#AskFarnoosh: All Things Credit!

This week’s #AskFarnoosh addressed a round up of credit-related questions. From closing accounts to establishing credit to qualifying for a mortgage.

As always, please keep your questions coming. You can leave questions below, Tweet, Facebook or email me.

Question from Leanne:

I am 31 and have never had a credit card….ive applied but the 3 credit places say i have a “0′ score what does that mean? and how do i change it?

Hi Leanne,

A “zero” score basically means that you have no history of establishing credit – whether through credit cards, car loans, mortgages or student loans.

The tricky thing here is that you often need credit – or a credit score – to earn the right to borrow. That, or you may need to work with a cosigner.

A better alternative? Consider opening up a secured card to establish credit, which can overtime help you open up a real credit card. A secured card is like a credit card on training wheels and perfect for those who need to establish credit or recover from bad credit. How it works: You load the card with your money – say $500 – and then proceed to use it as if it were a credit card, paying the balance every month. After six months to a year of good performance, you may get upgraded to a real credit card. You can shop around for them at local credit unions and banks. Choose ones with low fees. The folks at WiseBread.com and NerdWallet.com offer nice breakdowns on some of the best secured cards on the market.

Question from Hector:

My wife and I have credit card debt about $25,000. We are now looking to buy our first home. Should we pay off our debt first before looking for a new home? We are in our 30’s and have about $15,000 in savings. What should we do?

Hi Hector,

Yes, definitely do what you can to lower your debt prior to getting qualified. Keep in mind that the average household credit card debt in this country is about $16,000, according to the Federal Reserve, so try to – at least – get below that. In order to qualify for the best mortgage with the best rates, banks want to see that you have a clean balance sheet, which includes little to no credit card debt and savings, as well as a great credit score (740 or better is typically worthy of the lowest rates) and steady income. Just take some time to work on chipping away that debt – it will pay off! Good news is, interest rates are expected to stay low at least for another two to three years!

Question from Michael:

Hey Farnoosh! I recently paid of 2 credit cards (yay me!), but don’t know if I should keep them open or close them. Which is better for my credit score?

Hey Michael,

It’s better for your credit score to keep them open and use them sparingly (e.g. charging a utility bill and paying it off each month). Keep the cards active enough so that the issuer doesn’t shut them off for lack of activity. Your credit score takes what’s known as your “credit utilization ratio,” which is equal to the amount of debt you’re carrying on all your cards divided by your total available credit. The higher the ratio, the worse for your score. By closing an account, you effectively reduce your amount of available credit, which has the potential to raising this ratio and lower your score.  (By the way – a credit utilization of 10% of less is ideal).