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Readers Inquire About Credit, Investments

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The Tampa Tribune

Published: July 27, 2008

It's time to devote another column to answering your e-mails, because I know the readers below aren't alone in worrying about their investments and wondering how to keep their credit reports clean.

DEAR JEAN: I've relocated to the United States after spending 30 years overseas. I have no credit history here. How can I begin creating one? - Shannon in Chicago.

DEAR SHANNON: What you need is a secured credit card. It looks like a credit card and works much like a credit card, but the difference is that you deposit a sum of money with the card-issuing company and that becomes your credit limit. The best secured cards will also pay you interest on your deposit. As long as you don't pay your bill late or go over your limit, the card should automatically convert to a regular credit card 18 to 24 months down the road. Voila, you have a credit history. You can find a list of secured cards at cardweb.com.

DEAR JEAN: I will be retiring soon. I have no debt, receive Social Security and alimony, but I don't know if they will cover my expenses. I have investments in the stock market and a 401(k), but the value of most funds is dropping. I could get a reverse mortgage or liquidate my mutual funds and purchase an annuity. Which is best? - Jim in Annapolis, Md.

DEAR JIM: This is the stage of your life where you want to stop taking as many risks with your money and lock into some sort of income stream. Both immediate annuities and a reverse mortgage could provide that for you, but reverse mortgages tend to have higher fees than good immediate annuities (and they're really best for people who know they want to stay in their homes forever).

"If you need more money for basic expenses than Social Security will provide, you might want to consider an immediate annuity. Deposit a small portion of your money in one, then put the rest in stocks and bonds so you keep ahead of inflation and have an emergency reserve," says Walter Updegrave, author of "How to Retire Rich in a Totally Changed World" (Three Rivers Press, 2007).

How it works: You purchase an immediate annuity with a chunk of your retirement funds and it provides a guaranteed stream of income for life. The amount you should deposit depends on how much you need to receive as income each month; just keep in mind that you won't be able to get the money back in a lump sum. I used Money magazine's IncomeForLife calculator to run some annuity scenarios for you, and found that if you purchase a $50,000 annuity, you'd get a monthly payment of $373. $75,000 would get you $560 monthly, and $100,000 would net $746. Of course, you may be able to do better by shopping around.

DEAR JEAN: How does canceling a credit card affect your credit rating? I really don't want to hold onto a particular card, but I am afraid canceling it will negatively affect my overall credit rating. - Pam in Long Island, N.Y.

DEAR PAM: It's not just an urban legend that canceling credit cards dings your credit score. That's because about one-third of your score is made up of something called your utilization ratio - the amount you have borrowed divided by the amount of credit you have available to you. By canceling a card, you shrink your credit line (the denominator), so the ratio takes a hit.

If you really want to get rid of this card - and there are lots of reasons you may want to, including annual fees and high interest rates - make sure that you're not planning to apply for a big loan on a car or a house in the next six months. Then, pay down a little bit of debt (the numerator) at about the same time you cancel. Don't cancel any other cards for the next few months and it should be a wash.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show."

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