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I once heard that having too many credit cards is bad for your credit even if you pay them off on time. Is this true? If so, how many do you think it is safe to have? Also, How do you look up your credit score, and what is considered good or bad? Further, What kinds of practices do you recommend for improving your credit score in general? – Katherine, New York, New York

In general, having too many credit cards is not a good thing. You have to manage every account and make sure that every bill gets paid on time. There is no real need for a person to have more than three or four credit cards. One might consider getting a Visa, MasterCard and American Express just in case a merchant only accepts one type of card. For example, Costco, the membership warehouse, only accepts American Express at its stores.  Learn how to earn cash back on virtually every purchase you make with the Costco Card from American Express OPEN.

Every person that has a credit card also has a credit score. A credit score is what lenders use to determine how risky you are to lend money to.  You can always take a look at your credit score free of charge on the numerous domains offering that service on the internet.  A mortgage company will look at your credit score when determining what interest rate to give you, if they decide to give you a mortgage. If you get an auto loan from your local bank, it too will look at your credit score to determine what interest rate to charge.

The most well-known credit score is called the FICO score. The FICO score range is between 300 and 850 and it gets its name from the company that developed it, the Fair Isaac Corporation. If you want to see your FICO score, you will have to pay for it. You can go to www.myfico.com and sign up to view it. A good FICO score is anything in the high-700s. Consumers with a score in the high 700s will receive the best rates from lenders.

To improve your credit score you should focus on the following two things:

1) Pay bills on time.
This is the one that most people already know. Paying your bills on time shows lenders that you are dependable and trustworthy. Late payments negatively affect your credit score. If you have trouble organizing your bills, you should try using some personal finance software such as Quicken or Microsoft Money. Another way to assist you in paying your bills on time is using a free online service like mint.com, which automatically logs into your financial accounts and gives you reminders when bills are due.

2) Keep the debt to credit ratio in check
The debt to credit ratio measures how much debt one has compared to available credit. For instance, if I have a $15,000 credit line on my American Express card and I have spent $1,500 this month, my debt to credit ratio is 10% ($15,000 divided by $1,500). While the exact methodology for calculating the FICO score is not published, many credit experts say that keeping the debt to credit ratio below 50% is essential for having an excellent credit score. While some people shy away from a high credit limit, actually having one but not using it is beneficial to your credit score.

It is important to maintain a good credit score. However, it is not something to obsess over on a daily basis. Just keep paying your bills on time and monitoring your debt to credit ratio and your credit score should be excellent when it comes time to apply for a loan.

I’m looking into investing in stocks for the first time. I have heard that money market mutual funds are a good and reliable choice, however I would like to invest in something that has a greater earning potential. I understand that this kind of investing is a little more risky, but I don’t mind taking that risk if I have read up on the company and truly see growth potential. How can I find information on what kind of stocks would be good? – Katie, Maplewood, MN

Katie,
You are right in that stocks have the potential for greater gains than money market funds. One thing that you need to realize before investing in individual stocks is that they also carry a lot of risk. Most investment advisers urge their clients to invest in mutual funds for the diversification they offer. You said that you do not mind investing in a company where you see growth potential, but you need to keep in mind that the stock market might have already factored this growth into the stock price.

The first thing I would do is to visit your local public library and read everything you can get your hands on regarding investing. If you want to be successful, the first thing you will need to learn is how to interpret financial statements. These are the publications released by every publicly traded company on either a quarterly (10-Q) or annual (10-K) basis. They contain the relevant financial data that illustrates how the company performed for the given quarter or year. A word of warning: financial statements are very difficult for a beginner to understand. Make sure you read the footnotes of an annual report before even thinking of investing your money. Footnotes are where the company’s management likes to hide the bad news.

If you are determined to try your hand at picking individual stocks, I would certainly recommend reading The Intelligent Investor by Benjamin Graham. If you are unfamiliar with the author, he was Warren Buffett’s mentor and his professor at Columbia. The book is a difficult read, but it gives insight into how to select stocks using a “value” approach. Another great book to read is Common Stocks and Uncommon Profits by Philip Fisher. Warren Buffett has said that this book influenced his stock selection process, as it emphasized that buying a great business at a fair price as opposed to a lousy business at a great price.

Once you have developed your own criteria for purchasing stocks, you will need to keep up with current events in the stock market. I have found that the best place to find up to date information is in the Wall Street Journal. The online version of their website posts Wall Street’s breaking news. If you plan to invest in individual stocks you should also be reading industry trade magazines and newsletters to get a better feel for the business you are investing in.

While I have just given you some references that will serve as a starting point, I would like to warn you that successfully picking individual stocks takes a lot of effort. Most people, including the professionals, fail to beat the market average. Keep that fact in mind before investing a penny in an individual stock. Good luck!

The reason for this post is because I came across an article by Michelle Singletary of the Washington Post titled, “Like it or not, it’s unwise to use credit.”  In her article she claims that, “we are all suckers – that is, losers – when we use credit to pay for services and goods.”  She has a point if she is referring to those that run up large credit card balances and pay the minimums each month.  People who exhibit that behavior are hurt because they end up paying a lot more for the products or services than the list price due to accrued interest and various finance charges from credit card issuer.  However, she was referring to everybody that uses a credit card, even the responsible ones.

The basis for her argument is the conclusion from two studies by researchers at the Massachusetts Institute of Technology and the University of Warwick.  The results from the MIT study say that people paid more when using a credit card than with cash.  The University of Warwick study also concluded that in similar purchasing situations, people spent more using credit cards than cash or checks.  While these studies definitely describe a certain segment of consumers, it is still wrong for the author to make the blanket statement that all people who use credit to pay for services and goods are “suckers.”

While credit card issuers often face criticism for some of their unscrupulous practices, they do offer consumers many benefits.  The first being is that if your card is lost or stolen, you can call the credit card company immediately and not be responsible for any charges an unauthorized user might have put on your card.  This is my favorite benefit that cards offer that has led me to rarely carry more than $20 in my wallet at any given time.  I sleep well at night knowing that if someone steals my wallet, I’ll only be out $20 in cash and the frustration of having to go to the department of motor vehicles to get a new license.

Another major benefit that many credit cards offer are rewards for using them.  I prefer cash back, American Express Blue Cash to be more specific.  I use this card for everything, saving money every time I use it.  Once I reach the second tier of rewards, I save 5% on gas.  My gas tank remains the same size, so it’s irrelevant whether I pay with cash or credit.

Credit cards also offer consumer protection.  If a credit card user purchased a good or service from a merchant that did not fulfill expectations, the user can contact the card company.  The company will then take up the battle with the merchant on your behalf.  One example of when using a credit card came in handy was when I purchased a text book online and was shipped the wrong one.  After contacting the seller numerous times to no avail, I was able to call my credit card company who then credited my account for the cost of the book.  If I had not used a credit card, I would have been out of luck.

While credit cards have a bad rap among many people, not all people that use them are “suckers.”  It is true that some people purchase more when using a credit card than when they use cash.  However, it is completely unfair to paint all card users with a broad brush and say they are fiscally irresponsible.  Credit cards are practical in many cases and if a person has enough self-control to use them properly, the benefits are enormous.  If you are a person that exhibits self-control, think about whether or not you would make a purchase if you were using cash, but continue to use credit cards and enjoy the immense benefits they offer.

I have about $29,000 in private student loans. I applied for a consolidation loan with Citibank. Once my credit was approved, Citi gave me the choice of 8% APR with a fixed rate or 6% APR with a variable rate. Which should I choose? – Steve, MA

Steve,
At first glance, the 6% annual percentage rate looks like the more attractive option because of its lower rate. However, this is variable which means the APR can increase over time, resulting in a higher monthly payment. This could catch you by surprise if you have not prepared for it. I would recommend the fixed 8% rate due to the fact that it gives you certainty when it comes to planning your finances in the future. You might question why I would recommend paying the higher rate, especially when paying 6% is more appealing than paying 8%. Assuming that there is no cap on your variable interest rate, it is a reasonable assumption that your APR could increase to 10% or higher and you will end up paying more.

In a related fixed vs variable rate situation, over the past five years, many homeowners took out “teaser” adjustable rate mortgages. These loans had lower interest rates than the prevailing fixed rates at the time. As a result, these ARMs made the payments more affordable at beginning of their terms. However, the party ended when interest rates increased and many of these homeowners were left unable to pay their mortgages. The moral of the story is that without being able to predict the future movements of interest rates, it is a safer bet to take the fixed rate over an adjustable one.

As an aside, one important thing to remember is that you are able to deduct student loan interest from your taxes if you meet certain criteria. For more information about deduction eligibility, please see Publication 970 on IRS’s website.