Michelle’s Mailbag: Credit card limits and saving while you’re young

Michelle Singletary
Columnist May 13, 2013

This new online feature allows me to answer the questions I couldn’t get to during the live chat and to respond to questions you send by e-mail (colorofmoney@washpost.com), Twitter (@SingletaryM) or Facebook (www.facebook.com/MichelleSingletary.com)

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

Limits on credit cards

Q: Michelle, do you know if not having a credit limit on a credit card (AMEX, actually) can adversely affect your credit score (I’ve been told that by a loan officer)?

Michelle: Your credit limit does matter but only as it relates to how much debt outstanding you have on any one credit card and all of the cards together.

One of the top factors that go into your credit score is amount owed. It makes up about 30 percent of the FICO score, the one most used by lenders. Your credit limit falls into this category, according to the FICO scoring model.

Your credit limit comes into play when figuring your “credit utilization rate,” which is the amount of credit you are using. You want to keep this percentage at least 30 percent or below. For example, if you have a $10,000 credit limit, you don’t want to have more than $3,000 outstanding.

If you have a credit card that doesn’t have a preset limit and you have outstanding debt on it, your score could be negatively affected.

But the fact is your credit limit shouldn’t matter if you don’t revolve any debt on the card or cards, anyway. Your goal should always be to pay off your balance every month. Then you won’t have to worry about credit limits or your credit utilization rate.

Best Advice for a 20-something

Q. I’m 25 and I’m lucky enough to have gotten a full scholarship to pay for college. I have no debt, but I’m not exactly in a lucrative field, either. I have a steady job, but my money comes in and then it goes out, for rent and other bills. I don’t currently have a retirement account because none of my employers have offered one. What goals should I set now, and what can I do to best achieve them?

Michelle: Your number one financial goal right now should be to let time be on your side. The younger you start saving and investing the more of a habit it will become and the more money you will have for retirement.

I want you to start saving automatically. Set it and forget it. If you wait to save after your bills are paid, you will run out of money. But if you make savings your top priority the money will be there because you’ll have to cut other expenses (hint: eating out, basic cable, etc.). You can set your savings and forget it by having a set amount of money taken out of your paycheck or set a certain percentage every time you get paid. Start with $25, if you can, or a goal of 10 percent. Have the money directly deposited into a checking or savings account separate from the accounts you use to pay your bills every month.

Although it would be great to have a workplace retirement plan, you can save for retirement on your own through an IRA or Roth IRA. Check with any financial institutions and you can get help setting up a retirement account.

LovelyLemonDrop @MsRedKiki : Close on my first home Monday. What are the pros/cons of paying my mortgage biweekly? Would you recommend?

Michelle: I wouldn’t recommend paying for something that you can do yourself for free. It can cost as much as $300 to set up a biweekly mortgage plan with a lender, and you may have to pay a monthly fee. With a biweekly plan, all you’re doing is making one extra mortgage payment every 12 months. Depending on your interest rate, making the one extra payment a year with a 30-year loan can cut the loan term to about 22 years.

If you feel you’re not disciplined enough, then have money taken directly out of your paycheck and deposited into your savings account.

To simulate what the lender will do for you, just divide your monthly mortgage principal and interest payment by 12 and then add that amount to each monthly payment and clearly marked as “extra principal payment,” says Robert J. Bruss, who writes the Real Estate column for The Washington Post.

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