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Dear Liz: I have paid off my credit card bills each month for years, and I am becoming increasingly frustrated with credit card requirements. I canceled an American Express card because a fee was about to be imposed.

Yet most articles on credit cards say that one should never cancel a card. In a recent column in my local paper, you wrote that applying for a new card could ding my credit. So now I can’t cancel a card or get a new one without harming my credit rating? Where is the logic in this? Should I just cancel all of my cards and go back to paying by debit card and checks?

Answer: Probably not, because another thing that can hurt your credit is not using credit. In order to judge your creditworthiness, the scoring formulas need to see how you’ve handled credit in the past. If you stop using credit entirely, eventually your credit reports will stop generating credit scores.

That doesn’t mean you have to carry credit card balances. Using cards as you have been, as a convenience only, is a great way to keep your credit scores in shape without paying unnecessary interest.

You need to keep in mind that credit scoring formulas were designed for lenders, not consumers. Credit scores’ primary purpose is to predict a borrower’s risk of default, and their logic is based on identifying the behaviors that increase that risk.

Because both opening and closing accounts are associated with a higher risk of default, both actions may hurt your scores.

That doesn’t mean you should never open or close an account, but you should do both sparingly and not when you’re in the market for a major loan.

Dear Liz: I was disappointed with your answer to the person who wanted to settle student loan debt for less than what he owed, even though he had a windfall that would allow him to pay the balance in full. This person presumably benefited from the education that these loans provided and now could afford to pay them back. Why did you offer advice that would allow him to avoid that responsibility?

Answer: As you’ll recall, the writer originally borrowed $50,000 in federal student loans almost two decades previously but had received an annual forbearance ever since. Forbearance indicates the writer suffers some kind of ongoing, demonstrable hardship such as poor health, partial disability or inadequate income.

The unpaid balance had swelled to $155,000 because of interest and fees. Although the windfall would allow him to pay the debt in full, it wasn’t clear whether the problem that caused the need for the forbearance had disappeared. If not, then conserving some of the windfall might be a prudent option.

There are those who believe that paying the full balance of any debt is a sacred obligation, no matter how much damage such an action may do to a person’s financial future. Others would allow that there are shades of gray and that past and future obligations must be weighed against each other.

In any case, the writer isn’t going to be able to settle the debt for pennies on the dollar, as he might be able to do with other bills, such as credit card debt. Settling student loan debt is tough, because the Department of Education has many tools to force borrowers to pay.

As the previous column noted, what the department might be willing to do is forgive some of the accumulated interest and fees, according to student loan expert Mark Kantrowitz of FinAid (www.finaid.org).

Dear Liz: Do you foresee the $8,000 tax credit for first-time home buyers extending beyond the current Dec. 1 deadline?

Answer: When it comes to taxes, nobody has a crystal ball. You’d be smart to take advantage of the credit now if you’re financially able to buy a home and willing to stay put for a while rather than hope the credit will be extended and be disappointed.

If you’re not ready to buy a home, though, no tax incentive should rush you into the purchase prematurely. Savvy buyers make sure they have a decent down payment (10 percent is good, 20 percent is better), that they can afford the payments using a 30-year, fixed-rate loan and that after closing costs are paid they still have savings equal to at least three mortgage payments.

Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form atwww.asklizweston.com.

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