Credit-Score Roulette

I have four or five credit cards with zero balances that I have not used in at least six months. I'd like to close them, but I don't want to hurt my credit score. What do you think? My score is over 800. -- D.B. Macomb, Mich.

Closing card accounts you don't use is a good idea because card issuers are expected to impose all kinds of fees -- including inactivity fees -- now that the new credit-card law limits their ability to hike interest rates. For example, Fifth Third Bancorp recently added a $19 inactivity fee if its credit card isn't used for a 12-month period.

But closing card accounts can lower your credit score because of the impact on your "credit-utilization ratio," which is the total of your credit-card balances divided by the credit limits on all of your cards. If you close cards you haven't used in a while but don't pay down the balances on your other cards, your score could drop because your total balance will account for a higher percentage of your overall credit limit.

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The impact on your score depends on how much your credit utilization goes up. If your utilization ratio goes from, say, 7% to 15%, then your score will go down a modest amount, says John Ulzheimer, president of consumer education for Credit.com. But if it goes from 7% to 85%, then your score could drop from your current level of 800 into the low 700s or high 600s.

The best strategy is to pay down your balances before closing any card accounts so that you minimize the impact on your credit score. "A better long-term approach is to keep credit-card balances low," says Craig Watts, of FICO, which calculates the most widely used credit score. It's the balance on the date when the score is pulled that counts.

A bad deal for borrowers

I need cash fast. I know I'll be getting a fat tax refund, but I haven't had time to do my tax return yet. What do you think of refund-anticipation loans? -- R.L,Falls Church, Va.

These loans are a bad deal for borrowers. True, they provide money equal to your tax refund quickly, but they generally charge high interest rates and fees. A study by the Consumer Federation of America and the National Consumer Law Center found that the effective annual percentage rate for refund-anticipation loans can range from about 50% (for a $10,000 loan) up to nearly 500% (for a $300 loan) when you include interest charges and refund-account fees.

You can get your refund in as few as ten days -- without fees or interest charges -- if you e-file your taxes with the IRS and have the money deposited directly into your bank account. If your income is $57,000 or less, you can prepare and file your taxes free at www.irs.gov/freefile.

Roth-contribution redo

I put $5,000 into my Roth IRA last April. In September, I got married and our combined income put us over the limit for contributing to a Roth. What will become of the $5,000 I put in the IRA for 2009? -- Eric Abercrombie, Seneca, S.C.

It doesn't matter that you were single when you made the contribution. The fact that you were married by year-end means that you can't contribute to a Roth if your combined income on a joint return is more than $176,000 -- the cutoff for married couples. So you basically need to make your Roth contribution go away. There are a couple of ways to do that.

First, you can simply withdraw the $5,000 and any earnings on it (the IRA sponsor will figure the earnings for you). The earnings will be taxed as 2009 income and, if you're younger than 59, hit with the early-withdrawal penalty of 10%.

The second option is to "recharacterize" the Roth contribution as a nondeductible contribution to a traditional IRA. If you take this approach, you'll need to file a Form 8606 with your tax return reporting the contribution. Here's the good news: After you go through some paperwork to switch your contribution from a Roth to a traditional IRA, you can immediately convert the traditional IRA to a Roth.

Starting this year, the income-eligibility limit for Roth IRA conversions disappears, so anyone can convert to a Roth. If your traditional IRAs are funded, like your 2009 contribution, solely with after-tax contributions, you will owe taxes only on the earnings when you convert your IRA to a Roth. But if you've made both tax-deductible and nondeductible contributions to traditional IRAs over the years, then the tax-free portion of your conversion will be based on the ratio of nondeductible contributions to the total balance in all of your traditional IRAs.

Trimming investing losses

Given that stock prices have fluctuated so drastically over the past decade, do you think putting stop-loss orders on some or all of my stocks is a good idea? -- Gerard Panebianco, West Islip, N.Y.

A stop-loss order is a reasonable way to give your stocks (or other kinds of investments) room to run while providing a measure of protection. If placed with your broker, such an order automatically triggers a sale when the stock reaches a set price. Say you own a stock that trades for $10 a share. You can place a stop-loss order to sell the stock if it falls to, say, $9 a share.

A "trailing stop-loss order" may be a better strategy. You set a stop-loss point for a certain number of dollars or a certain percentage below the stock's current price, and the order adjusts as the stock price rises. For example, if you put in a trailing stop-loss order of 10% on a stock that currently trades at $10 a share, the stop-loss point is $9. If the stock rises to $11, the new stop-loss is $9.90.

My thanks to Tom Anderson for his help this month.