Should You Cancel a Credit Card with $0 Balance?

The downsides of cancelling a credit card are usually not worth itCollage of overlapping credit cards
Many consumers are tempted to limit their debt by closing one or more credit cards as a result of the steady rise of the cost of living and credit card interest rates. However, though there are many reasons to close a credit card, there are ultimately even more and better reasons not to.

Adverse effect on credit score
If you care about maintaining a good credit score, you should avoid closing a credit card even if you have fully paid off the balance. This is because your credit score is based on a number of different factors that will almost all be adversely affected by closing a credit card.

“An account closure could wind up hurting your score because it eliminates the available credit line associated with the card and could easily skew your…credit utilization. It could also lower the age of your credit report, which may affect your score over time,” warns Jeanine Skowronski, credit card analyst and reporter for Bankrate.com.

According to FICO™, the United States’ biggest credit scoring service, 10 percent of your credit score is determined by credit mix. The more diverse the mix of your credit types, the better, so you should especially avoid cancelling a credit card if it is your only one or one of just a few.

Another 15 percent of your credit score is determined by the length of credit history. Because of this, you should take care not to close your oldest credit card. “Lenders tend to view borrowers with short credit histories as riskier than borrowers with longer histories,” writes LaToya Irby, credit and debt management expert, in a May 2017 article for TheBalance.com. “Closing your oldest credit card won’t impact your credit score immediately. But, once the credit card falls off your credit report several years down the road, you might see an unexpected credit score drop.”

More importantly, 35 percent of your credit score is determined by your payment history. If the credit card you want to close has a long and good history, closing it will hurt your credit score significantly. “If you have a good payment history on a card, then it is a good idea to leave that card open. This is especially important if you have a poor history with other cards or forms of credit,” says Chizoba Morah, contributor for Investopedia.com.

Debt and identity theft
Limiting debt and preventing identify theft are among the top two reasons people might decide to close a credit card. According to Morah, “When people feel they are spending too much money and cannot resist the lure of the credit card, they close the account.”

Furthermore, Morah adds that “by closing a credit card, they can lessen the chances that their identity will be stolen,” a risk that is increasingly at the front of people’s minds given the increase in identity theft in recent years.

While these are legitimate reasons to cancel a credit card, there are alternative methods to tackling these without incurring penalties on your credit report.

Alternative methods
There are a couple of steps you can take to keep a credit card open while making it very difficult to use it, thus limiting the aforementioned temptation and risk of identity theft. One step is to remove your credit card information from any online retailer that still has it, such as Amazon, so that it can never be unintentionally used by you or the retailer.

Another step is to destroy the physical credit card itself so that there is no risk of losing it or having it stolen. “If you have an inactive credit card or a card with a high balance, cut it up instead of closing it so that the history remains on your credit report but you won’t accumulate more charges on it,” advises Morah.

Ultimately, the negative consequences of canceling a credit card more than offset the potential benefits, especially as these benefits can be explored via alternative means. Unless the credit card you want to cancel is very new, mostly unused and one of many other credit cards, you are likely better off leaving it open.

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How a Personal Loan Impacts Your Credit

The relationship between loans and credit scores
It’s well-known that your credit score has a big impact on your ability to take out a loan, as marchfeatured_prsnllnimpactwell as on the total amount of the loan and interest rate your lender offers. But did you also know that the relationship works in the other direction as well?—that a loan can impact your credit score?

To understand this relationship, you have to consider where your credit score comes from. Your credit score is calculated using a variety of factors, including your payment history, the total debt you owe and the number of credit lines recently opened. When you take out a personal loan, the last two factors are affected.

Even just applying for a loan has an impact, since your credit score goes down slightly each time an inquiry is placed on your credit report by a lender checking your credit.

The financial advantage of finding a great loan far outweighs the negative impact that an inquiry has on your credit score. If you take out a personal loan to pay back a high-interest credit card, for example, you would benefit from the reduced interest and your credit score could be improved overall.

“A personal loan may help your credit score by moving credit-card debt over to the installment loan column,” states NerdWallet staff writer Amrita Jayakumar. “The way credit scores are figured, borrowers who use all or most of the available credit on their cards get hit with a significant penalty.”

Another thing to know about the impact that loan applications have on your credit score is that each inquiry may not count fully against your credit score if you are just comparing the rates of more than one loan. For example, if a car dealership places an inquiry on your credit score in the process of offering you an auto loan, and you want to check with your local financial institution to find a better deal, the second inquiry may not count against you.

“Generally any requests or ‘inquiries’ by these lenders for your credit score(s) that took place within a time span ranging from 14 days to 45 days will only count as a single inquiry, depending on the credit scoring model used,” according to the U.S. Consumer Financial Protection Bureau. “You can minimize any negative impact to your credit by doing all of your shopping in a short amount of time.”

Once you have taken out your loan, it is important to make regular payments in order to maintain and improve your credit. A strong payment history goes a long way toward achieving a good credit score, and as you pay down your loan, your overall debt will decrease, further benefiting your credit.

So if you are considering taking out a loan, don’t let fear of a negative impact on your credit score stop you from exploring your options.

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Tips for Building Your Credit Score

If your credit score could use a boost, read these foolproof tips

There’s a certain three-digitCreditScore_Featured number that can make all the difference between being denied or approved for credit, and whether you’ll receive a low or high interest rate. That number is called a credit score, and it’s derived from your payment history, accounts owed, length of credit history, types of credit used and other factors.

Many of the credit-related decisions you make can have an impact on your credit score. For example, skipping a payment on a credit card bill can have a negative impact on your score. Your credit score defines you financially, and if you do something to negatively impact it, you could face a risky financial future with poor credit.

“A low score warns lenders that you might be an unreliable borrower, which can thwart you from getting the credit you need,” writes Credit Karma contributor Jenna Lee. “A high credit score can save you tens of thousands of dollars in interest over the life of your loans.”

So how can you build up your score in the unfortunate event it’s not where you’d hoped? Read on for expert advice on improving your credit score.

Get rid of small balances on several cards. “A good way to improve your score is to eliminate nuisance balances,” says John Ulzheimer, president of consumer education at Credit Sesame. “That way, you’re not polluting your credit report with a lot of balances.”

Since your credit score takes into account how many of your cards have balances, charging a few dollars on one card and then a few on another, instead of using the same card to make multiple purchases, can negatively impact your credit score. To build your score up again, pay off all the small balances you have on your cards, and then use just one or two cards for the majority of your everyday purchases.

Pay bills on time. If you’re skipping payments or paying them late, your credit will suffer. If you’re struggling to pay bills by their deadlines, try setting reminders on your smartphone or leaving sticky notes on your desk with the payment information and deadline for all your bills. Or hire a financial planner to help you get organized, which will help with paying bills on time.

“It isn’t necessarily hard — it just takes discipline,” says Hitha Prabhakar, a retail and consumer analyst and spokesperson for Mint.com.

Keep old debt. It sounds counterintuitive, but it’s actually better for your credit score if you leave old debt on your report. Some of that debt is good for your score, and trying to get older accounts off your credit score simply due to the fact that they’re paid off isn’t wise either.

Why? The longer your history of good debt, the better it is for your credit score. When you attempt to eliminate old good debt, it’s like getting great grades throughout school and trying to get your records erased down the line. You want to keep it around.

Get rid of student loans. If feasible, try to pay off those pesky student loans in a timely manner.

“If you pay your student loans in full and on time each month, the credit bureaus will make a record of that on a continuing 30-day basis,” writes contributor for NerdWallet Divya Raghavan. “And that will demonstrate to future lenders that you can be trusted to handle money responsibly.”

Keep new accounts to a minimum. Every time you open a regular or retail credit card, or even just apply for one, your report is looked at to determine whether or not you’ll receive the credit.

“Since a lot of hard inquiries may make it look like you’re desperate or aren’t getting approved for credit, it’s best to minimize how often you apply for more credit,” says Lee.

“You just don’t want to do anything that would indicate risk,” explains Dave Jones, retired president of the Association of Independent Consumer Credit Counseling Agencies.

Your credit score is an important part of your financial success. As an AOFCU member, you are entitled to a FREE Credit Score Analysis. We can offer a comprehensive list of actions you can do based on your credit report to help you raise your credit score.
Ask for your FREE CSA today!

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Credit Scores and Loans

The relationship between your credit score and the loan you need

If you’re interested in applying for a loan in the near future, you may be wondering about the relationship between credit scores and loans. Not only does your credit score impact the type of loan you can receive, loans also affect your credit score. The following information will help you understand more about the ways that loans and credit scores impact each other.

Credit score affects loan interest rates
When you need funds for a large purchase, such as tuition, a new vehicle or a home, it’s important to understand all of the factors that will be important during the loan application process. Your credit score is one of the most important of these factors. If you already know your credit score, you’re one step ahead of many people, but you still have to know exactly what it means.

“Today’s economy runs on credit,” states Erin Peterson from Bankrate. “Good credit can be the make-or-break detail that determines whether you’ll get a mortgage, car loan or student loan.”

Your credit score represents your financial history and paints a picture of how responsibly you have used your credit. Lenders use this information to assess how likely you are to repay a loan. If you have a low credit score, lenders fear that you may not be able to pay off your loan, which will cost them money. In order to balance this risk, lenders offer people with lower credit scores loans with higher interest rates.

“If you have a higher mortgage rate because of a low credit score, it means you’ll be paying that much more in interest in the end,” according to Elizabeth Rosen, Banks.com contributor. “Thus, a strong credit rating can help secure a low mortgage rate, which gives you lower monthly mortgage payments overall.” This is why it’s important to pay attention to your credit if you need to secure a loan.

Loans also affect your credit score
Your credit score has a big impact on your ability to get a loan, but loans also affect your credit score. The application process itself can have an impact on your credit score because each time a lender checks your credit, your score goes down a few points.

“That’s because 10% of your credit score comes from the number of credit-based applications you make,” according to About.com guide LaToya Irby.

Fortunately, this won’t hurt your ability to shop around to find the best loan because there is a grace period during which multiple lenders can check your credit without your score going down. This means that the second lender you speak with will see the same credit score as the first, so you have the opportunity to receive competitive offers.

“Even after you’re done rate shopping, the loan inquiries are treated as a single application rather than several,” explains Irby. “That window of time is between 14 and 45 days depending on which credit score the lender checking your score is using.”

Any loans that you have now can also impact your credit score. You can improve your credit score and prospects for future loans by making payments for any current debt on time. Irby notes that “payment history is 35% of your credit score. That’s more than any other credit score factor.” This also means that paying late or defaulting can seriously harm your credit, so be sure to take your current financial responsibilities seriously.

The balance of your current loans also affects your credit; you gain credit points as you pay back the balance.

“The larger the gap between your original loan amount and your current loan balance, the better your credit score will be,” states Irby.

Your credit score and loans go hand-in-hand. Good credit can help you receive a good loan, and good loan repayment patterns can help you achieve good credit. The steps you take today to repay your loans responsibly and take care of your credit will boost your ability to get a great loan in the future.


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Six Myths About Credit Cards

Credit cards can be an incredibly valuableshutterstock_64945411 part of your financial toolbox. With the amount of credit card advice offered on the Internet or by friends and family, it can be difficult to separate fact from reality. Suggestions about the best way to cook eggs so that the shells peel off easily or chop an onion without crying may contain more fiction than fact, but these innocent pieces of misinformation aren’t especially harmful. Credit card myths, on the other hand, can be damaging. Here are six credit card myths that you may have heard before and maybe even repeated. The corresponding facts will clear up the confusion:

1) Credit or Debit? It Doesn’t Matter
Unless you have a personal assistant who does all of your shopping, you are probably asked “Credit or debit?” several times a day. If you answer, “It doesn’t matter,” then you are perpetuating this first myth. Even if your credit card has the same logo as your debit card and you monitor them on the same site, they don’t do the same thing for your finances. Only purchases made on your credit card affect your credit score. If you use your credit card reliably and pay your bill responsibly each month, you will build credit, so stop to consider this next time you swipe your card. Your credit score can also be harmed if you do not use any credit at all.

2) You Need to Pay Only the Minimum Balance
A credit card statement lists several figures in summary of the previous month’s activity. These include the balance of the previous statement period, minimum amount due, APR and total available credit. Checking your statement online gives even more information, including current balance, current available credit and activity since the previous statement. With all these numbers to consider, you may zero in on the phrase “amount due” when you write your check or pay online. The minimum amount due is not the most important figure, however, because it is only the amount of money that you need to pay to avoid a late fee or other penalties. The total balance of the previous statement period is actually the complete amount owed. If you pay only the minimum balance, you will be charged interest on the remainder. This is how credit cards make money and why they typically suggest such low minimum balances.

Furthermore, if you avoid paying your full balance because you’ve heard that having a balance is better for your credit score, you are paying interest for no reason. MSN Money contributor Liz Weston clears up the confusion, stating that “your credit reports and scores don’t ‘know’ whether you’re carrying a balance or paying it off in full every month.”

3) You Should Always Pay Your Current Total Balance
If you have focused on the total balance of your online statement, you are in better shape than are those who pay only the minimum but don’t fully understand how much they owe. Paying off the full balance is important, but it is the full balance from the previous statement period that matters. The total balance includes both the previous statement balance and all activity since that statement. You will not be expected to repay those new charges, however, until they appear on your next statement. Paying just the previous statement balance and not the total balance will not hurt your credit or accrue interest.

4) There Is No Minimum Credit Card Purchase
If your desk drawers are full of packets of gum that you’ve grabbed in check-out aisles to bolster your bill to a minimum credit card purchase amount, you may be interested to know that this practice is not technically legal. Although not usually enforced by credit companies, there is no true minimum purchase necessary to use your credit card. Stores enforce this to offset the fee they pay on each purchase made with a credit card. If you are uncomfortable with this practice, you can seek out local businesses that do not enforce minimums or that charge a small fee for credit card transactions on small purchases, which is a more transparent policy.

5) Your Fixed Interest Rate Will Stay Fixed
If you have a fixed interest rate, you may think that the case is closed, but that is not so. In fact, you may find that your rate increases if you miss a monthly payment, fail to pay the full amount, transfer your balance to a new card or take a cash advance. Make sure to find out how much you will be penalized for these activities in order to decide if they are worth the price.

6) You Should Use All of Your Credit
Even though you are allowed a certain amount of credit, you do not have to use all of it. Yes, using little or no credit can negatively affect your credit score, but so can using all of your credit. Paul Sisolak of the website GoBankingRates.com says that “creditors also make use of a term called ‘low utilization,’ which means that using a smaller amount of credit in your account looks better to the credit bureaus, and subsequently, your credit score.” Monitoring your credit score can help you determine if you are using an appropriate amount of your credit.


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Protect Yourself from Identity Theft!

When your personal financial information gets into the wrong hands, the consequences can be devastating. It’s critical to understand how identity theft and card fraud can happen to you. The information provided here will help you avoid becoming a victim and tell you what you can do if your identity is stolen.

What to do if your identity is stolen
If you should fall victim to identity theft, it is important that you act quickly. Contacting the correct agencies and filing the necessary reports will go a long way toward minimizing any damage to your financial well-being.

Financial Institutions and Credit Card Issuers
Report the theft to your credit card issuers and request replacement cards with new account numbers. Ask your bank to close affected accounts and obtain new account numbers there as well. If you have checks stolen, you can also ask your bank to stop payment on any checks about which you are unsure.

Law enforcement
Report identity theft to your local police department. If the crime occurred somewhere other than where you live, you may wish to report it to law enforcement there as well. The police will create an “identity theft report” and give you a copy.

Credit Bureaus
Immediately contact the fraud departments of each of the credit bureaus – Experian, TransUnion and Equifax. Alert them that you are a victim of identity theft, and request that a fraud alert be placed in your file. You can also request a security freeze, preventing credit issuers from obtaining access to your credit files without your permission. This prevents thieves from opening up new credit cards or other loans.

Federal Trade Commission (FTC)
The FTC does not investigate identity theft cases, but they can share information that you give them, such as the identity theft report number, with investigators nationwide.

Simple Ways To Protect Yourself
There are some simple steps you can take to reduce or minimize the risk of becoming a victim of identity theft or card fraud.

Practice safe Internet use – Delete spam emails that ask for personal information and keep your anti-virus and anti-spyware software up-to-date.
Shop online only with secure web pages – Check the bottom of your browser for an image of a lock or look for “https” in the address bar.

Never send via email – Never send credit or debit card numbers, social security numbers and other personal information via email.

Destroy personal financial records – Tear up or shred credit card statements; ATM, credit, or debit card receipts; bank deposit receipts; loan solicitations; and other documents that contain personal financial information.

Secure your mail – Empty your mailbox quickly and get a mailbox lock. When mailing bill payments and checks, consider dropping them off at the post office or a secure mailbox.

Be careful with your Social Security number –  Your social security number is a major target for identity thieves because it can give them access to your credit report and bank accounts. Never carry your card with you. Instead, memorize your number and keep the card in a secure place at home or in a safe deposit box. Never write or print your social security number on checks. You may also ask your employer to remove your social security number from your pay check stubs.

Check your credit report at least once a year – Obtain and review your credit report for suspicious activity. We can review your credit report with you here at the credit union, or  you can request a free copy of your report at www.annualcreditreport.com or by contacting any one of the three major credit reporting agencies; Experian, TransUnion and Equifax.

Beware of scams – Always be on the defensive with your financial information. Never give out personal information to telemarketers or respond to emails from someone claiming to represent your credit union, credit card issuer, a government agency, a charity, or other organization. If you think the request is legitimate, contact the agency directly to confirm their claims.

Tips For Frequent Travelers
When you travel be on the alert for opportunities that thieves may try to take advantage of.

Receipts – Do not leave credit card receipts on the table at restaurants; sign them and hand them directly back to the server. Keep your copy of all receipts.

Wallets – Stolen wallets frequently lead to identity theft, so instead of carrying your wallet in your pocket or having it easily accessible in your bag, use travel pouches that are worn inside your shirt.

Checks – Leave checkbooks at home in a locked safe or drawer. Checking account takeover is one of the hardest types of financial fraud to clear up.

Camera phones – That tourist with a camera phone may actually be taking a shot of your credit card or driver’s license. Keep important personal information out of view from others.

Hotels – Lock up all valuables in room or hotel safes while you are out, including laptops, passports and other documents that contain your personal identifying information. Do not leave these items with a hotel doorman to transport or hold—carry them yourself.

Airplanes – Do not put any items that contain your social security number, card numbers, or financial institution account numbers in checked luggage. Always carry that with you.

This content is used with permission of Visa, Practical Money Skills for Life.