MONEY SMART KIDS Consolidate Credit-Card Debt by Janet Bodnar
I truly enjoy your advice for those of us in our 20s. My credit-card debt is around $3,000, divided among three separate cards, and I am wondering if you'd recommend consolidating this amount. Does consolidation hurt my credit score? Thanks for your help.
Thanks in return for your kind comments. Judging by the growing volume of e-mail I'm getting from readers like you, there's a big demand for information from young people who want to start out on the right foot financially, especially when it comes to credit.
To answer your question, consolidating three credit-card balances into one could hurt your credit score temporarily, but it might make sense to do it anyway.
As far as your credit score is concerned, what counts is how close you are to your credit limit. Fair Isaac, the company that compiles those oft-quoted FICO scores, prefers to see a borrower with three cards, each using less than 50% of its available credit, rather than one card using close to 100%. "The closer you are to 100 percent of your credit limit, the bigger risk you're considered to be," says Craig Watts of Fair Isaac.
But unless you plan to apply for a major loan in the near future, that doesn't matter. If you want to consolidate for a good reason -- to take advantage of a lower interest rate, for example -- go for it. As long as you pay promptly and reduce the remaining balance, your score will rise again.
If you do combine your balances onto one card, don't close the old accounts. Having only one account makes it look like you're much closer to maxing out your available credit. And if you have a stellar history, those old accounts look good on the record of a young borrower.
If you'd prefer to close the accounts on principle, to avoid being tempted to run up your balances, go ahead. Once again, your score could be hurt in the short term, but it will recover.
Instead of trying to micromanage your credit score, you'd be better off following some basic rules: Pay on time. Use credit sparingly, keeping your balances to less than 50% of your available limit. And don't open too many new accounts at the same time.
"If you're fresh out of college and you open six accounts, that's way above average, and it could lower your FICO score," says Watts. "If you've been managing credit for 25 years, you have a lot more latitude."
GETTING STARTED
