Daily Press (Sunday)

Credit score cautions

- Motley Fool

Q. Will it really hurt my credit score if I close some credit card accounts? — P.S., Anchorage, Alaska


Sorry, but yes. The FICO score is among the most commonly used, and about 30% of your FICO score is tied to how much you owe relative to your available credit.

If you have five credit cards with a total credit limit of $50,000 and you owe $25,000, you’re using 50% of your available credit. But if you close two accounts and your total credit limit drops to $30,000, you’re suddenly using most of your available credit, and a bank might not be eager to lend you more.

Meanwhile, 15% of your FICO score is based on the length of your credit history. If you close out cards that you’ve held for many years, that can lower the average age of your accounts, which also lowers your score.

Q. What’s a shell company? — A.D., Conway, Arkansas


It’s a generally legal structure that can have a legitimate purpose, such as when it’s a special purpose acquisitio­n company, or SPAC, formed to acquire another company.

But shell corporatio­ns have a shady reputation. The Corporate Finance Institute minces no words: “A shell corporatio­n is a business that is formed that has no actual business operations. They are mostly created for money laundering. … They do not employ anyone or provide any services. Shell corporatio­ns are created in tax havens to avoid paying taxes and to hide the identity of the owner. If an individual is involved in an illegal activity, a shell corporatio­n can be a platform to hide money.”

Shell companies are often establishe­d in countries with very business-friendly laws or low tax rates (such as the Cayman Islands or Switzerlan­d).

Put your math hat on

To be an effective investor, you’ll need to use a little math from time to time. Here are a few examples of investing-related math concepts to understand.

First, imagine buying into the Home Surgery Kits Co. (ticker: OUCHH) at $50 per share and seeing it rise to

$100. The share price doubled, and some refer to that as a “two-bagger” gain. Note, though, that when something doubles, it grows by 100%, not 200%. A 200% gain reflects tripling, and a 300% gain quadruplin­g.

Now, remember that when OUCHH rose by $50 to $100 per share, that was a 100% gain. But if it rises another $50 to $150, that’s a 50% gain — because $50 is 50% of $100. Another $50 gain, from $150 to $200, would be a 33% gain, as $50 is 33% of $150.

Here’s some more math that might surprise you: Imagine that the Two-Legged Stool Co. (ticker: OOOPS) falls in value from $80 to $40. That’s a 50% drop — the stock price was cut in half. You might assume that it needs to rise by 50% for you to break even, but no: Once it falls by 50%, it needs to grow by 100% to get back to the starting price. Once it’s at $40, it needs to grow by another $40 to reach $80.

If the stock drops 75%, from $80 to $20, it will need to quadruple, gaining 300%, to get back to $80. Even a more modest 20% drop in value will require a 25% gain to recover. As the drop gets bigger, the required return for a recovery gets much bigger. That’s good to understand when you’re waiting for recoveries. If you no longer have much confidence in a stock, don’t wait for a recovery — move what’s left into an investment you do have faith in.

Remember to focus on how you expect a stock to perform in the future, too, without thinking too much about how much it has risen or fallen. What matters now is how it’s likely to do from this moment on.

 ?? ??

Newspapers in English

Newspapers from United States