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Credit where credit is due — or not

TODAY Financial editor Jean Chatzky answers your tough debt and money  questions.
/ Source: TODAY contributor

Q: I have obtained a copy of my credit report. I have two outstanding bills for approximately $500 each (Con Ed and Sprint). Is it best to make a one-time payment in full to settle these accounts? (I am able to do so.) Or should I contact the collection agencies and ask to make arrangements to pay in installments? I want to do what is best to improve my credit score, as I am trying to purchase a co-op within the next three to six months.
A: According to a spokesman for Equifax, you're better off paying the collection company. In some cases, the creditor has sold your debt to the collector. In other cases, the creditor has just asked the collector for a helping hand (in exchange for part of the money recovered). But as it often won't be clear to you which one you're dealing with, dealing with the collector is the easier thing to do. And, personally, if you're able to settle the whole matter, do that, if for no other reason than to get the collector off your back.

As far as improving your credit score, though, it's tough for me to say how much of a bump (if any) clearing this matter up will give you. The further back in your credit history these unpaid debts were accrued, the less of a jump in score you'll get for making good. The best thing you can do for your credit future is to pay all your bills on time from now on. Then, when you go out looking for a mortgage, shop competitively.

Q: I was hoping you could e-mail me the links to each of the credit bureaus so I can ask for my report, which you've said I'm entitled to. I would really appreciate it. A: That's right — you and the rest of the country are entitled to one free credit report annually from each of the country's three large credit bureaus, Equifax, Experian and TransUnion. The best way to get these, though, is not to go through each company's Web site specifically (if you add a ".com" to the company names you'll get there), but to go to the joint site the bureaus have established for this specific purpose. The address is www.annualcreditreport.com.

Note: This is the only official, secure site the bureaus have established for the purpose of carrying out the free credit report mandate. Other copycat sites have been springing up like mad, naturally, but don't fall for them. In the end, most will cost you money. If you'd rather request your free reports by phone, you can do so by calling (877) 322-8228.

Q: I have had a few companies raise my credit card interest rate. They say it is because I have too much debt and am using a high percentage of my available credit. The fact that I have NEVER been late or missed a payment does not factor into this. Can you explain this logic to me? (My only answer is that they want to keep me on the hook for a longer time.)

A: I don't doubt for a minute that your answer hits the nail on the head — at least in part. But what the credit card companies will say is that because you're using a high percentage of your available credit (even if you're doing so on other cards), you represent a greater risk to them. They believe that, as you start using more and more of the money out there available to you, the possibility that you'll go on a bender someday and no longer be able to pay them back is increasing.

Their solution to this conundrum is to start charging you more money today to make up for that risk. If you think this seems unfair, I agree with you. But your only recourse is to call the particular credit card companies that are hiking your rates and complain. If they won't lower the rate once again, it's time to start shopping for another card with a lower rate, onto which you can transfer your balance.

Q: Hi. I was once told when I was canceling a few credit cards because I no longer wanted as many as I had that doing so can poorly effect my credit rating. I did, and my rating is still A-1. But I'm curious — can canceling credit cards negatively affect credit ratings?

A: You're lucky your credit wasn't hurt, but that won't always be the case. Every person who uses credit has something called a credit utilization ratio. That's the percent of credit you have available to you (if you add up all your credit lines) that you're actually using (if you add up the balances on all of your cards). That ratio is best when it's about 40 to 50 percent. The problem with canceling cards is that it actually reduces your available credit, which sends your ratio higher. That's why, even when you start using a credit card with a better interest rate, you might be better off putting your old ones in the freezer instead of closing your accounts.

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” and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day”(Portfolio, 2004). To find out more, visit her Web site, .