How To Improve Your Credit Score Without Carrying A Debt

07 Oct, 2008

Dear Liz: Last I looked I had a credit score of 680. I think it should be better as I haven't even missed a payment in well over seven years.

The reason my score isn't higher is that I don't use much credit. I save up for purchases or do without. Lenders don't like that, so they punish people like me by reducing our credit scores. Because we use credit sparingly and wisely and aren't chained to monthly payments, lenders call us deadbeats. Is there a way we responsible people can raise our credit scores by removing this "credit bias"?

Answer: Credit scores are designed for lenders, not borrowers. Scoring formulas were created to help a lender evaluate a borrower's risk of default, based on how the borrower has handled credit in the past.

If you don't regularly use credit, the scoring formulas have a tough time evaluating you and may score you lower than you perhaps deserve.

But you don't have to change your spending patterns or carry credit card balances to improve your score. You just have to occasionally pull out your plastic and use it. When you've saved up enough to buy something, use your card and then pay the balance in full when your statement arrives.

Keep your charges to less than 30% of your credit limit and you should notice a steady improvement in your scores.

By the way, the term "deadbeat" isn't applied in the credit industry to people who don't borrow. It's applied to people who use their credit cards for convenience only, paying their balances in full every month and not incurring finance charges.

About 40% of credit card users are "deadbeats," and it's the one kind of deadbeat you really want to be.

It's best to defer 401(k) withdrawal

Dear Liz: I am approaching my 60th birthday and have about $200,000 in a previous employer's 401(k). I have enrolled in a new 401(k) with my current employer. I owe $180,000 on my mortgage. Should I use the money in my older employer's plan to pay off my existing mortgage so that I can redirect my monthly mortgage payment into my new 401(k)? Or should I convert the old 401(k) into an IRA?

Answer: You want your tax-deferred retirement money to stay tax deferred as long as possible.

You may not have to pay penalties on withdrawals once you're older than 59 1/2 . But you'd still have to pay income taxes -- and at a rate that will be much higher than what you're likely to pay in retirement, since the withdrawal almost certainly will push you into a higher tax bracket.

What's more, you've lost all those future tax-deferred returns the withdrawn cash could have earned. That's why raiding retirement funds rarely makes sense, especially not when they're being used to pay off a low-rate, tax-deductible debt such as a mortgage.

Speaking of leaving the money alone, there's also no reason to roll your old 401(k) into an IRA if you're happy with your previous employer's plan.

People who don't like their investment options often are eager to transfer the money into an IRA so they can pick their own investments. But 401(k) participants tend to have access to institutional funds and other options that charge far less for expenses than the retail funds available to IRA investors.

That's why many 401(k) providers try so hard to get former employees to roll the money into an IRA -- there's more investment choice but also bigger fees for the provider.

Source : http://www.latimes.com/