Keep unused credit cards current

Dear Liz: Citibank just sent us a letter saying that they have closed one of our credit card accounts due to nonuse. This is one of our oldest cards and it has a high limit. We have other credit cards, also with high limits, that we use regularly and pay off every month. Our FICO scores are excellent, above 750. Will Citibank's action affect our FICO score adversely?

Answer: In general, you want to try to keep open your oldest and highest-limit accounts to protect your credit scores.

But if you have other cards with high limits, the damage to your scores from this closure is likely to be slight and temporary.

More issuers are closing dormant accounts these days as their profits slip. In the past, they would have been happy to carry the accounts hoping that you'd come back, but not today.

If you want to prevent this from happening to your other dormant accounts, consider having some small expense automatically charged to each card. To reduce the hassle of writing a bunch of checks, you could arrange to have those cards paid automatically from your checking account.

Besides keeping the accounts alive, this approach ensures you get statements every month so you can monitor these accounts for fraud. Otherwise, an identity thief might be able to change the address on the account and run up considerable charges. You might not discover the problem until your excellent credit scores plunged.

Payday loans start a vicious cycle

Dear Liz: I did something very dumb and took out a payday loan. I paid that one off but then had to take out another one to get to the next payday. In all, I owe about $1,000 to various lenders. I can't seem to get out of the cycle.

Answer: With many problems, acknowledging that you've been an idiot means you're halfway to a solution. With payday loans, it's just the start.

You need to raise some cash. Sell whatever you can, have a yard sale, get a second job.

Look at every expense to see what you can trim. You may feel you've cut as far as you can; chances are, you're wrong. Check out sites like the Dollar Stretcher at www.stretcher.com to see how truly frugal folks live on incomes less than yours.

Once you're free of this debt, build a pad of cash so you're not tempted to resort to high-rate lenders.

You can start small -- $400 or $500 is enough to cover many minor emergencies -- and try to build it to a few months' worth of expenses.

Try not to solve this problem with another loan, even if it's from a friend or family member. If you're allowed to take another shortcut, you won't solve fundamental financial problems that led you to a payday lender in the first place -- and you're likely to be right back in this hole in a few months.

Think 'boring' for emergency fund

Dear Liz: I'm 28 and saving for retirement in my company's 401(k) plan. I've also managed to accumulate $10,000 in savings.

What is the best way to safely make this savings work for me and earn more money? Should I invest in stocks, short-term high-yield certificates of deposit or something else?

Answer: If this money is your emergency fund, forget about making it "work" for you.

An emergency fund's purpose is to be there when you need it, which means putting it in safe, liquid, boring investments such as a money market account, short-term certificates of deposit or a high-yield savings account.

You can find the latter at online banks, credit unions and some brick-and-mortar banks. Prevailing rates are around 3%.

You can research rates on savings accounts, money markets and CDs at sites such as Bankrate.com.

Liz Pulliam Weston is the author of the new book "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life." 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 at www.asklizweston.com. Distributed by No More Red Inc.