The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers.
This week’s question: I heard my friend closed her oldest credit card of 4 years and lost all of that credit and her credit score went down. I have one year of credit on a credit card that has a $98 fee after one year, if I close the card do I lose all my credit?
Generally, you can expect your score to drop when you close a credit card, especially if it is your only credit card. So, consider keeping it open. However, if you are primarily motivated to close this credit card to avoid the $98 annual fee, you may have the option to downgrade your credit card for one that doesn’t have an annual fee. Contact your credit card and ask about your options. This way, you can keep your account and its history on your credit report. You could also consider adding another credit line to help you establish a new credit history if you need to close your credit card for good.
But there are more critical factors that impact your score. Understanding what factors influence your credit score can help you understand how your credit score could be affected if you close a credit card and what you can do to build it back up.
What goes into your credit score
Your score is calculated using a secret formula based on the information on your credit reports. Five common factors influence your credit score. Below, we explain how these factors affect your FICO score, which is the scoring model most lenders use. Other scoring models, such as the VantageScore, use a similar system to calculate your scores.
Payment history (35%): This part of your score takes into consideration whether you make on-time and complete payments every month. Late or missed payments lower your score and stay in your report for 24 months. When you close a credit card, your past credit history it’s not erased. Instead, it stays in your report for seven years, influencing your score to a lesser degree. But, if you close your only credit line, your score will likely suffer more because you won’t have any monthly activity to use to calculate your new score. Amounts owed or utilization ratio (30%): This category factors how much credit you use compared to your available credit. It’s calculated by adding all of your credit card debt and dividing it by your overall available credit. Creditors like to see that you use little of your available credit. Ideally, you should use less than 30%. For instance, let’s say you have two credit cards with a credit limit of $1,000 each and $500 debt in one of your cards. In this scenario, you have $1,500 in available credit, equal to a 25% utilization ratio. Suppose you close one of those credit cards (even if it has a balance). In that case, you are decreasing your total available credit by $1,000, increasing your utilization ratio to 50%, lowering your score. Credit history length (15%): This percentage of your score is set by how long you have had accounts reporting to your credit file. Influencing factors include the age of your oldest account, the newest, and an average of the other accounts. So, closing your oldest account can directly affect your credit history length, shortening it. Generally, the older your credit history, the better it’s for your score. The only way to create a long history is to be patient as time goes by. The credit mix (10%): Diversity in your credit lines may not be the greatest influencer of your credit score, but it does make a difference. Ideally, it would be best to have a healthy mix of revolving credit (your credit cards) and installment loans, such as mortgages, car loans, and student loans. There’s no set rule of how many credit cards or loans you need to have. New credit (10%): How often you ask for new credit defines this category. Any new credit request generates a hard inquiry in your report, which stays there for 24 months. Too many inquiries in a short period not only brings your score down but makes you look like a risky borrower because it seems that you are borrowing too much too fast.
Now that you have a better understanding of what goes into your score, you have more insight into how closing your credit card can affect you. Remember, your best strategy will depend on why you want to close your account, your current credit report, and your financial goals. If you need additional guidance, talk to an NFCC Certified Financial counselor by visiting NFCC.org or calling 800-388-2227. Your counselor can review your credit report to help you decide what works best for you.
If you have a question, please submit it on our Ask an Expert page here.
Having bad credit can make it challenging to get approved for a new credit card. Luckily there are credit cards specifically designed for consumers looking to rebuild their credit and improve their financial situation.
These credit cards allow you to apply despite having a low credit score. Continue reading this guide to learn more about the best-rated credit cards for bad credit in 2022.
People Searching for Credit Card Bad Credit Are Looking For THIS Guide
Several things can cause bad credit history. The most common causes include late payments or high credit utilization. Maintain consistency in the repayment of your bills, credit cards, and loans when trying to improve your bad credit history. Keep reading if you want to:
Learn how to find the best credit cards you can get right now—even with bad credit. Learn how to end bad credit through credit cards Learn how to win a perfect credit scor
Who Has Bad Credit? Here Are Bad Credit Examples.
According to Experian, a bad credit score is 579 or lower on the FICO scale. Poor credit scores can make it difficult for financial institutions and credit unions to offer you competitive interest rates on loans, mortgages, and credit cards.
You can order free annual reports from each of the three major credit bureaus: Equifax, Experian, and Transunion. Some bad credit examples include:
If you default on your mortgage and your house is foreclosed on, this will severely hurt your credit score.
Defaulting on loans, mortgages, and credit cards Too many late payments Filing for bankruptcy Mortgage foreclosure Repossession of a financed property like a car, furniture, etc.
Ratings on Best Credit Cards for Bad Credit
Understanding which credit card company is most likely to accept your bad credit history is essential when searching for your next card. Applying for cards you know you won’t get approved for causes unnecessary credit inquiries.
Some credit card companies offer cards tailored explicitly for borrowers with certain types of bad credit. It’s also essential to understand the benefits each card may offer, such as rewards points or no annual fees.
Best After Bankruptcy Credit Cards
You are less likely to qualify for credit cards or loans after bankruptcy because it significantly damages your credit scores. However, there are credit cards designed to help you gain credit after bankruptcy. In contrast to using prepaid and debit cards, credit cards allow you to establish a positive credit history again after bankruptcy. Among the best after bankruptcy credit cards are:
Discover it® Secured Credit Card Capital One Platinum Secured Credit Card OpenSky® Secured Credit Visa® Card
Best Unsecured Credit Cards with Bad Credit
An unsecured credit card lets you borrow money against the credit limit provided by the issuer. Credit cards of this type can help you improve your credit score and effectively rebuild your bad credit history. Some of the best unsecured credit cards for bad credit include:
Credit One Bank® Platinum Visa® Total VISA® Credit Card Milestone® Mastercard® Indigo® Mastercard®
Best Guaranteed Approval Credit Cards
Certainty of approval is the unique feature that attracts people towards credit cards. This benefit allows you to access a credit line without any pre-qualification. This makes it an excellent card for rebuilding your bad credit track record. The best-guaranteed approval credit cards include:
First Progress Platinum Select Mastercard® Secured Credit Card OpenSky® Secured Visa® Credit Card First National Bank of Omaha Secured Visa® Card OakStone Platinum Secured Mastercard® OneUnited Bank Unity Secured Credit Card
Best Bad Credit No Annual Fee Credit Cards
Many credit card providers require an annual payment to continue using their cards. Fortunately, that isn’t the case for all credit cards. Here are the best credit cards for those with bad credit that also offer no annual fee:
Discover it® Secured Credit Card BankAmericard® Secured Credit Card Capital One Quicksilver Secured Cash Rewards Credit Card
Best Bad Credit Rewards Credit Cards
Some credit cards offer a wide range of benefits and rewards programs. These include air miles, cash back, and rewards points. Some cards also offer bonus purchase periods and online shopping portals. Here are the best rewards credit cards for people with bad credit:
Bank of America® Customized Cash Rewards Secured Credit Card Capital One Quicksilver Secured Cash Rewards Credit Card Credit One Bank® Platinum Visa® for Rebuilding Credit
Six Ways to End Bad Credit Through Credit Cards
There are several ways you can work towards fixing your bad credit by utilizing credit cards responsibly. By demonstrating that you can handle debt appropriately and make on-time payments, your credit score will begin to improve. Here are our best tips to consider:
1. Learn Your Credit Limits
Maxing out your credit cards is an indication of debt trouble. If you don’t know your credit card limits, contact the credit card issuer and inquire further. Learning this information will help keep your debt utilization under control and avoid future penalties.
2. Set Up a Budget
Be aware of how much you can spend to pay off all debts and bills before any additional charges are accrued. Creating a monthly budget and understanding all of your expenses is an excellent habit to form. Try only to charge the amount you know you’ll be able to commit to paying off at the end of your billing cycle, or ideally even before.
3. Set a Reminder for Bill Payment
To keep track of due dates and the number of bills, you can set up a reminder on your phone or calendar. Keeping track of due dates and bills will ensure you avoid late fees. Late payments are one of the most common reasons for poor credit scores.
Set up bill pay reminders or automatic payments so that late payments don’t damage your credit score.
4. Keep Credit Card Bills Under Control
You should avoid carrying a balance on your cards to rebuild a better credit score. Consider making multiple payments throughout the month, so it doesn’t feel like a lot all at once. If you can’t afford to repay in full, do not continue charging more to your card.
5. Avoid Too Many Hard Inquiries on Your Credit Report
When you apply for a new credit card or loan, the issuing bank will conduct a hard inquiry to review your credit score and credit history. They will also use it to determine interest rates. Too many hard inquiries on your credit can negatively impact your credit score. This is why you should try to limit hard inquiries when possible.
6. Limit Your Credit Utilization
Credit utilization ratio (CUR) measures how much debt you have in relation to your total available credit. It is the result of dividing your credit balances by your credit limits, usually expressed as a percentage. A CUR under 20-30% (ideally under 10%) will help increase your FICO score, while a CUR above 30% brings down your score.
Twelve Ways to Win a Perfect Credit Score
It will be easier for you to find competitive interest rates on loans, mortgages, and credit cards if you have a stellar credit score. Here are twelve tips to help you get closer to a perfect score:
1. Pay Down High-Balance Credit Cards
Consider paying off high-balance credit cards first if you want to boost your credit score quickly. Each credit card is assigned a credit utilization ratio, and carrying high balances can lower your credit score. As a result of paying off a few high-balance credit cards, you’ll see your utilization ratio on each card drop, thereby improving your credit score.
Paying down high balances and keeping them low by paying your card off multiple times per month can boost your credit score by lowering your credit utilization.
2. Make Multiple Payments Monthly
Another excellent way to boost your credit score is to pay your bills on time. You reduce your credit balance before the statement closing date by paying more frequently throughout the month. Your credit utilization ratio will then fall due to lower balances, which will positively affect your credit score.
3. Set up Automatic Bill Payments
Automatically paying your credit cards and loan accounts can significantly improve your credit score. Even a single late or missed payment can adversely affect your credit rating. By setting up automatic creditor payments, you will not forget to make payments on time. This is especially helpful to prevent late fees, penalties, and interest rate increases.
4. Transfer Balances to a Card With a Lower Interest Rate
Consider transferring your balances from high-interest credit cards to a card with a lower interest rate. To qualify for a balance transfer credit card, you must have decent credit.
Usually, this type of credit card typically offers a special introductory offer of 0% APR on balance transfers for the first few months. Before committing to a balance transfer, make sure you’ll be able to pay off the balance before the introductory period ends. If you can’t handle an additional credit responsibly, avoid this credit hack.
5. Pay Down High-Interest Balances First
Paying off high-interest balances first will allow you to save money that you can use to pay down debt faster. Essentially, you work your way from the credit cards with the highest interest rates down to the lowest, hence the term “debt avalanche.”
6. Delete Collections From Your Credit Report
A missed payment can lead to your account being negatively reported to the credit bureaus. If you have a collection account on your report, it can lower your credit score. Depending on the circumstances, you can have the collections account removed from your report.
If it has been misreported, you can dispute it with any of the three credit bureaus. If the collection account is legitimate, automatic removal may take up to seven years after the first delinquency date. As an alternative, you can negotiate with your lender a “pay for delete” agreement to stop reporting the collection to the credit bureaus.
7. Increase Your Credit Limit
You can improve your credit score by increasing your credit limit, which will improve your utilization ratio. You can request a credit limit increase after showing the lender you are a responsible cardholder for several months. The usage ratio of your debt, which accounts for about 35% of your FICO score, will significantly improve if the debt-to-credit ratio is below 30%, which will result in a boost in your credit score.
8. Negotiate Lower Interest Rates With Your Credit Card Issuer
Your credit card lender may be willing to negotiate a lower interest rate if you ask for it.
Are you aware that you can negotiate a lower interest rate with your credit card issuer? The only step you need to take is to contact your card issuer to request that your interest rate be lowered. Let them know that you have been a faithful customer by paying your bills on time, and let them know why you want the interest rate decreased. Lowered interest rates can significantly reduce the amount you pay in interest, which allows you to repay your debts faster.
9. Pay Off Low-Balance Accounts
The number of your accounts with balances significantly affects your overall credit utilization ratio. The fewer accounts you have with balances, the better your credit utilization ratio. Pay off low-balance accounts as quickly as possible to improve your credit score.
10. Dispute Inaccurate Information on Your Credit Report
A credit score can be lowered by erroneous information such as unauthorized credit inquiries and wrongful collections accounts. Get a free copy of your annual credit report from any of the three credit bureaus and check it for errors. Any incorrect information can then be disputed by following instructions on their website.
11. Consider Piggybacking on Someone With a Good Credit
Piggybacking on someone’s credit can help you build credit history.
Consider piggybacking on the good credit of a family member or friend if you have a poor credit rating. Piggybacking refers to using another’s good credit score to help you build your credit score. You can either get a co-signer, become an authorized user, or open a joint account together. Before applying for a loan or credit card, be sure to discuss it with your co-signer first.
12. Get a Secured Credit Card
You can build your credit history using a secured credit card since it requires a security deposit. If you fail to repay your debts, your deposit can be used as collateral to secure the bank’s funds.
Essential Credit Cards for Bad Credit
Securing a credit card for bad credit is one of the most important things for you to do to build your credit score. You can find many options available to choose from that are essential for you. The following credit cards should come in first place:
1. Capital One Platinum Secured Credit Card
Capital One is one of the major card issuers offering a secured personal credit card to customers with poor credit history. The Capital One Platinum Secured card has no annual or hidden fees, requires no minimum credit score, and offers an APR of 26.99%.
You only need to put down a refundable security deposit of $49 to $200 to secure an initial credit line of $200. After you’ve demonstrated your ability to be a responsible cardholder, you can upgrade to an unsecured Platinum card and get your deposit back.
2. Credit One Bank Platinum Visa for Rebuilding Credit
The Credit One Platinum Visa for rebuilding credit is an unsecured credit card to help you rebuild your credit without making any deposits. You can earn 1% cash back rewards on eligible products and services like grocery purchases, gas, TV services, and phone bill.
0% Fraud Liability prevents you from being held responsible for unauthorized charges. With Credit One Bank’s mobile app, you can manage your account on the go and schedule your monthly payments.
3. OpenSky Secured Visa Credit Card
With a low annual fee of $35 and a regular APR of 17.39%, the OpenSky Secured Visa Credit card is one of the most flexible secured credit cards available. This is an excellent way to rebuild your credit standing and requires a low refundable security deposit as low as $200.
OpenSky reports your credit history to the three major credit bureaus to improve your credit score. Their dedicated credit education page also provides credit education and tips to assist with your credit rebuilding process.
Fundamental Credit Strategies for Bad Credit
If you have bad credit, you can do a few things to improve your score. Here are some essential credit card strategies for bad credit:
1. Pay Your Bills on Time
One of the most important things to improve your credit score is paying your bills on time. Late payments will lower your score and could damage your credit history. Try to set up automatic payments so you never forget to pay your bills on time.
2. Keep Your Balances Low
Another critical factor in improving your credit score is keeping your balances low. When you owe too much money, it lowers your credit utilization ratio and negatively affects your score. Try to keep your credit utilization below 30% by paying your monthly payments in full each month.
Review your credit reports regularly to check for incorrect information.
3. Review Your Credit Reports
It is a good idea to review your credit reports annually. Check your credit report for any errors or misinformation that might lead to you owing more than you should or lowering your credit score, and then take action to correct these errors.
4. Avoid Hard Inquiries
A hard inquiry on your credit report occurs when you apply for a new credit card or loan. Having too many hard inquiries over a short time can lower your score.
5. Keep Old Accounts Open
While you’re working to rebuild your credit score, keeping old accounts open even if you’re not using them is a good idea. 15% of your credit score is determined by the length of your credit history, meaning the older your accounts, the better.
Build a Portfolio of Secured & Unsecured Debt
When it comes to your credit, it’s essential to understand the difference between secured and unsecured debt. Secured debt is debt backed by an asset, such as a house or a car. If you don’t make your payments, the creditor can take the asset and sell it to pay off your debt. Secured debt can be an excellent way to start rebuilding your credit after bankruptcy.
Unsecured debt, such as a standard credit card or a personal loan, is not backed by an asset. If you don’t make your payments, the creditor can’t take anything from you to pay off your debt. Both unsecured and secured debt will negatively impact your credit score if you are late with a payment.
Secured credit cards allow consumers with bad credit to open credit cards by paying a security deposit.
Secured Debt Pros:
Usually offer lower interest rates It can help build your credit score
Secured Debt Cons:
Requires collateral May have lower limits
Unsecured Debt Pros:
Requires no collateral No risk to personal property
Unsecured Debt Cons:
May have higher interest rates Defaulting on payments will negatively affect your score
Conclusion
Credit cards can be challenging to qualify for if you have a bad credit score. Thanks to the best-rated credit cards for bad credit, you can get a credit card regardless of your past credit history to work towards rebuilding your credit score. These cards require no particular credit score and report payments to all three major credit bureaus.
You can rebuild your bad credit score by making timely payments with bad credit credit cards. A bad credit credit card can help you get back on track to achieve a better financial future.
Losing something can put you in a panic. If it’s a credit card, losing it can be especially troublesome. So, what to do when you lose your credit card?
A thief who steals it or someone finds it could ring up charges on your credit card, which you may have to pay some of if you don’t report it lost soon enough.
And even if you get all the money back from credit card fraud, your credit score could be temporarily hurt if a thief quickly runs up a lot of charges on your card.
Worse than that is if someone uses the information from your lost or stolen credit card to create a fake identity in your name and uses the information to open a new account in your name.
People reported losing $1.48 billion to fraud in 2018 according to the Federal Trade Commission.
What To Do When You Lose Your Credit Card
The first thing you should do when realizing your credit card is lost or stolen is to call the issuer and report it missing. We’ll get into how to do that later, but the simple thing to do is to call ASAP to report it missing.
The reason is the sooner you report it missing, the more you’ll be protected from being responsible for fraudulent charges and the chance that your information can be used by an identity thief. If the credit card is canceled, a thief can’t use it to buy things or create a new card.
Under federal law, if you report a credit card as missing before it’s fraudulently used, you’re not responsible for any unauthorized charges.
However, if a card is used by a thief before you report it missing, you could be responsible for some of those charges. The maximum liability amount is $50 under federal law. Some credit cards offer zero liability.
So if your missing card is still used after you report it missing, you won’t be liable for the charges you didn’t authorize. If your card wasn’t stolen but your credit card number was, you aren’t liable for any unauthorized charges.
How to Report a Missing Credit Card
Your credit card statement has instructions on how to report a missing card. Most companies have 24-hour, toll-free numbers. If your spouse has the same credit card, the phone number will be on the back of their card.
Call your issuer as soon as you realize your card is missing. Even if you think you might have misplaced it, you can still call your credit card company and ask it to suspend charges immediately but temporarily until you can determine if the card is really missing or if you’ve left it in the car or find it elsewhere.
Once you’ve determined that the card is gone, file a report by phone and follow the credit card company’s instructions. Also follow up with a letter to the company, providing your account number, date you noticed the card missing, and the date you filed the report.
The Federal Trade Commission recommends keeping a copy of your letter and sending the letter by certified mail with a return receipt.
You should check your card statement carefully for transactions you didn’t make. Report them to your card issuer as quickly as possible.
After you’ve reported a missing card, your card issuer will send you a new card, usually within a few days and sometime overnight.
If you have automatic payments tied to your credit card, such as for a phone bill, call your creditors or go online and update your accounts.
What To Do If You Lose Your Debit Card
If you lose a debit card, the consequences can be a lot worse, so you need to call your bank as soon as possible to report it lost or stolen.
Debit cards, which pull money immediately out of your checking account when used, must be reported missing within two business days of learning of their disappearance so that your liability is limited to $50.
Longer than that and up to 60 days after your next bank statement is sent to you, and you’re responsible for up to $500 in losses. Wait more than 60 days after your statement is sent to you, and all losses are your responsibility.
Thieves can quickly drain accounts linked to debit cards. Even if you quickly report the card lost, it can take awhile to get your money back from the bank.
Other Hassles of Lost Credit Cards
With the $50 liability limit set by federal law on missing credit cards, you may assume it’s OK not to report it missing. Not true. If you don’t report it missing, other problems could crop up.
Thieves who steal credit cards often start using them as quickly as they can so they can buy things before the card is canceled by the bank. But if it’s not reported missing soon, they can keep ringing up charges that you’ll have to dispute with your credit card company.
If you have a good credit card company, they’ll notice the fraudulent charges and alert you immediately. But if more purchases accumulate, you’ll spend more time trying to fix things.
A lot of fraudulent charges could also hurt your credit score temporarily. Once the fraud is found and resolved, your score should return to normal.
It used to be embarrassing to buy a pack of gum or other small purchase with a credit card. Not anymore.
It’s common to see people pull a credit card out to buy something for $5 or less when they don’t have cash on hand.
Small purchases are just the start of where credit card usage is going.
By slowly replacing cash as more people are using credit cards than ever before, credit cards are being used in new ways and the technology behind them is being updated in ways that make the future of credit card use more widespread and innovative.
How Credit Cards Will Work In The Future
Here are some ways credit cards may work in the future:
A truly cashless society
Everything you buy in the future may likely be bought with some sort of credit or debit card, mobile wallet, cash-sharing app or cryptocurrency.
Credit cards may be the least sexy of those, but they’re being used more than ever before.
The number of credit card accounts rose 2.6 percent in 2017 to 416 million, and nearly 175 million people had access to at least one credit card, according to a report by TransUnion.
Such a high number of people using credit cards may not entirely eliminate the need for cash, but it’s a sign that more people are using credit instead of cash for daily purchases.
Controlling credit card from your phone
More banks are adding features to phone apps that allow credit and debit cards to be controlled by an app.
Cardholders can turn the cards on and off, limit how much they can spend, where they can shop and report a card lost or stolen to help prevent credit card fraud.
Using an on/off switch on a mobile app can be a smart way to prevent fraud on a credit card.
Turn the card on just before you use it and turn it off after the purchase has been made. This is why it’s so important to know how your credit cards work so that you can be ready in case of any type of fraudulent activity.
Wells Fargo is slowly rolling out an app feature called Control Tower that lets users not only manage their cards and spending but keep track of recurring payments such as subscription services.
If you’ve ever changed your credit card number and forgot if Dollar Shave Club, Netflix or another subscription service was automatically paid through the card, the app will be an easy way to see where your recurring payments are going.
Tap-and-go transportation
Instead of buying a subway ticket at a machine or ticket booth or reloading money onto a transit card, commuters will be able to tap a credit card at a ticket turnstile to get through the gate.
Transport for London already offers tap-and-go contactless technology with MasterCard, which has announced it is establishing contactless acceptance as standard by 2020 across Europe.
In London the contactless cards can be used to pay for tube, subway, bus and some rail travel without having to first load a transit card. Maybe driverless cars too someday?
Leave credit cards behind with a mobile wallet
If contactless payment with a credit card is possible, why not just use your smartphone instead for the same payments?
Contactless payment uses Near Field Communication or NFC, and an NFC chip installed in your phone and an app from your bank could have your phone replace your credit cards as a contactless payment system.
You can leave your credit cards at home. That would make a trip out a lot lighter.
A universal card
While the idea of a universal credit card that can put all of your credit cards on one device hasn’t fared so well lately — the company Coin failed in 2017 after four years of trying to succeed — the idea is still a possibility.
The idea is that a magnetic strip on one card would store all of the data from all of your credit cards. You choose which one you want to use at the checkout counter through an app and the card pulls your data.
Paying friends with credit cards
Paying a friend for drinks or your share of dinner can be a little tricky without cash, but not impossible.
Venmo, PayPal and other person-to-person apps, called P2P, allow people to pay each other. Someday credit cards may also become two-way devices between individuals.
Technology is changing constantly, so before paying Coin or another startup for a new gadget, you may want to start by using credit card services your bank offers — and only the free ones.
There’s no point in using updated credit card features if you have to pay extra for them and possibly rack up more debt.
As the 2021 tax filing season wraps up, now seems to be as good of a time as any to take a look at a commonly asked question: Should you pay taxes with a credit card?
We will discuss some of the nuances in this post, but for now let’s cut to the chase. For many people, the answer is “no.” Credit card debt is a major financial hurdle for millions of people. Why take it on if it’s avoidable?
When it comes to your income taxes, credit card debt is usually avoidable, and you’ll be better off paying interest and fees to the IRS than paying interest to a credit card company.
However, there are some scenarios in which it might make sense to use a credit card. Again, those are the exceptions to the rule.
In General, Skip the Credit Card
If you have tax liability (meaning you owe money rather than being owed a refund when you submit your return), then ideally you would make the payment required to cover the full tax liability. However, sometimes that is not possible. If you can’t pay the balance you owe, first make sure you still file your return. The IRS has separate penalties for failure to file and failure to pay. By filing, you avoid late filing penalties. Yes, you will be subject to late payment fees and interest, but at least you can avoid some penalties by filing.
Second, you could consider an IRS Payment Plan (also known as Installment Agreements in the case of long-term repayment plans). A Repayment Plan or Installment Agreement helps provide a formal repayment program. It can also save a small amount of money.
In general, when you do not pay your taxes on time you are subject to two additional costs: a failure to pay penalty, and interest. The default penalty is 0.5% for each month you are late, up to 25%. On top of this penalty, you will also be charged interest at a percentage set by the IRS (right now three percent).
If you are on a repayment plan, the penalty drops 0.25%. That may not be a huge savings, but it is better than nothing. Most importantly, whether you are on a formal repayment plan or not, you will likely spend much less in fees or interest when dealing directly with the IRS than you would with a credit card company. If you paid with a credit card, you would be subject to a processing fee (more on that below) and interest rates above 15 percent, and maybe even above 20 percent, depending on your card.
When does it make sense to use a credit card?
There are a few scenarios in which using a credit card for taxes may make sense. Again, these are not common, and we would encourage anyone to think carefully before choosing one of these options.
First: be aware of the fees! At the outset, you should know that paying taxes with a credit card will incur fees. The IRS does not accept credit cards directly, but instead you would make the payment through a third-party processor. The lowest processing fee currently is 1.96%. You can see the processors and their fees here. This is important, because to the extent that you use a credit card to avoid fees or penalties, you will need to remember that this particular cost is unavoidable should you use a credit card. That said, here are some situations in which you may decide to use a card anyway.
When you cannot pay your taxes but know you can soon
If you’re in a pinch and can’t pay your taxes as soon as they are due, but you know you can pay them in a short time (say just a few weeks), then putting the balance on a credit card and paying it off in full within a few weeks (i.e. before interest accrues) may make sense.
“Balance transfer” or Zero-Percent Promotions
If you are struggling to pay your tax bill and have good enough credit to qualify for a zero-interest credit card (promotion), then this could be a viable option. This method may allow you to pay less in overall fees and interest by taking advantage of favorable, short-term credit terms instead of paying the IRS fees and penalties. Keep in mind, all the usual disadvantages and caveats of debt consolidation apply if you go this route.
When you can earn rewards greater than the fees
If you can make your tax payment but would like to earn credit card rewards, you might be able to do so by paying taxes with a credit card. The trick here will be to ensure that the rewards you earn outweigh the fees you will pay to use a credit card.
Bottom Line
We think that for most people, it does not make sense to use a credit card for taxes. If you can pay what you owe, it is very simple to pay the IRS directly and avoid any hassle by using a credit card and paying fees. If you are having difficulty making the payment, then the IRS offers quite reasonable repayment terms. If you skip the IRS’ terms and opt for a credit card instead, you may end up paying much more in interest and fees and may create a long-term debt problem that could have been avoided.
If you have more questions about tax debt, other debt, or your financial plan in general, connect with an NFCC counselor for a free counseling session today.
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I entered into a payment agreement with my credit card company but they still charged off my account. They are not reporting to the credit agencies that my account on a payment plan. Are they doing this because the government has some sort of assistance plan and pays them for charge offs? Is this legal? Should I reach out to another authority?
It’s quite possible that many consumers find themselves in a similar situation. However, your situation depends on the nature of the payment arrangement and the status of the account when the plan started.
The Details of Your Agreement
If you entered a temporary hardship program, it would most likely have been designed to allow for flexible repayment without any danger of falling further behind. If the account was past due at the time the temporary payment plan went into effect, it would remain in that same status if paid as agreed according to the negotiated terms. Temporary programs are exactly as labeled, so when the payment arrangement ends, the expectation is that you would resume regular payments. Otherwise, if what you agreed to was a long-term restructuring of the account, you should have been provided documentation by the creditor.
Either way, having the terms of the repayment agreement in writing would be most helpful if a formal dispute of the account status is filed.
Disputing Your Account
Besides going to the creditor, you can dispute the status of how the account is being reported by contacting the credit bureau directly. Only file the dispute with the credit bureau or bureaus displaying account information you believe to be incorrect. The dispute would need to be based on the most recent copy of your credit file, which could be obtained for free by visiting https://www.annualcreditreport.com/index.action. You can start your dispute directly on the credit bureaus’ websites, by phone or mail, and you can expect to have a resolution within 30 days.
If all else fails and you still feel that your account is being mismanaged or incorrectly reported, you may want to consult an attorney with your local legal aid office.
I would also recommend speaking with a nonprofit credit counselor to identify some long-term solutions to any debt challenges you may continue to face. The easiest way to connect is to visit https://www.nfcc.org/locator/ or call 800-388-2227.
The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I have two questions related to opening a new credit card for a balance transfer offer. For my credit score, is the negative mark of a new account offset by increase in available balance? With a 0% intro offer, does interest silently accrue in the background to be added at the end of the into period? It’s not likely I would pay of the balance completely, and I would hate to be surprised by 18 months of interest.
A balance transfer usually works best for consumers dealing with small debts and who plan to pay them off before the 0% promotional period ends. If used wisely, it can save consumers quite some money, but that’s not always the case. Whenever you transfer your balance without a repayment strategy, you are just postponing your payments and not really dealing with your debt. The advantages of a balance transfer will ultimately depend on your repayment ability and your current credit score. If you don’t have a good credit score, it is unlikely that you will qualify for a credit card that would offer you a good enough deal to make the balance transfer worth it. With that in mind, let’s address your questions.
How a Balance Transfer Affects Your Credit Score
There’s no way to know exactly how much a credit score will increase or decrease by any given action. It all depends on your current credit history. But, in general, balance transfers can hurt your score by adding a hard inquiry on your credit report and reducing your single-card utilization ratio. Your utilization ratio is how much debt you have on your credit cards divided by the total amount of your available credit. This ratio is calculated both per card and as a total. So, you may be increasing the single-card utilization ratio on one card but decreasing your overall utilization ratio, which will boost your score. It’s important to understand that you will only see a boost in your score if you maintain a zero balance on the old credit card and you do not add any new balances on the new.
Know the Details About the 0% APR Introductory Rate Offer
After the 0% promotional period ends, most credit cards will charge you interest on new purchases and the remaining balance that’s on the card. You may not have to deal with a sneaky interest rate accumulating in the background, but you may be caught off guard by the fees and overall costs of your balance transfer, especially if you won’t be able to pay it off before the promotional period ends. Balance transfer fees usually range from 3% to 5%, depending on the card. So if you are planning to transfer $4,000 with a 3% balance fee, that’s $120 just for the transfer. In addition, some credit cards charge annual fees.
You need to know what your interest rate will be after the promotional period ends. Sometimes, these interest rates are higher or similar to what you already have. So mathematically speaking, your savings on interest may not be what you expected in the long run. For a more accurate assessment, use an online calculator to help you determine how much interest you could save on a balance transfer and how much you’d pay on the remaining balance after the promo period ends. Compare all this with what you are expected to pay on your current credit card to determine if the balance transfer is worth it. You can find details of how much you will pay on interest on your current credit card on your monthly statement.
Consider Alternative Payment Options
No different than any financial move, balance transfers have pros and cons. On the one hand, you could move your balance to a new card with better terms and save on interest. On the other hand, you could end up with a higher interest rate after the promo period ends and not save as much as expected. But the biggest risk of all is taking on more debt than you can handle. If you know you won’t be able to pay off your balance after the promotional period ends, you will likely end up right where you were, possibly with more debt and fewer repayment options. So, I suggest you talk to an NFCC Financial Counselor to discuss other repayment options that could help you to deal with your debt effectively without moving it around. If you move forward with the balance transfer, do your best to pay it off before the promo period ends and make a plan to deal with the old card. If you feel tempted to use it, consider canceling it even though it will hurt your credit. You still have options, so use choose them carefully. Good luck.
Things aren’t always what they seem, and sometimes what seems like a “no brainer,” can actually turn out to be quite a headache. This rings true particularly in the realms of credit management and personal finance. Often, you might think that you are taking a course of action that’s in your best interest, only to find out later that it wasn’t.
In particular, there is one very simple-sounding strategy often touted to people who are taking action to improve their financial well-being: CLOSE ALL YOUR CREDIT CARDS.
On the surface, it’s a very simple idea. If credit cards have been leading you to into debt, why not close them? But it isn’t always the right answer. Let’s take a quick look at each side of the argument: why you might not want to close your credit cards vs. why you should consider closing cards.
Don’t Close Your Credit Cards: Negative Credit Score Impacts If credit cards have presented some financial challenges for you, then the idea of closing them may be very appealing. Just get rid of them, and everything will fall into place, right? Well, not so fast. If one of your financial goals is to improve your credit score, particularly in the short-term, then closing credit cards may work against you.
Closing, or cancelling, a credit card generally has a negative impact on two components of your credit score: credit utilization and average age of accounts.
Your utilization is affected because when you close an account you will have less available credit, which inflates how much available credit you are using as a percentage. Similarly, when you close an account, the age of that account will no longer contribute to your average. The higher your average age, the better. This means that if you close an account that has been open for a long time, your score will likely take a hit. The drop will likely be larger if the accounts that remain open are significantly younger than the one you close.
If you are considering cancelling a credit card because of the annual fee, you might be thinking that the money you will save by closing the card outweighs the credit score impact. You might be right, and in general extra money in your pocket each year that’s not going toward a fee is probably better. However, before you close a card solely for this reason, be sure to call the credit card company to see whether the card has a free downgrade option. If so, you can essentially change to a card without an annual fee while avoiding any of the negative consequences of cancelling, because your history on the original card (with the fee) will carry over to the new card (without the fee).
In general, avoid closing cards if there isn’t a compelling reason to do so. You’ll potentially improve, or at least maintain, two important factors in your credit score. And the great thing is that you don’t have to pay interest on these cards or even use them to reap these benefits. Yes, it seems counterintuitive, but an old credit card sitting in a drawer is likely to do more for your credit score than cancelling the card.
The Case for Cancellation: A Lifestyle Change Everything we just said above is true. However, we made the argument inside of a vacuum, completely void of any considerations of human behavior. Let’s be real, the main reason people often recommend closing credit cards is so they won’t create more debt for you! And that can be very good advice.
Credit cards aren’t always little pieces of plastic that can sit unused in a drawer! For some of us, they have been avenues to significant spending—sometimes on things we didn’t need at all, and other times on food, clothing and other essentials. We are all in different stages of our financial journeys, and learning to manage credit wisely and have a healthy relationship with our money takes time. Credit cards make negative decisions much easier to make. So, if getting rid of them altogether by closing and cancelling the cards is a mental victory over the cards, that may be worth far more than any boost in credit score.
Bottom Line When it comes to credit, be wary of general advice, and always think about the specifics of your situation. Closing credit cards is not always a great move and can hurt your credit score. But, worrying about your credit score often isn’t as important as learning to manage credit and improving your own financial habits. So, if you’re thinking about cancelling a credit card, be sure to weigh these pros and cons and consider your own financial strengths in the process.
Remember, the NFCC can help with managing your credit, building a budget, and working toward your other financial goals. You can get started with a credit counselor for a free counseling session today.
Anyone who likes to shop at major retailers has probably at some point been asked to open a store credit card. The sales pitch for these cards often includes some lofty promises about the amazing savings you will receive. Unfortunately, most cards don’t live up to being such a great deal in reality.
But are these cards bad for your credit? You may have heard financial experts recommending against these cards. They won’t hurt your credit score simply because they are retail credit cards, but they do have a few features that can increase the likelihood that your credit score will suffer or won’t as quickly reach its potential.
Here’s what you need to know.
Background
The decision to open a credit card should never be taken lightly, yet much of the marketing around store cards tries to catch consumers off guard and get them to make rash decisions. If you open a retail card, it’s certainly not the end of the world, but ideally you would give it some thought before saying yes. That’s because many store cards have a few major disadvantages.
Also, keep in mind that opening such a card probably is not a big deal for someone with a long, established credit history who could turn around and access more credit if they needed it. On the other hand, for a young consumer—say, someone who would be opening the store card as their first credit card—the disadvantages will be felt quite a bit more.
Low Credit Limits
A big disadvantage of these cards is that they offer low credit limits. On the one hand, that could be a good thing for some consumers since it puts a low ceiling on how much new debt you can take on. But on the other hand, it could hold back your credit score. A higher credit limit can help your credit score by improving your credit utilization. So by offering low limits, these cards may not help your score as much as some others.
Again, if you were a new credit user and you were choosing between a store card or a traditional credit card, the traditional card will likely provide the better boost to your credit score over time because of a potentially higher credit limit.
High Interest Rates
Perhaps the most well-known disadvantage of retail cards is that they often have very high interest rates. CNBC reported that one popular department store offers a credit card with a 26.99 percent variable rate. Compare this to the average interest rate on a credit card, which is somewhere between 15 and 20 percent (different outlets arrive at different figures on this point). That’s a significant difference.
If you take out a store credit card, you will want to be extra careful to ensure you can pay the balance in full and avoid the sky-high interest rate.
Few Places to Use the Card
Another major con to store credit cards is that most of them can only be used at the associated store. Though there are a few exceptions, you generally won’t be able to take the credit card you opened at ACME Department Store and use it anywhere else. This can make the card pretty useless in your wallet and limit its effectiveness in helping you build your credit score.
Potential for Overspending
Also, a store card could cause a psychological effect that works against you—by incentivizing you to return to that store more than you really need to, leading to overspending.
Limited Rewards
One of the selling points of store cards that often reels people in is that they offer good rewards. You’ve probably heard pitches like “You can save 20 percent on your purchase if you open a card today.” However, these rewards may not be great in the long-term. First, remember that for many cards—like department stores—you will only earn rewards at that store because that’s the only place you can use the card. Even for store cards that do give you greater flexibility, you will want to compare the rewards against other credit cards on the market.
You may be able to find a card that gives 1-2 percent cash back on all purchases, which could turn out to be better than the rewards on the store card. If so, it might be better to skip the store card and opt for better rewards instead.
All the Normal Tips Apply
We have so far touched on some of the drawbacks to retail credit cards. This doesn’t mean that you cannot or should not use them, but instead that if you do you should be strategic. Look for the card with the best features—good rewards, higher credit limit, and the ability to make a variety of purchases.
If you choose a card—whether it be from a department store or online retailer—remember that all the normal tips about credit card management apply. Just like with any other card, you will want to do your best to avoid interest and fees and to stick to your budget so your spending does not get away from you.
Not having any cash on you or forgetting to pack a lunch can seem like an emergency when you’re hungry at lunchtime. Having a credit card can save the day by paying for a small, manageable expense.
A credit card can also come to the rescue in real emergencies, such as paying for a hospital stay, air conditioner repair during the summer, major car repair, or a plane ticket home to visit a sick relative, among other things. But depending on a credit card to pay for unexpected expenses can be a bad idea for a number of reasons.
Is it really an emergency?
A shoe sale isn’t an emergency. Neither is a beer run on a Saturday night. You know what an emergency is.
But sometimes that can be difficult to see during whatever the situation is. Or it’s subjective and an emergency to one person isn’t one to another. Buying a plane ticket to visit a sick friend may be an emergency to you, while another person may call them or send a card.
If it’s something that affects your basic, immediate needs, then it’s probably an emergency. Food, shelter, your health or getting home while traveling can be emergencies worth charging to a credit card. But even those should get you thinking about alternatives and the implications of using a credit card.
Pay it off within 3 months
If you expect to have the extra income to pay off an emergency charge within three months, then it’s probably OK to use a credit card. One month is best so you can avoid interest charges, but three months is reasonable — provided you can afford the interest.
This is one reason why it’s important to think about how you’ll pay for an emergency long before it happens. If you can’t come up with a way to pay it off within three months, then you could get into financial trouble.
It’s a loan with interest
Not having the money in your bank account to pay for an emergency room visit definitely sounds like an emergency. But remember, using a credit card means you’re taking out a loan that you’ll have to repay — with interest if you can’t pay it all back at once.
If the credit card you’re using is one that you regularly pay off entirely each month, then paying interest for a few months may not be a problem. But if you’re paying interest on other transactions each month, adding more may not fit in your budget.
It could lead to more debt
The interest on the emergency you charge could be just the start of debt you can’t afford. If you can’t afford to repay it soon, it could lead to more credit card charges.
Try to avoid this by resolving not to charge more purchases to your credit card until you’ve paid off the emergency debt.
Also, emergencies obviously don’t happen when you expect them to. Two or three can pile up at one time, not giving you enough time to pay them all off and leaving you with a huge amount of debt.
You’re at a creditor’s mercy
Many credit card companies are happy to give you a higher credit limit when you need it for an emergency.
But if you’re at your credit limit, do you really want to rely on a last-minute call to a creditor to raise your credit limit during an emergency? They may decide not to extend you enough credit for your emergency, especially if you’re already maxed out or have a history of late payments.
If you’ve had a few emergencies happen together, you can easily max out your credit card and not have many options.
Harder to save
Beyond saving for retirement, your kids’ education and any other long-term goals, piling more debt onto a credit card for an emergency can prevent you from putting money into an emergency fund.
This fund can be the best way to cover such costs. It’s cash you’ll have available to use whenever it’s needed. Ideally, it should cover a year’s worth of living expenses in case you lose your job, but starting with one to two months of expenses is a great start.
Emergencies are going to happen to you sooner or later. Planning for them now, when you don’t have one in front of you, can make funding an emergency fund easier.
Start by automatically transferring $50 or so per week to the fund, and set a small goal of $1,000 to get you motivated.
Pick the right card
It can help to have one credit card dedicated to being used mostly in emergencies. You’ll want to use it once a month to keep it active — such as for a recurring bill such as cable TV — and then leave it untouched until an emergency pops up.
Find a credit card with the lowest interest rate possible, without an annual fee or a low fee, low late fees or over-limit fee, and a good grace period.
Get a card with a high enough credit limit to cover the emergencies you’ll need to cover. Homeowners who commute, for example, will need higher limits than a renter who walks to work.
Once you get a credit card dedicated to emergencies only, keep it deep in your wallet or purse and don’t use it for anything else. If it’s too much of a temptation when shopping, leave it at home or with a trusted relative. Just be sure to carry it with you when you travel, or that you can be billed for the emergency and pay it later.
And when using it for an emergency, you may want to call your creditor to alert them to the big charge coming. If you only use the card for small purchases from time to time to keep it active, they may suspect fraud when a large charge is made, and may flat it as stolen or freeze it. You don’t want a real emergency to lead to another one with your credit card provider.
Having 
A shoe sale isn’t an emergency. Neither is a beer run on a Saturday night. You know what an emergency is.