Can canceling a card hurt your credit score?

>>> now to "today's money 911" where we answer some of your most pressing financial questions. courtney reagan, correspondent for cnbc, david bach , founder of finishrich.com and author of "debt free for life" and sharon epperson , cnbc's personal financial correspondent. good morning. too early to say happy new year?

>> happy birthday.

>> thank you, i was stretching it out one for day. first question e-mail, jacqueline in honolulu, hawaii, i havele examinent credit but i just canceled one card as i wanted another airline card. i was told it could hurt my credit score if i cancel a card. is this true? courtney , a lot of people wonder this. you hear this. what is the truth?

>> seems not to make sense but it does impact your credit negatively if you cancel a credit card . there are five factors that go in to determining that credit score , payment history, amount owed, types of credit , it's new credit and all of these things together make up that credit score . two of them make up your credit utilization, so the easiest way to explain this is with an example. if you have four credit cards , say that total is $30,000 of available credit and you have 10,000 of an outstanding balance. 10,000 divided by 30,000 is 30%, you're managing your credit fairly well according to the credit agencies. however, you cancel one of the cards you lose $10,000 of available credit , so now you're $10,000, over $20,000, you have a 50% credit utilization. not as good.

>> around 30% is a sweet spot .

>> keep it at 10% you may improve your score. that's what they want to see.

>> 10% would be ideal.

>> 10% boo be ideal.

>> david, next one for you, skype, kevin in sherman oaks , california, up early with us. kevin , good morning.

>> good morning.

>> go ahead with your question.

>> my wife and i have two kids, ages 3 and 1. plus a third on the way. we'd like to start some sort of college fund for them. we've heard about a 529 account, but don't know if this is the best option. what else is out there for us? also, if we do set up the fund, we set it up in their names or in our names?

>> first of all mostly you're speaking about saving for college and the key is to save automatically. so every time you get paid, whatever plan you use, you want to be saving every two weeks when you get paid. having that money removed from your checking account into whatever you choose to use for college savings. the 529 plan is what i use for both my kids. here's why. first of all it's in my name. i looic that. in your case it's in your name. i control the money, you control the money, the kids don't control the money. the money grows tax free until i take it out for education costs. it will be the same thing for you. so it's tax deferred growth and you control the money, that's the key. if you choose not to do a 529 plan , you can look at what's called an educational i.r.a. or a cloverdale account. i don't like those because you can only put up to $2,000 into it and it depends on how much money you earn so i choose the 529 plan , go to savingforcollesavingforcollege savingforcollege.com, review the 529 plans across the country. every state right now has a plan. in many cases the plan in your state will allow to you get an extra tax deduction , a small tax deduction but check based on your state.

>> thanks, kevin , hope that answers your question. another e-mail from michelle who writes, "our oldest daughter will begin college in the fall of 2012 . we established a 529 account for her years ago and contribute to it regularly. recently a high-interest cd of hers matured and we're wondering whether we should roll this into her 529. how does it affect the fafsa, and is there any advantage of having the money be in her name or in our names?" sophisticated viewer this is morning.

>> i have a 529 for my kids. i love it. the reason why it's terrific, this is in your name and when it's in your name, that's better for financial aid . you'll be assessed at a lower rate than it was in the students' name so that cd should go into a 529 plan , regardless of who the owner is, it will be assessed at the parents rate that's under 6% compared to the student's rate which would be assessed at 20%. the other thing that as david mentioned the tax free withdrawals and the growth tax free, that's great for financial aid purposes as well. the thing to remember, less than a year, couple months away from going to college, don't. you the this money all in equities. you can find cds, money market accounts within a 529 plan , that's where the money should be invested, savingforcollege.com a great place to go and also for financial aid .

>> lisa's question from granger, india indiana, i'm in debt, trying to climb out but there is no money left after paying bills. is there a way to attack debt load and still live a bit, that i'm not seeing?

>> i think this problem is two-fold. first thing is tackle that debt, make it as low as possible. the first thing i would do is call up the different billing companies or billing agencies that deal with the different debts that you owe. see if they will settle with you, if you agree to pay it a little bit sooner, perhaps even immediately, they will not knock some of that off. second prioritize those debts. pay off the ones that have the highest interest rates first so that's the first part. second part, stretch that income. what i want you to do is write down everything you spend for a month, everything from the rent that you pay to the soda that you buy at the gas station . it's going to be hard but it's like a food diary. will you see where every penny goes and it's much easier to cut back that way, and last but not least, make little cuts where you can. pack your lunch, carpool to work. all of that adds up in a big way especially if you do it over time .

>> thank you so much. good questions from our smart viewers and smart panelists, courtney reagan, david bach , sharon epperson thank you.