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Student loan consolidation and refinancing can help you manage your debts, reducing monthly payments, creating more favorable terms, and ensuring you have more money in your pocket at the end of the month.Â But how do these payoff strategies work, what are the differences between private loans and federal loans, and how much money can […]
A Guide to Consolidating and Refinancing Student Loans is a post from Pocket Your Dollars.
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Maria O. says:
I’m a huge fan of the Money Girl Podcast and am also a Get Out of Debt Fast student. I’ve taken your financial advice and am glad to say that my husband and I are in a much better financial situation now.
We both have travel rewards credit cards with zero balances that we haven’t used in over a year. We know that canceling cards isn’t advisable, but we really want to stop paying the $95 annual fee. My husband’s credit score is 780 and mine is 818. What do you recommend?
Maria, thanks so much for your question and for being a part of the Money Girl community!
Before you cancel a credit card, it’s critical to understand how it will affect your entire financial life. Whether you should get rid of a card depends on a variety of factors, including your future financial goals.
In this post, I’ll cover 10 dos and don’ts for when to cancel a credit card. You’ll learn how to manage these accounts wisely so they improve your finances and don’t hurt them.
Before I cover each of these dos and don’ts, here’s an overview of why building good credit and using credit cards the right way is so important.
The benefits of building your credit
Having good credit simply means that you have a reliable financial track record according to the data in your credit history with the nationwide credit bureaus: Equifax, Experian, and TransUnion. Different credit scoring models use that data to calculate credit scores, which act as shortcuts for various businesses to evaluate you quickly.
When you have high credit scores, potential lenders and merchants have more confidence that you’ll be a good customer who pays their bills on time. That’s an incentive for them to give you top-tier offers, which saves you money.
Having good credit scores allows you to get the most competitive interest rates and terms when you borrow money using credit cards, mortgages, car loans, student loans, and personal loans. For instance, paying just 1% less for a mortgage could save you over $100,000 on the cost of a 30-year, fixed-rate loan, depending on the total amount you borrow.
However, even if you never borrow money to finance a home or charge a vacation to a credit card, having good credit gives you other significant benefits, including:
- Lower auto insurance premiums (in most states)
- Lower home insurance premiums (in most states)
- More opportunities to rent a home or apartment
- Lower security deposits on utilities
- More government benefits
- Better chances to get a job
RELATED: 12 Credit Myths and Truths You Should Know
The Connection Between Credit Cards and Your Credit
The only way to build credit is to have active credit accounts in your name and to use them responsibly over time. That’s where credit cards come into play.
One of the biggest factors in how credit scores are calculated is called your credit utilization ratio. It only applies to revolving accounts, such as credit cards and lines of credit, which don’t have a fixed term. Credit utilization isn’t measured for installment loans, such as mortgages and car loans, because they do have a set ending or maturity date.Credit utilization is a simple formula that equals your total account balance divided by your total credit limit. For example, if you have a credit card with a balance of $1,000 and a credit limit of $2,000, your utilization ratio is 50% ($1,000 / $2,000 = 0.50).
Keeping a low utilization, such as below 20%, is optimal for good credit.
Keeping a low utilization, such as below 20%, is optimal for good credit. So, by paying down your balance on the card to $400, you could reduce your utilization ratio to 20% ($400 / $2,000 = 0.20) and boost your credit scores.
A low utilization ratio says that you’re using credit responsibly. A high ratio indicates that you may be maxed out and even getting close to missing a payment.
Many people mistakenly believe that getting rid of their credit cards will automatically improve their credit. The surprising truth is that canceling credit cards usually hurts it because your available credit on the card plunges to zero, which instantly increases your utilization and causes your credit scores to drop right away.
However, whether closing a card is right for you really depends on your current and future financial situation. Use the following do and don’ts to know when ditching a card is best and how to do it with minimal damage to your credit.
RELATED: 5 Ways to Get a Loan With Bad Credit
10 dos and don’ts for when to cancel a credit card
1. Do cancel credit cards that are a net loss
If you’re like Maria and have great credit with an unused card that’s costing you money, you may want to consider canceling it. Many rewards cards come with an annual fee, especially when they offer cashback, airline miles, or points for merchandise. In some cases, using the rewards easily offsets the annual fee.
If you won’t use the card or can’t afford the annual fee, common sense should be the deciding factor, not your credit score.
However, if you won’t use the card or can’t afford the annual fee, common sense should be the deciding factor, not your credit score. However, one option is to replace a card that charges an annual fee with another card that doesn’t, ideally before you cancel the first one. That allows you to swap out one credit limit for another one and avoid any damage to your credit.
2. Do cancel credit cards that tempt you to overspend
I also don’t recommend keeping a credit card if it tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.
3. Do cancel credit cards to simplify your financial life
If you’ve missed payments or can’t keep up with transactions because you have too many cards, it might be worth it to strategically cancel one or more credit cards. Keep reading for tips to minimize the potential damage to your credit.
4. Do cancel credit cards with low credit limits first
If you cancel a credit card, choosing one with a higher credit limit poses more of a threat than getting rid of one with a smaller limit. The lower your credit limit on a card, the less closing it could negatively affect your credit.
As I previously mentioned, for optimal credit, it’s best to never carry a balance that exceeds 20% of your available credit limit. If you’re not sure what your credit limits are, you can review them by getting a free copy of your credit report at annualcreditreport.com.
5. Do cancel credit cards you recently opened by mistake
A common credit dilemma is what to do after opening a new credit card that you felt pressured into at a retail store. Sales clerks make getting a huge discount with a new card signup sound too good to pass up. In some cases, you may not even realize that what you’re signing up for is a credit card.
If you’re loyal to a store and make frequent purchases there, having its branded credit card can give you nice savings and promotional benefits that make it worthwhile. While you can’t erase the card from your credit history, if you decide that you’d rather not have the account, closing it sooner rather than later is better for your credit.
Free Resource: Credit Score Survival Kit – a video tutorial, e-book, and audiobook to help build credit fast!
6. Don’t cancel your only credit card
In addition to maintaining low credit utilization, the health of your credit depends on having a mix of credit accounts. That shows you can handle different types of credit, such as installment loans and revolving accounts. But if you cancel your only credit card, that would leave you deficient in the revolving credit category.
It’s better to spread out your balances on multiple cards and maintain low utilization on each of them, rather than have one card that you charge to the limit.
Therefore, I don’t recommend canceling a credit card if it’s your only one. Having at least one card in the mix rounds out your credit file. Ideally, you would have a total of two or three cards that come from different issuers, such as Visa, Mastercard, American Express, or Discover.
If you have more than one line of credit or credit card, most credit scoring models calculate your utilization ratio for each account and collectively on all your accounts. So, it’s better to spread out your balances on multiple cards and maintain low utilization on each of them, rather than have one card that you charge to the limit.
Depending on the types of charges you make, you may need a low-rate card for times when you must carry a balance and a higher-rate rewards card for charges that you always pay off each month. No annual fee cards are best, but as I previously mentioned, rewards cards that come with a fee may be worth it.
7. Don’t cancel credit cards you’ve had for a long time
As if credit utilization and having a mix of credit accounts weren’t enough, a canceled credit card hurts your credit in other ways. Another factor that’s used in calculating credit scores is how long you’ve had credit accounts.
Having a long, rich credit history boosts your scores and makes you appear less risky to potential lenders and merchants. Canceling a long-standing credit card causes your average age of credit history to decrease, which hurts your credit. So, value credit cards that you’ve had for a long time more than those you’ve recently opened.
8. Don’t cancel multiple cards at the same time
If you have more than one credit card that you want to cancel, don’t shut them all down at the exact same time. It’s better to space out cancellations over time, such as one every six months, to minimize the damage to your credit health.
9. Don’t cancel credit cards if you’re planning to make a big purchase
If you’re planning to finance a big purchase, such as a home or vehicle, in the next three to six months, it’s not wise to cancel any credit cards. If your utilization rate increases and your credit scores suddenly take a dive during the application process, you may ruin your chances of getting a low-interest loan.
If you’re planning to finance a big purchase, such as a home or vehicle, in the next three to six months, it’s not wise to cancel any credit cards.
Maria didn't mention if she's looking to use her great credit to borrow money any time soon. But it's an important issue that I recommend she consider.
10. Don’t cancel credit cards because you’ve made late payments
Never cancel a credit card with negative information, such as late payments or being in collections, thinking that it will disappear from your credit file. All credit accounts stay on your credit report for seven years from the date you became delinquent, even after you or a card issuer closes it. Accounts with only positive information remain in your credit file longer, for up to 10 years
What should you do with unused credit cards?
If you or Maria go through these dos and don’ts and decide that it’s better not to cancel a credit card, use it occasionally to make small purchases that you pay off in full. That keeps it active and allows you to continue adding positive information to your credit history.
However, I don’t recommend keeping a credit card that you’re not using responsibly or that tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.
If you’re one of the millions of Americans who have declared bankruptcy, financial recovery can seem like a pipe dream. But don’t give up. According to a study by the Consumer Financial Protection Bureau, people’s credit scores increased steadily after filing for bankruptcy. While any credit improvement is good news, is it enough to offer… Read More
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Final Expense Life Insurance: What You Need to Know is a post from Pocket Your Dollars.
For those who are caring for their aging parents and raising kids at the same time, it can often seem like there’s never enough time, money, or energy to provide for all the family members who need you. In particular, handling finances when two different generations are relying on you can feel like an impossible balancing act — not to mention an exercise in feeling guilty no matter what you do.
But being the caregiver sandwiched between two generations makes it even more important for you to prioritize your own financial needs, especially when it comes to retirement planning. By protecting your retirement during this difficult season of your life, you’ll be in a better place to remain independent as you age, launch your kids into a more secure adulthood, and offer ongoing support to your parents.
Sound impossible? It’s not. Here’s how you can protect your retirement if you’re a member of the sandwich generation.
Retirement savings comes first
Retirement savings should get priority ahead of putting money into your kids’ college funds. You know that already. Your kids can take on loans for college, but there are no loans available to pay for your retirement.
The more difficult decision is prioritizing retirement savings ahead of paying for long-term care for your parents. That can feel like a heartless choice, but it is a necessary one to keep from passing money problems from one generation to the next. Forgoing your retirement savings during your 40s and 50s means you’ll miss out on long-term growth and the benefits of compound interest. By making sure that you continue to set aside money for retirement, you can make sure your kids won’t feel financially squeezed as you get older.
Instead of personally bankrolling your parents’ care, use their assets for as long as they last. That will not only allow you to make the best use of programs like Medicaid (which requires long-term care recipients to have exhausted their own assets before it kicks in), but it will also protect your future.
Communication is key
Part of the stress of being in the sandwich generation is feeling like the financial burdens of two generations (as well as your own) are resting entirely on your shoulders. You feel like you’ll be letting down the vulnerable people you love if you can’t do it all. But the truth is that you can’t do it all. And you shouldn’t expect that of yourself, nor should your family expect it of you. So communicating with your loved ones about what they can expect can help you draw important boundaries around what you’re able to offer them.
This conversation will be somewhat simpler with your children. You can let them know what kind of financial help they can expect from you for college and beyond, and simply leave it at that.
The conversation is a little tougher with your parents, in part because you need to ask them about nitty-gritty details about their finances. Whether or not money is a taboo subject in your family, it can be tough for your parents to let you in on important financial conversations — to them it feels like they were changing your diapers only a few short years ago.
Being in the loop on what your parents have saved, where it is, what plans they have for the future, and who they trust as their financial adviser, will help protect their money and yours. You’ll be better able to make decisions for them in case of an emergency, and being included in financial decisions means you can help protect them from scams. (See also: 5 Money Strategies for the Sandwich Generation)
Insurance is a necessity
Having adequate disability insurance in place is an important fail-safe for any worker, but it’s especially important for those who are caring for aging parents and young children. The Council for Disability Awareness reports that nearly one in four workers will be out of work for at least a year because of a disabling condition. With parents and children counting on your income, even a short-term disability could spell disaster, and force you to dip into your retirement savings to keep things going. Making sure you have sufficient disability income insurance coverage can help make sure you protect your family and your retirement if you become disabled.
Life insurance is another area where you don’t want to skimp. With two generations counting on you, it’s important to have enough life insurance to make sure your family will be okay if something happens to you. This is true even if you’re a full-time unpaid caregiver for either your parents or your children, since your family will need to pay for the care you provide even if they aren’t counting on your income.
It’s also a good idea to talk to your parents about life insurance for them, if they’re able to qualify. For aging parents who know they will draw down their assets for long-term care, a life insurance policy can be a savvy way to ensure they leave some kind of inheritance. If your parents are anxious about their ability to leave an inheritance, a life insurance policy can help to relieve that money stress and potentially make it emotionally easier for them to draw down their own assets.
Become a Social Security and Medicare expert
Spending time reading up on Social Security, Medicare, and other programs can help you to make better financial decisions for your parents and yourself. There are a number of misconceptions, myths, and misunderstandings masquerading as facts about these programs, and knowing exactly what your parents (and eventually you) will be entitled to can help make sure you don’t leave money on the table or make decisions based on bad information.
The eligibility questionnaires at benefits.gov can help you determine what benefits are available and whether your parents qualify. In addition, it’s a good idea to sign up for a my Social Security account for yourself. This site will provide you with personalized estimates of future benefits based on your lifetime earnings, which can better help you prepare for your own retirement.
Don’t be afraid to ask for help
Caring for children and parents at the same time is exhausting. Don’t compound the problem by thinking you have to make financial decisions all by yourself. Consider interviewing and hiring a financial adviser to help you make sense of the tough choices. He or she can help you figure out the best way to preserve your assets, help your parents enjoy their twilight years with dignity, and plan for your children’s future.
Even if a traditional financial adviser isn’t in the cards for you, don’t forget that you can ask for help among your extended family and network of friends. There’s no need to pretend that juggling it all is easy. Family can potentially offer financial or caregiving support. Knowledgeable friends can steer you toward the best resources to help you make decisions. Relying on your network means you’re less likely to burn out and make disordered financial decisions. (See also: 9 Simple Acts of Self-Care for the Sandwich Generation)
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