Jennifer asks: I just read your article about closing credit cards. My question is, I have store credit cards that I never use anymore and when I did I would only put a couple hundred on and pay as soon as they came in. I don’t have a balance on any of these cards. I am asking because I am looking to buy my first home and before I look into a loan, I would like to make sure all my finances are in order. What should I do?

Are any of the store credit cards your oldest credit account? In other words, was one of these cards the very first credit card or loan you took out? If so, I would keep that card open until after you get a mortgage, but go ahead and cancel all the others now.

If not, I don’t see the harm in canceling all four of these accounts. Store cards don’t have really high credit limits, so closing them is unlikely to have a huge impact on your credit utilization. Plus, the fewer open accounts you have when you apply for a home loan, the better. Your credit score may dip slightly immediately after closing the accounts (for a couple of months), but not by much, and it should recover.

Even so, I would think lenders would rather see you have a slightly lower credit score than a higher score but a bunch of open and unused credit cards.

Good Luck,

David @MoneyUnder30

Although the fact that those four accounts are already listed as potentially negative means some damage has already been done to your credit, the best thing to do is always to repay as much as you can of your debts, no matter how old they are.

You may want to try contacting these creditors directly and seeing if they will take a partial payment to settle the debt. This will appear on your credit report as a settlement, but that’s better than having a closed account which you still owe money. Or, try to negotiate a payment plan with them that will repay the total amount over time. Sometimes creditors will stop charging interest altogether if you can promise to make monthly payments on time. If they did this and you could afford just $80 a month, you could get rid of these debts in about two years.

Accounts stay on your credit report for about seven years from the last time information is reported about them. And typically, your credit score starts to recover from negative accounts after about two years have passed. So the sooner you pay them or settle them, the sooner the clock starts ticking on the two years and seven years. As long as they stay unpaid, they’ll probably remain on your account.

Good Luck,

David @MoneyUnder30

I plan on trading in this car once it is repaired and I have a steady income, but I need to figure out how to get it fixed first. I know I need to build credit as well, so would you recommend putting the repair on a new credit card so I can make small payments until I get a job (the one I am hoping to get pays well and will allow for much larger payments once I start)? I don’t want to drain my savings to fix this car just in case something else happens, but I do not like
debt. If it does sound like a good plan, what credit card would you recommend? I only plan on using the card for this one big repair cost, and once that is paid off, only small purchases to build credit, occasional big expenses for no more than a few hundred dollars for electronics and/or possibly small trips. What would you recommend?

Sorry to hear about your car troubles! I just shelled out $1,000 for car repairs last week and know exactly how painful that is. It sounds to me like you have a couple of things going on here: you need to figure out your transportation problem, you want to start building credit, and you’re wondering what a good first credit card would be.

$2,300 is a whopper of a repair bill, but still cheaper than buying a new car. The question is, will making this repair get you another year or two out of the vehicle? If not, is it worth repairing? Is there any way you can get by without a car until you get a job and can buy a new car? If not, would spending $2,000 on a clunker that will last a year or two be better? (That’s another question you can ask a mechanic you trust).

Alternately, you might consider trying to finance an inexpensive, but more reliable, new car sooner. If you can find a relative to cosign an auto loan for you through a local bank or credit union, you might be able to get a 36-month loan for a $6,000 to $10,000 quality used car. This will solve your car problem and help you build credit. It’s worth a shot.

I recommend trying these avenues only because I’m not sure getting a credit card to pay the repair bill is a great idea or if it will work at all. Typically when you get your first credit card (especially while you’re still a student and don’t have full-time work yet), the cards you can get approved for are going to have higher interest rates and lower interest rates than average. It’s not uncommon for your first credit card to only have a $500 limit and a 19 percent APR.

Should you still get a credit card? Sure. But you don’t need to carry a balance to build credit. It’s far better to get in the habit of using your card for things like gas and food and paying it in full each month. You’ll still build credit to help you down the road, but you won’t go into debt. Again, if you belong to a local bank or credit union, ask about starter credit cards there.

Alternatively, try the Discover Student Card or Citi Forward Visa. These cards are both designed for people “new to credit” so you’ll be more likely to be approved for them.

Good Luck!

David @MoneyUnder30

Hi Craig: Electric Orange from ING Direct is a free online checking account with a debit MasterCard that also features an overdraft line of credit for approved customers. So it’s not technically a credit card, but it sure can be used like one.

According to ING Direct’s Website, the current APR for the overdraft line of credit is 7.25%. It’s a variable rate, however, so it will go up and down with the prime rate, which is very low right now. Still, this rate is far better than most leading credit cards.

Good Luck!

David
@MoneyUnder30

It all depends on whether they treat the change as a “conversion” as they suggest or the cancellation of your original credit card and a reapplication for a new one. Push them on whether the account will remain the same, or whether you’ll have to apply for a new card. Some credit card companies will only allow you to switch cards by canceling your original account and reapplying for a new card.

If this is the case, yes, it may damage your credit, because your credit score improves the longer you have had accounts opened. If, for example, you had the original “Elite” card open for five years, you would losing out on five years of history on your report. In the end, I wouldn’t take the company’s word for it. If you are convinced you want to make the switch, be prepared for it to have at least a minor negative impact on your score.