I received a question from one of my readers to this blog and I thought it was relevant enough for all of my readers to see and learn from.

Dear Mark,

I have four major credit card accounts in my name. I use one of them for my work expenses, one for household expenses, a Cabela’s card which I like for the points, and another one that I don’t use much.  It has a zero balance. Does this hurt my FICO scores by having a zero activity  and zero balance? Will it hurt my credit score more if I close the account?

Sherry M. Austin, TX

Hello Sherry,

Thanks for writing in. I have a short answer for you to your question….if your main goal is to keep your current high scores, you should leave the account open, but you must start USING the card! Keep the activity small so that you don’t boost up your credit utilization.

You don’t want the bank to cancel the card because you are not using it. Remember, the banks are in business to make money, if they have given you a product and they aren’t making any money, then they may make a decision to close it. As you know this will hurt your scores because your available credit ratios will change.

Regardless of who closes the account, your credit score may fall due to a change in a key credit scoring ratio. “Closing an account causes you to lose the available credit limit associated with it. Your utilization rate, also called your balance-to-limit ratio, will increase as a result of closing the account. That may cause a temporary decline in your credit scores.

To get an idea of how your utilization ratio could be impacted by closing an account, let’s say each of your four cards has a credit limit of $1,000, for a combined total of $4,000 in available credit. Let’s also say that across those four accounts, you’ve got a total debt burden of $2,000. Then your unused card gets closed, taking your available credit down to just $3,000. Now, instead of using 50 percent of your credit lines, you’re suddenly using about 66 percent of your total available credit. That higher proportion makes you appear to be a riskier borrower, since you’re that much closer to maxing out your available credit.

Your credit score should reflect that change, although the actual scoring damage will vary from borrower to borrower. The FICO score assesses all the information on your credit report.  So the score impact from any one action, such as closing an account, will depend on what other information is present on the credit report.

Stay tuned,

Your Credit Repair Expert

Mark

Now that we have had a chance to digest all of the details of the Credit CARD act, here is a great article at yahoo finance that summarizes how all of the different credit cards are going to be handled in the future.

Click Here For The Full Story

One tragic outcome of a divorce is that each partner more than likely will have damaged credit and be in need of credit repair.

But, a large number of my students and coaching clients  are severely damaged by divorce. There are a few things to consider to keep your credit protected.

Most couples merge all their finances during marriage and then one spouse manages everything. During divorce you will want to separate all accounts. Be aware of what accounts you have and whose name is on them. A joint account has both spouses names attached and both are responsible for seeing that any debt is paid. If the divorce decree states that one spouse is responsible for paying the credit card bill both parties are still responsible for the balance. Creditors do not know who agrees the pay the card and they do not care.

Quite often a joint account will remain open and one spouse will run up a large bill. Both spouses are responsible for this even after divorce. If you and your spouse have a joint account you will want to call the creditor and change it to an individual account. Creditors are not obligated to do this. They can require you to reapply as an individual. An account must be paid in full before it can be closed or changed.

If you have an individual account with an “authorized user” you will want to remove the authorized user. As long as they are authorized they can fully charge the card. The only person responsible for any debt is the account holder. Typically, the account is reported on the card holder’s credit and the authorized user’s credit. If you are an authorized user and the account goes negative it may affect your credit.

You will also want to dissolve any other joint accounts including bank accounts. When cancelling a bank account be sure to do it together, the legal way. You also may want to just remove one of the spouses name and divvy up the funds accordingly. You will also need to remove one spouses name from any joint loans including auto.

Deciding what to do with the house can be a little trickier. On a home loan it is not as easy to just drop one person’s name from the account. If one person decides to keep the house they will need to refinance the home in just their name. If this is not possible, the best thing to do to protect every one’s credit is to sell the house and divide the profits. Many divorcees have found their credit destroyed after their former spouse let the home foreclose. Informing new creditors that you are divorced and not responsible for the debt will not help you.

Once you dissolve all joint accounts you will probably be left with some liquid assets. With the help of your attorney you can divide any remaining cash. This is the legal and most sensible thing to do.

You will also need to notify all creditors and banks of your divorce. If a collector is calling on a debt that you are not legally responsible for you will want to let them know that you are no longer married and therefore not responsible. You may also want to notify them in writing to expedite the filing,

Once you get all your joint accounts closed and everything settled it is important that you check your credit regularly. Quite often people are surprised when, months later, something belonging to their former spouse pops up on their credit. Be sure to read over your credit report carefully looking for accounts that are not yours. Even if it is a positive account you will want to have it removed. You never know what might happen with an account. Be sure to check your credit on a monthly basis. If there is a problem, you may want to learn how to improve credit score

Divorce can be a very difficult and emotionally challenging time. Credit issues and high court fees do nothing to ease the situation. If you are separating from your spouse or thinking about divorce, take the proper steps to separate your finances and all accounts. Our world today is run off credit so it is important to protect it. By taking these measures early in the process you will prepare yourself for a new life that is not held back by a low credit score.

To learn more tips on how to fix bad credit, visit my website at www.CrushingTheCreditBureaus.com