 by Chris Farrell

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How many credit cards

Question: I have paid off all my credit cards, and am now looking to work on one car loan and then my student loans after that. I am trying to figure out what to do with these 4 credit card accounts now. Do I simply close them out? Do I keep them at a 0 balance but pay the yearly fees for the sake of an improved credit score? What do you recommend? Thank you, Ed, Key Largo, FL

Answer: I bet it feels good to get rid of your debts. It's terrific. I wouldn't clutter up your finances with multiple credit cards. I can't think of a good reason why anyone wants more than one. An exception to that rule is freelancers and other self-employed folks. It's a savvy move for them to have one card for personal use and the other for business expenses. It makes record keeping easier.

What's more, why pay a fee for something you don't need. Go through the cards and decide which offers the best features for the lowest cost. You should also take into account the length you've owned the card. The longer you've had it the bigger its impact on your credit score. Closing the remaining accounts will ding your credit score somewhat, but the effect is fairly limited and with good habits your score will bounce back. The only real issue is timing. If there is a major purchase in your immediate future, such as buying a home, leave your unused accounts alone until the deal is done. Then close them.

One last point: Do you really need a credit card? Or is a debit card enough? A debit card is an electronic checkbook and, with a debit card, you can't spend more than you have in your checking account. In an epic shift, consumers are now using debit cards more than credit cards. It's a wothwhile question to ask. I do need one, but a friend of mine decided he didn't.

06/29/09 by Chris Farrell

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Pay off auto loan

Question: I have a car loan that I could afford to pay off. However, is the loan, which has been paid on time for about 2.5 years, helping my credit score? By paying it off, might I lower my credit score in the short term? The long term? Ardimus, Houston, TX

Answer: I don't see any reason to increase the profits of your lender by continuing to pay interest. Why drain your bank account of that money when you could put it elsewhere, say, into savings or entertainment? I'd get rid of the loan. It's a nice feeling to own your car free and clear. We shouldn't let the credit score tail wag the debt dog. It's always financially smart to pay off consumer debts as fast as possible. As for your credit score, it will reflect a history of paying bills on time. That's the key to a decent credit score short-term and long-term.

07/10/09 by Chris Farrell

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Cancel landline

Question: My husband and I each have a cell phone, and are thinking of cancelling our landline phone service, which we almost never use. Is there any chance that cancelling our landline could make us look like a poor credit risk? We will be in the market to buy a home in the next year or so. Susan, Hollister, CA

Answer: Getting rid of your landline should not impact your credit score. Lots of people--including me--have dropped their landline phones and rely on their cell phones. There really can't be an issue with your credit report or your credit score if you've paid everything you owe. Go ahead and cancel.

07/17/09 by Chris Farrell

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Automatic bill payment

Question: I understand that credit card companies take a dim view of certain credit-using behavior when deciding on your interest rate. For instance, I've read on this site that you shouldn't use credit cards at the salon, at bargain stores, or for purchasing alcohol. What about monthly bills, though? American Express offers double rewards points for setting up your monthly bills (utilities, cable, phone service) to be paid automatically with the card. I already have these bills set up to be paid automatically from my checking account each month anyway, so is there much difference in shifting them to my AmEx and gathering the extra rewards points (to transfer to frequent flyer accounts, or to help out with Christmas gifts, etc.)? And will this have a detrimental effect on my credit score? Suzanne, Rochester, NY

Answer: The biggest factor in determining your credit score is paying bills on time. (It accounts for 35% of the score.) So, it certainly doesn't hurt your credit score to pay them automatically, and it will probably boost it over time. By the way, it doesn't matter whether the bills are paid on time by check, automatic withdrawals from your checking account, or automatic bill paying through your credit card. Of course, the key to the latter method is paying the tab on your card on time.

The credit card companies are replicating the mistake of the recording industry. They are going after customers, changing the rules of the game without notice, closing accounts, raising interest rates, hiking fees, and cutting lines of credit. In trying to lower the overall risk of their credit card portfolios it looks like red flags were raised when customers shifted from shopping at premium stores to discount emporiums. The data mining into our habits and behavior is breathtaking--and disturbing.

Still, the industry would go out of business if it denied credit cards or hiked rates on everyone who on a monthly basis got a haircut, went to a liquor store, picked up household items at a bargain basement store and groceries at discount warehouse. What they're really looking for is abrupt changes in spending that might signal financial trouble. In a sense, with regular bill pay you are steadfast and you get the rewards you want. (There is another whole question about rewarding credit card companies for their behavior, but that is for another forum.) For more on credit card company behavior and your spending habits check out this terrific interview my colleague Tess Vigeland had with Charles Duhigg.

If you're responsible with money it's probably best to use a credit card with an automatic payment instead of a checking account. The reason is that so long as you are well under your credit limit you don't need to worry about overdraft fees and the like from the bank--and those fees are costly.

08/13/09 by Chris Farrell

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New credit card

Question: My MasterCard company (Citicards) recently sent me a letter saying that my card number had been compromised by a large-scale theft of credit card numbers. They sent me a new card, which has a different 16-digit number than my old card. When I called to activate the account, the customer service representative asked permission to "close" the old account and "open" the new one. Will this show up on my credit report as one 7-year-old account closing and a new one opening (thus hurting my credit history)? And whom do I call to find out? I am conscientious about paying it off in full every month - I would hate to have this hit my record negatively. Jennifer, Boston, MA

Answer: No, the change in numbers shouldn't impact your credit score. Your credit history should be transferred into the new account when the old one is closed. The other thing is that your balance and credit limit are the same (that's what happened with me after a similar shift following a credit card security breach.) So, there shouldn't be any negative impact on your credit ratio.

08/22/09 by Chris Farrell

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Closing credit card account

Question: I have a high interest credit card--24.9% with Bank of America, with a large balance $12,000. I am closing the account and Bank of America says the interest rate on paying off the balance is 5.5%. Is this ok under the new credit card law signed into affect? Dennis, San Diego, CA

Answer: My guess is that you got an offer of a lower interest rate in return for closing the account. It's common practice these days.

Although many finance experts recommend against closing an account because it will nick your credit score, I often think it's a good move on your part, especially if money is tight. It can be tough to pay off a large balance at a loan shark rate of almost 25%. A 5.5% rate of interest can make a big difference. Just doing a quick calculation, if you paid the minimum payment at 24.9% you would fork out $5,095 in interest payments alone. At 5.5% the interest charge adds up to $774. Hopefully, you can put even more than the minimum toward getting rid of the loan.

The new credit card law that comes into effect in stages basically protects cardholders from unexpected interest rate hikes and significant changes to the terms of the loan. It also bans some bad practices, such a universal default. (A "universal" default policy hidden in the fine print of a credit card agreement meant that if you were late on any payment to any creditor, the rate on your credit card could automatically jump to the default rate of 30%.) I would imagine in the future that so long as credit card issuers give their card holders sufficient, clear notice they should be able to offer a lower rate in return for closing the account.

08/25/09 by Chris Farrell

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Closed credit card account

Question: I just received a notice from HSBC, one of two of my credit card companies, that they were going to increase my interest rate - again! (Six months ago they increased it from 9.9% to 14.9%) This increase is unrelated to any delinquency on my part nor a particularly low credit score (approx. 760+). The notice indicated that HSBC was raising my interest rate because I am part of a "class of accounts" whose interest rates are being raised as of December of 2009. They are offering me the opportunity to "opt out" of the increase. This means they will cancel my account. I know Marketplace has advised other listeners that closed credit card accounts negatively impact credit ratings - so my question is: should I keep the account open and not use the card or should I "opt out" on the presumption that it will not negatively impact my credit score? Chris, Los Angeles, CA

Answer: You have a lot of company. Yes, closing the account will have a slight negative effect on your credit score. The impact of a closed account comes from the change in your ratio of total credit balances to total credit limits. A closed credit card account lowers your overall credit limit and raises the ratio.

But so what? The nick won't really matter unless you're in the market to buy a home, a car, or some other big ticket item. If that's the case, I would swallow the increase for now. But if you aren't going to be borrowing money anytime soon I would recommend closing the account and paying off the balance at the lower rate. Why reward this company with your business considering how it is treating you? After all, the real goal is to get rid of credit card debt. And the effect on your credit score--if any--does fade with time.

One other point: Do you really need more than one credit card anyway? I can't think of a good reason why anyone wants more than one. An important exception to that rule is having one for personal use and the other for business expenses. It makes record keeping easier.

10/05/09 by Chris Farrell

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Credit check

Question: I am inquiring as to if the State of Missouri has enacted legislation to enable consumers to "freeze" their credit report access from landlords and employers. The state of Missouri, where I reside, currently has one of the highest unemployment rates in the nation (near 10%) and an employer that I interviewed with who otherwise would have hired me based their decision NOT to hire me on my credit report, which is a disaster. Last Sunday's Parade magazine mentioned that the Federal government is considering legislation that would block employer access to credit reports. Please advise and thank you. Sincerely, Colleen, St Louis, MO

Answer: The official unemployment rate is close to 10%. The broadest measure of unemployment, which includes folks that want to be working full-time but are employed part-time, is at 17%. Its numbers like these that have the federal government and a number of states worried with almost half of employers making use of credit checks to screen potential employees.

That said, not much has been done on the legislative front. Washington instituted limits on employers tapping into credit histories for job candidates in 2007. Hawaii became the second state with such a law this year. A number of other state legislatures have considered comparable proposals, among them is Missouri with a 9.5% unemployment rate. The bill is here. The bill hasn't passed into law.

All these bills recognize that a credit check is essential in some industries and jobs, such as financial services and bank tellers. There isn't and shouldn't be any dispute about that.

But it sure seems like an abuse of power in the current economic environment. Look, when the economy is weak employers have the upper hand. They can impose all kinds of job qualification requirements for potential openings. Sometimes, it seems as if applicants need a PhD to be a janitor and an MBA for a clerical position. Yet when the economy is booming and the unemployment rate is low these onerous requirements disappear. That's what happened in the late '90s.

The journalist Dana Dratch has a nice backgrounder on the issue.

Your credit score isn't supplied to employers (at least your FICO score, which is the main one).And the fact that a potential employer may run a crdeit check is yet one more reason to monitor and correct any errors in your reports.

10/19/09 by Chris Farrell

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Responsible for debt

Question: In 1999 I opened a credit card with my nanny to help her establish credit. I have never used the card so all of the charges on it are hers. Last year in July I was informed by the bank that she was late on a payment. I canceled the card. Since then she had been paying regularly until this past May. She is over 90 days late and it is now in collection. I had her fill out a form to assume financial responsibility for the card. The bank will not allow that because she has been late. Technically it is my responsibility. The total due on the card is around $10,000. What can I do so this doesn't ruin my credit? Vivian, San Mateo, CA

Answer: I know you don't need me to say this at the moment, but for other listeners and readers your experience is why it doesn't pay to co-sign or open a joint account with non-family members--no matter how trustworthy. Life intervenes, and many of us fall behind on our payments for a number of reasons. (Even with family members I urge caution; there are other ways to help them out financially without taking on a legal obligation.)

Fact is, the bank and collection agency has every incentive to enforce your legal responsibility for the payments. You can't get off the financial hook. Still, the good news is that you've closed the account. The potential damage is limited to the $10,000 remaining on it. Now that it's in collection the simplest way to minimize any damage to your credit is to pay it off and then work out a payment plan with your nanny. Of course, this course of action depends on your relationship with your nanny.

Does anyone else have a suggestion?

10/27/09 by Chris Farrell

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Another credit report

Question: I have been requesting credit reports in tandem from one of the three agencies every fourth month. In this way, I receive a free report from each agency once a year. Would I jeopardize the free report privilege if my wife requested separate credit reports as well? Robert, Raleigh, NC

Answer: No, what you're thinking about doing is fine. It's a good idea for each of you to ask for your own free credit reports. (And to reiterate, the only place to apply for your free annual credit reports is from annualcreditreport.com. Jingles and ads notwithstanding, it's the official site to help consumers get their free credit report.)

Of course, much of the financial information will be the same, but not all of it. The way the credit reporting bureaus work, married couples don't share a credit report. You each get your own report. But the activity from your joint accounts will show up inn each.

I like what you're doing. You're getting a free report from one of the three agencies--Experian, Equifax, and TransUnion--every four months. Your wife can take a similar approach. But she could pick a different monthly pattern. For instance, let's say your reports arrive in January, May, and September. Well, she could choose to get hers in March, June, and November. This way you'll essentially have a running credit report tally for review covering much of the year.

11/09/09 by Chris Farrell

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