Thursday, July 31, 2008
A few days ago I had an interesting conversation with a friend. She knows about my interest in credit. I had not seen her since launching this blog, so I took the opportunity to promote it. What she said next surprised me. Instead of reading my daily blog entry (something that should take no more than five minutes a day), she said that she would rather have one-on-one time with me. Uh, no. That's not how it works.
Amazed, I had her reiterate that she did not have five minutes a day to read my stuff. With a straight face, she told me that she did not. Sigh. I'm now wondering if that's the problem with most of the people I run into on a daily basis. Are these people -- who know so little about credit -- strapped for time? I doubt that's it.
I'm thinking that people don't care enough about credit to make time for it. That seems to be the real problem. I'm thinking that people are making an opportunity-cost decision when foregoing credit education. If they're learning about credit, then they're not able to watch as much television. If they're learning about credit, then they're not able to kill their free time in other ways. At the end of the day, then, there just isn't enough free time (or so the thinking goes) to get up to speed on credit issues.
Given how important credit is, I am shocked that people refuse to educate themselves. The Internet is the single-most important technological breakthrough that has occurred during my lifetime. We have so much information at our fingertips. To not utilize that resource (for just five minutes a day) is mind boggling to me.
To be sure, understanding all of the ins and outs of credit is not easy. It takes study and it takes time. Still, if you're not even willing to take five minutes out of your day to get a basic education, then it's hardly surprising to learn that these very same people are carrying balances at 25% a year. These people couldn't tell you the difference between FICO and FICA (aren't they one and the same? a guy once asked me). They're perfectly content to know as little as possible when it comes to credit. If that's some kind of achievement, then some of these people are overachievers indeed.
Luckily for you, you're not one of those people who couldn't care less about credit. (In fact, if you were, you wouldn't be reading this CreditMattersBlog.com entry right now.) Becoming a savvy credit consumer takes time and work, but it's not difficult to master.
Dedicating just five minutes a day -- to a blog such as mine -- makes the education process a lot more enjoyable (and a lot less painful).
Thanks for being a regular reader. And thanks for listening.
Wednesday, July 30, 2008
That's right. Don't let your credit card accounts get dusty. If you've got several cards that you haven't used for a while -- longer than six months -- there's a chance that they're no longer being updated with the credit reporting agencies. If that's the case, you could be losing FICO points. What's more, in this credit environment, there is a good chance that a creditor will close the account too.
When you sit down and give it some thought, it does make sense that inactive, or dormant, accounts are discounted in the FICO scoring formula. Here's why: FICO is a risk-assessment tool. Lenders use the score to predict the likelihood that a consumer will default on a loan, be delinquent by more than 90 days on at least one account, or suffer a bankruptcy over the next two years. FICO figures that if you're not using credit -- which would help it measure the risk you represent -- it won't include it in the score. Which is why parts of the FICO formula completely ignore inactive accounts.
It turns out, by the way, that utilization formulas completely ignore inactive accounts. Given that some 30% of your score is derived by calculating the amount of credit you're using (link here) (in relation to the amount of available credit you have), one can see why it's important to keep accounts active.
Consider this example: You have three credit cards. Each of those cards has a $5,000 credit limit. Assume that you use one of the cards religiously, using, on average, $3,000 of the limit each month. Moreover, imagine that you've allowed your other cards to go inactive. Instead of FICO using all $15,000 of your available credit in its model, it now uses just $5,000, which represents the one card that you have kept active. It's easy to see why you'd take a score hit in this scenario. As far as FICO's concerned, you've only got $5,000 in available credit (it ignores the other $10,000). As a result, your utilization ratio appears to be 60% ($3,000 of the $5,000 being used) -- when it should really be just 20% ($3,000 of the $15,000 being used).
In the lead paragraph of this blog entry, I used the word "chance." I italicized that word because some credit card companies, regardless of whether you keep the card active, report to the credit bureaus regularly. Indeed, I've got a Home Depot card, for example, that I have not used in more than a year. Yet, just like clockwork, the card gets updated each month. As a result, that card is being factored into my utilization ratio.
Still, that doesn't mean I should keep ignoring the account. At some point, there's a strong possibility that Citibank (which underwrites the Home Depot card) could close the account for inactivity. It costs the credit card company money to administer the account on a monthly basis (plus, it costs the credit card company money each time it reports my account to the credit bureau). If you're not using the account, the card company figures that it may as well save itself some money by closing it. I've had that Home Depot card for about five years. I'd hate to see it go. I think I'll be smart and put a little purchase on the card during the next week.
There's also another potential problem that customers don't think about. If the card company closes your account (because of inactivity), and you have amassed a bunch of rewards points, there's a chance that you could lose the rewards. Read the fine print of your credit agreement to see how your card company handles this scenario.
If you've been neglecting one, or several, of your cards during the past year, you might want to check to see when your creditor(s) last updated the account(s). You can do that by pulling your credit report. If you find credit card accounts that haven't been updated in more than six months, you might consider taking the card out for a spin. After that, you should get in the habit of rotating your cards at least once a quarter.
Your credit card company will appreciate it (because of the merchant fees) and your FICO score will appreciate it, too.
EDIT (October 25, 2008). Since originally writing this story in July, it's become very obvious that card companies have stepped up account closures because of inactivity. I can't emphasize this enough: if you want to keep your cards open, be sure to use them on a regular basis. It used to be OK to use the card every six months. No more. I would recommend using cards every other month. Once every three months seems too risky in this environment.
Tuesday, July 29, 2008
If you aren't doing business with a credit union, you're missing out.
Everybody should be doing business with a credit union. They're easy to join, they're easy to deal with, and they're needed -- for diversity purposes -- in today's era of big banks. Consolidation in the banking industry has left consumers with fewer and fewer options. I'm constantly surprised when friends and acquaintances tell me that they've only got one banking relationship and it's with one of the huge bank conglomerates (such as Wells Fargo, Bank of America, Chase, Citibank, etc.).
I'm not suggesting that you dump your banking relationship. Instead, I am suggesting that you open a credit union account in addition to your mainstream bank account. Credit unions often have awesome deals on loan products. Because credit unions primarily exist to serve their members (and not to turn huge profits), they're able to offer lower interest rates on loan products, lower fees, and higher interest paid on deposits.
Take Pentagon Federal Credit Union, for instance. It was recently offering 4.25% on auto loans (which included both used and new autos). Though the rate was recently upped to 4.5%, the deal is still solid. Penfed, which is what many people call Pentagon Federal, also has some great credit cards. My favorite, of which I recently opined, is the Pentagon Cash Rewards card. The card offers 5% back on gasoline purchases (at the pump), 2% on supermarket purchases, and 1.25% on everything else. Getting 5% back on gas purchases makes this card a no-brainer. For more information, read about the card here.
To be sure, credit unions aren't always conveniently located. Penfed, for example, does not have a branch where I live, which means that I can't drop by to visit my money. But that's OK. I use my Penfed relationship for credit cards and other loan products. It's not my main source for deposit accounts. Same goes with my NASA credit union account. I don't have much in the way of deposits with the credit union, but I do have a credit card. Both credit unions offer credit limits that go as high as $50,000. That's the kind of limit I am looking for. It's the kind of card that can grow with you over time. (Do note that most credit unions will request two recent pay stubs if you apply for a credit card.)
According to one of my readers, Awedio, NASA, as of August 1, 2008, was pulling Equifax when you joined the credit union. What's more, if you applied for a credit card or loan shortly thereafter, NASA pulls another Equifax report. That second credit inquiry is good for up to 30 days (meaning you could apply for several products during that 30-day period without incurring another hard inquiry). As for Penfed, it pulls Equifax when you join the credit union. Penfed will use that same Equifax pull for up to 60 days. Thus, unlike NASA, Penfed will only pull one Equifax report -- and you'll be able to use that pull for multiple products during the first 60 days. Thanks, Awedio.
Credit unions also offer excellent customer service. Most don't offshore their calls -- even after hours. During the day, you'll deal directly with the credit union staff. After hours, you'll be dealing with a company that has been outsourced to handle the credit union's customer base. Best of all, outsourcing is done with U.S.-based representatives. (If your credit union is off-shoring its customer service, please leave a comment at the end of this blog entry. I'd like to know which credit unions are moving their customer-service operations offshore. Thanks.)
What's more, your share deposits are just as safe as they'd be if they were sitting in an FDIC bank. Credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF), which is part of the National Credit Union Administration (NCUA). The insurance coverages are in line with the FDIC limits. An individual with several non-retirement accounts will be insured up to $250,000 total. (With the government bailout, the limit is now $250,000 until December 31, 2009. See NCUA press release here.) In other words, if you have (in your name alone) a regular share account, a certificate of deposit, and a share draft account, they'll be calculated in the aggregate -- meaning that you shouldn't allow all three of those financial instruments to be worth more than $250,000 combined. (With the government bailout, the limit is now $250,000 until December 31, 2009. See NCUA press release here.) If they are, you'll need to take the excess and move it elsewhere (to another credit union or bank, for example). That same individual will also -- separately -- be able to have an IRA that's insured up to $250,000. For more information, here is a link to NCUA's Web site.
Finally, doing business with a credit union also provides diversification. Just as having several credit cards -- with different lenders -- is important, having a relationship with several banks and credit unions is likewise important. In today's ever-shrinking banking world, it just makes a lot of sense to do business with credit unions as well. My friend Trevor, a guy who is a real genius when it comes to credit strategies, also makes this point: when a bank sees a credit union on your credit report, it knows that you have options. Diversity, Trevor says, is power. Amen, Trevor. Having options is imperative. That's why I always recommend that people have more than one credit card from one creditor. You never know when a creditor will get an itchy trigger finger.
Now that you know about the importance of doing business with credit unions, it's time for you to start doing some homework. Indeed, you don't want to join just any credit union willy-nilly. Always do your homework. I'd start with the big ones first (but don't ignore your local credit union, either). I'd look into Pentagon Federal (doesn't pull ChexSystems to qualify you for membership), Patelco (does use ChexSystems for checking accounts; not for savings), and the Navy Federal Credit Union (does not use ChexSystems, but there are other eligibility requirements that must be met; bankruptcy friendly). These are all solid institutions that treat their members well. By the way, I also like NASA (it does use ChexSystems). Even though it's not one of the "big ones," it's a credit union that I would look into. They've always treated me extremely well and customer service is very good.
Monday, July 28, 2008
American Express cardmembers: you're being watched -- closely. That's the takeaway from American Express's second-quarter earnings conference call, which was held July 21.
Chief executive Kenneth Chenault, responding to a question from an analyst, said that American Express has been targeting cardmembers for credit-line reductions who live in some of the most challenged real-estate areas. The targeting, though, has been "very, very surgical against those customers that we believe, based on our modeling, have a higher risk," Chenault said. But it's not just real-estate hampered cardmembers who are being scrutinized.
Daniel Henry, chief financial officer, said that American Express continues to "see the big significance in geographies where housing prices have fallen the greatest, but recently we have actually started to see a greater impact in customers who were in that middle cycle band. Generally it is customers with low FICOs where you see the greatest impact and we are certainly seeing it there." But, he added, "we are now seeing it creep into FICO scores of people between 650 and 750."
In other words, folks, American Express is monitoring the situation closely. Its models are scouring customer lists, looking for any sign of distress. Knowing this, it's not surprising that there has been an upswing in the number of American Express cardmembers who have seen their balances "chased." This happens when you pay off part of your balance and American Express reduces your credit limit to just above your new balance. So-called balance chasing makes the customer look as though he or she is maxed out on the credit card as well, which hurts the customer's FICO score. It's bad news for the customer.
So what do I go out and do -- about 24 hours after the conference call ended? You can see this coming from a mile away, huh. I applied for an American Express card, of course. Even in the face of all this American Express doom and gloom, I figured that there was no better time than the present for me to grab my first American Express card. My scores were solid (somewhere between 740 and 760) and I was applying for a charge card (as opposed to a credit card).
My thinking, leading up to the application, went something like this: I don't live in an area of the U.S. that has been hit hard by real-estate issues. In fact, the real-estate market where I live is holding up remarkably well. Give me a point. Next, my credit history is lengthy and my record is strong. Chalk up another point. Rather than applying for a credit card (which would be assigned a credit limit), I decided to go for a charge card. Charge-card purchases must be paid off -- in full -- every month. American Express won't need to monitor my month-to-month balances. There won't be any. Give me another point. I plan on using the card regularly, which is what American Express's "spendcentric" business model (use it or lose it) prefers. Give me yet another point. In sum, I figure that I look like American Express's model customer. Not surprisingly, I was approved instantly.
By the way, I fully expected the approval. As part of my homework, I learned that American Express has historically been more lenient when it comes to charge-card approvals. During the second quarter, charge-card applicants (who were approved) had, on average, a FICO score of 738. The average credit-card applicant, meanwhile, had a score of 750. (Note that American Express does not rely on FICO scores exclusively to approve cardmembers; instead, it uses its own internal scoring system, which gives FICO between 20% and 25% weight in the internal-scoring model. The source for the 20% to 25% figure comes from American Express's August 6, 2008, Financial Community Meeting. The figure was given during the Question and Answer portion of the conference call.)
Here is the FICO chart that American Express used during its second-quarter earnings conference call:
(If you're interested, here is the pdf file to the rest of the slides that were presented during the earnings conference call. In the meantime, if you are an American Express cardmember -- or thinking about being a cardmember in the future -- you should absolutely read the transcript from the earnings call. I was able to glean a ton of information about the company's cards and philosophy. It can be accessed here.)
EDIT (August 7, 2008): Since publishing my original blog entry, American Express has rolled out another presentation. The company held a financial community meeting on August 6, 2008. During that financial community meeting, Al Kelly, president of U.S. Card Services at American Express, presented his view of current market conditions. He zeroed in on American Express's US portfolio. One particular slide (picture below) was interesting.
Look at some of the card actions that American Express has been taking in its card portfolio. Bullet point five means that American Express is not tolerating people who don't use the card. Additionally, American Express is stepping up its monitoring of those who have high limits. I haven't changed my stance. Watch your back when it comes to American Express. They've got a microscope on everyone. If you are interested in hearing the conference call, here is the link (2 hours 42 minutes).
If you'd rather read the transcripts from each of the presenters, you can read them here (Ken Chenault), here (Al Kelly), and here (Ed Gilligan). The transcripts, meanwhile, do not cover the Q&A portion of the call. You'll have to listen to the audio if you want to find out what was said on the Q&A. END EDIT.
Just as an aside, American Express rolled out its first charge card in 1958. From the beginning, American Express has always been a paid-in-full kind of outfit. That's its core competency. It stayed that way until 1987, when the company unveiled its first credit card (a card that could be paid off over time). When I applied for the charge card last week, that's exactly the kind of information that was floating through my mind. I wanted to resemble what I figured American Express would classify as its classic customer. As a result, I felt that getting a charge card, which I'd have to pay in full each month, was the right move.
As for my friends who already have an American Express relationship, I'm frank with them. No one is immune from American Express's risk modeling right now. Still, I am telling them to keep balances low throughout their entire credit portfolio (American Express does a lot of account reviews). I'm also recommending that they keep no balances on their American Express accounts. They should also carry a backup card or two (Visa, Mastercard, or Discover) just in case American Express shuts their cards down at the most inopportune time (like when you're on vacation in Europe, for example). Moreover, I'm telling them to keep their American Express cards active. In essence, I think the best course of action, during this difficult credit climate, is to look as much as possible like the American Express customer of 1958 to 1986.
I've got my American Express game plan in place.
•Read More American Express Stories Here Read More...
Thursday, July 24, 2008
Last week I was talking with someone that I consider both intelligent and business savvy. We got to talking about her small business, which, despite a tough economy, is doing well. After a while, I started asking her about her business expenses -- and about the business credit cards that she uses to fund those expenses. She said that she doesn't have any business credit cards. Instead, she funds many of her expenses with personal cards. Say what?!? Yeah, that's what I was thinking, too.
Given her background, and given her business acumen, I figured that others might be doing the same thing. Curious, I called another friend who runs a small law office. He said that he doesn't have any business cards, either. The day-to-day expenses, he said, are purchased with personal cards. I was surprised.
When I was thinking about starting my own small business last year, the first thing I did was look into a credit card that I could use exclusively for my business. I never thought about using a personal card for those purchases. Indeed, why would I want to run my business expenses through one (or several) of my personal credit cards? I wouldn't. And neither should my friends.
Here's why it makes more sense to get a business credit card for your business. First, it's always smart to keep your business expenses separate from your personal expenses. Don't commingle the two. A business card -- that's only used for business expenses -- makes it easy to segregate business expenses from personal expenses.
Second, those business expenses (and the monthly balances) could be having a negative impact on your credit score if they're being paid for with a personal credit card. Think about it. If you're using a personal credit card with a $20,000 limit, and you're running $15,000 a month in business expenses through the card, that's a lot of utilization -- utilization that's being reported to your personal credit report. That kind of utilization is likely dragging your FICO score down. (Read about utilization and its impact here.)
Worse, if you apply for a new personal credit card, while you have this kind of utilization on one of your personal cards, you could get denied. It won't matter that the utilization problem stems from your business. Try explaining that to the underwriter that just denied you. The underwriter will see that your personal cards are being over utilized and conclude that you're a credit risk.
Still, you're probably scratching your head trying to figure out how a business card would change your plight. After all, expenses are expenses. And credit cards are credit cards, right? Wrong. As it turns out, most business credit cards (and those huge balances) are not reported to your personal credit report. As a result, your scores won't suffer because of your business expenses. Which means that you won't have to worry about utilization ratios that have nothing to do with your personal life. It all seems so logical. And yet I have two small business owners telling me that they've always used personal credit cards to pay for things that are clearly business related. Go figure.
Both of these people are now going to apply for business cards. But before doing so, here's what they need to know. The credit card company will pull their personal credit reports to see if they're creditworthy. The applicants will also have to agree to be personally liable for the debt that's accumulated on the business card. In other words, the card applicant will agree to be the personal guarantor of the purchases. The legal significance is that the applicant wouldn't be able to shift the expenses onto the business if the business went under. Instead, the applicant would be responsible for those expenses.
Given that reality, it's easy to see why the credit card company would pull the applicant's personal credit report. The creditor simply wants to make sure that the personal guarantor isn't a deadbeat. Assuming they're not, they'd likely get approved for the card. After that, the only time that the personal credit report could come back into play is if the borrower defaults on the credit card obligation. Only then would the credit card company report the bad debt to the person's credit report. Barring that scenario, the business card will never be reported to the small business owner's personal credit report. (In the meantime, your business card could get reported to a business credit report that's maintained by Experian or Equifax. This would be good news for your business. Many creditors (not credit card companies) pull your business credit reports when they're deciding whether to extend credit to your business.)
There are several business cards available. I'd stick with the major players. Bank of America (business cards here), Citibank (business cards here), American Express (business cards here), and Chase (business cards here) all have several business offerings. Also make sure that you get a true business card. Citibank, for example, peddles a card called the Citibank Professional card. It's a hybrid card that serves both as a personal and business card. Unfortunately, it also gets reported to personal credit reports. If one of your goals is to keep your business expenses from harming your personal credit score, then stay away from the Citibank Professional card. Instead, check into one of Citibank's true business-card offerings, such as the CitiBusiness card. The same goes for the Chase Quicken business card. It, too, reports to personal credit reports.
Note that many of these business cards also offer some excellent balance transfer deals. If you're not paying your business expenses in full each month (and they're accruing interest on your personal cards), you should take advantage of these 0% offers. Chase, for example, has a card called the Chase Business Rebate Card (application here). It offers a 0% balance transfer deal that lasts 15 months. The only caveat is that your transferred balances must consist of business-related expenses. I assume your balances do.
If you're running a small business -- and using personal credit cards to fund expenses -- do yourself a favor and look into getting a business credit card. Not only will it be easier to track your business expenses (many business cards provide online tools that make it easy to manage expenses), but your credit score will appreciate the move as well. Read More...
Wednesday, July 23, 2008
Yesterday we wrapped up our look at the terms and conditions that often accompany online credit card applications. Today we'll conclude by looking at the credit card application itself. For illustrative purposes, we'll once again be using Bank of America's WorldPoints Platinum Plus Mastercard application.
The credit card application isn't difficult to navigate. However, it is fraught with potential moral dilemmas -- especially as it pertains to income and other financial information. But we'll get to that a bit later. In the meantime, the application starts off with a bunch of softball questions.
Bank of America wants to know if you're a resident and it wants to know what your first, middle, and last name is. That's simple enough and needs no explanation. Next, we're asked for our home address, city, state, and zip code. Note that all of these questions require a response (as indicated by the asterisk symbol). Our first optional response arrives when we get to the "years at current address" field. I usually answer all of the questions on an application, but feel free to ignore that field if you'd like. It's optional, so it's up to you.
The next field asks about our housing situation. A drop down box gives you five options to choose from: other, own/buying, rent, parents/relatives, and dormitory. Choose one of the fields and then provide the amount of money that goes toward that particular housing question. If you have a mortgage, it wouldn't be too difficult for an underwriter to verify your answer (the mortgage would be listed on the credit report and the amount of that mortgage would be listed). Renters, however, have a different situation. Rental information is not listed on credit reports. As such, it would be easy to fudge this part of the application. But do yourself a favor: don't give false information.
As codified in 18 U.S.C. § 1014, it's a crime to knowingly provide false information in an effort to influence the credit card company's decision as it relates to your application. The statute provides a laundry list of financial entities that are covered under the rule. The banks that underwrite credit cards are included. The person who commits this kind of fraud "shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both," according to the statute. In other words, knowingly putting false information on a credit card application could have severe consequences (assuming you were ever caught and someone wanted to prosecute it). My best advice? Just be truthful when filling out applications. Indeed, committing this kind of fraud could be especially troublesome if you eventually file for bankruptcy and try to discharge your credit card debt. Credit card companies, if they could prove you lied on your application, would have all the proof they need to block you from being able to discharge this particular debt.
Moving on, we're next asked to provide information about our phone number and mailing address. Both fields are required. Answer those and continue with the rest of the application.
After dealing with the address and phone number information, we're asked to provide our social security number, date of birth, mother's maiden name, and email address. These are all required fields. The card company asks for the social security number so that it can pull your credit report. Date of birth is used as part of the identification process. Next, Bank of America would like to know if you have any accounts with them. If you do, check those that apply.
Next up is the employment information. A drop down box allows for seven possible answers: employed, homemaker, permanently disabled, retired, self employed, student, and unemployed. Choose the one that is most appropriate. If you choose "employed" you'll be asked to provide the name of the company that you work for and its telephone number. Everything else is optional, including household income. As a practical matter, though, I do provide household income, figuring that it will give the credit card company more data to work with when assigning an initial credit limit. The choice is yours, though.
Regarding household income, it's always been my practice to only include income that I can rely on when paying my credit card bill. If there are five working adults in my household, and I can only count on two of them to help repay my bill, I only use those two in my calculation. Some people, however, are more aggressive than me. They'll include everyone in the house -- regardless of whether they're a source of financial support. How you handle this particular question is up to you.
Finally, we are asked about any balance transfers that we want to do. If you're planning on a balance transfer, then indicate that here. If not, move on to the next field, which deals with a credit protection program that Bank of America is peddling. I always decline this protection. I'd rather not pay protection money to Bank of America. But, as always, you'll have to figure out if you want this sort of insurance policy. It's not for me. Last, you're asked about additional cardholders. If you'd like to make someone an authorized user on your account, feel free to identify the person. That person will be issued a card as well.
We're just about done. Before submitting your application, Bank of America would like you to verify all of the information that you've provided. Click the "verify your information" button. You'll be presented with all of the answers you've provided during the application process. This is where you'll be able to edit any of the answers you previously gave. (I imagine this is also where Bank of America would like you to think about 18 U.S.C. § 1014 again.)
Assuming everything looks good, it's time to submit your application. You'll either receive an instant approval or you'll be informed that your application needs further review. If your application does need further review, you'll receive a link to Bank of America's "application status" page.
And that, my friends, is that. I hope this exercise has been an educational one.
Tuesday, July 22, 2008
Yesterday we looked at the terms and conditions that often accompany online credit card applications. Today we'll wrap up our discussion on that. For illustrative purposes, we'll once again be using Bank of America's WorldPoints Platinum Plus Mastercard application.
As we move down the terms and conditions page, note the default APR. At 29.99%, you'd do well to stay out of that doghouse. Bank of America has also included an explanatory note, which we'll take a look at later.
The grace period for this particular card is at least 20 days -- provided, Bank of America states, that we have fully paid our previous balance from the month-earlier statement. Here, too, Bank of America has provided an explanatory note, which will be found in the notes section. We'll get to that soon enough.
There is no annual fee. Bank of America uses the average daily balance method for purchases. Fees for wire transfers done from non-financial institutions are assessed at 3%, with a $10 minimum. Finally, Bank of America charges a 3% fee if you make purchases in a foreign currency. In other words, if you plan on going to London at the end of the summer, remember that your purchase total will be getting dinged 3% when you shop at Harrods.
Moving on, we see a few more miscellaneous fees. We get the balance transfer fee, which is 3%, but no less than $10 (and no maximum). We see the cash advance fee, which is 3%, but no less than $10 (and no maximum). We see the late-fee charges and the over-the-limit charges. That's all pretty straightforward. Don't go over your limit and don't be late.
Beyond the fee information, we finally get to the meat of the disclosure. This is where all of those explanatory notes are spelled out. But before getting to those numbered sections, take a look at the boldface disclosure that explains how payments are applied when you have two balances with different APRs. Payments, Bank of America explains, will be applied to lower-APR balances first; higher-APR balances will get paid off last. Thus, if you have a balance of $7,000 accruing interest at 22% and then you take advantage of a 0% balance transfer offer on the same card, that 22% balance is going to be trapped until you've paid off that 0% balance first. It's a trap that I discussed in a previous blog entry here.
Meanwhile, note one explains the introductory rate in a lot more detail. It makes clear something that we weren't so sure about yesterday. The introductory rate does not apply to purchases or cash advances. It does apply to cash advance checks (convenience checks), and direct deposits. When the introductory rate ends, the standard APR will be applied to all outstanding and new balances. If you are late or over the limit (even once) during the introductory period, Bank of America will snatch your introductory rate from you and apply the standard APR to balances as of the first day of the billing cycle in which you were late or over the limit. In other words, if you are late or over the limit, you'll lose your introductory 0% interest rate. The takeaway? Don't be late and don't go over your limit.
Note two is a bit more ominous. If you are late or go over your limit twice within 12 consecutive months, Bank of America may slap you with its default rate, which, as we learned earlier, is 29.99%. The default rate will apply to all new and outstanding balances. Scary stuff. Don't be late and don't go over the limit. That's our mantra.
Our third note simply explains that the amount of days in the grace period could change from month to month (but in no case will it be less than 20 days -- as we learned from a previous disclosure).
Note four is there to explain that transaction fees (those 3% fees that we've discussed several times) are included in Bank of America's finance-charge computation. Those fees will make your APR look significantly higher during the month in which they appear on your statement. In other words, don't get worried when you see an out-sized interest rate during the first month in which you did a balance transfer. You're still getting the 0% offer -- and it's not accruing interest.
Note five is straightforward. It's there to put you on notice about the fees that will be charged for cash advances and direct deposits when you are no longer in the introductory period.
Note six defines what "cash equivalent transactions" means.
We now move to the agreement that we make when electronically submitting our application to Bank of America. Nothing onerous jumps out at me. I do note, though, that my card will be serviced by FIA Card Services, which is an arm of Bank of America. For the most part, you're simply agreeing to all of the terms that have been laid out to you by Bank of America. I also see that if Bank of America cannot approve us for the Platinum Plus account it will consider us for the Preferred account instead. The Preferred account, as we discussed yesterday, has different APRs and benefits. Would the Preferred account be eligible for the 0% introductory rate? I don't see an answer to that question. As a result, we should call Bank of America before jumping on this application.
Finally, Bank of America details the mechanics of the balance transfer that we may have requested when we applied for the card. If our balance transfer request exceeds our credit limit, Bank of America may send a full or partial payment to our creditors. This kind of stuff happens when we request a $10,000 transfer from XYZ but we're only granted a credit limit of $5,000. Under this kind of situation, Bank of America would likely opt for a partial payment. Last, balance transfers accrue interest from the transaction date. In other words, even though your other creditor won't get a payment from Bank of America for at least five days (and probably closer to ten days), you'll still be assessed interest as though the other creditor was paid off on day one. Nice work if you can get it, eh?
That's it for today. Tomorrow we'll conclude by looking at the application itself.
Monday, July 21, 2008
Although this blog entry will seem basic to many, I suspect that someone is going to find it useful. Today we're going to take a look at the terms and conditions that often accompany online credit card applications. Tomorrow we'll finish up whatever we don't get to today. For illustrative purposes, we'll be using Bank of America's WorldPoints Platinum Plus Mastercard application.
Notice that we're merely looking at the marketing page. This is the page that gives you the basic terms of the card. It's the page that's used to entice you to click the "apply now" button. Let's take it from the top. The first thing you see is an offer for a $50 statement credit. Notice, though, that there is a catch. The $50 credit will only be applied if you make a purchase, cash advance, or balance transfer within 45 days of opening the account. Are there any other requirements? There could be. But we won't know until we read further into the document. For now, suffice it to say that we've already figured out that we've got to qualify for the $50 statement. It's not enough to just get approved for the card.
Moving lower, we see the "Card at a Glance" section. This is where the basic facts about the card can be found. We can see that there is no annual fee and there is a 0% introductory annual percentage rate (APR). There's also a cross next to the introductory rate, which means that there is more that we need to know. Turns out that the cross -- and what it denotes -- can be found in the "terms and disclosure" section. We'll get to that in a bit. For now, we know that there is a 0% offer attached to the card. We know that it applies to cash advance checks and balance transfers. It does not apply to purchases. If there is more we need to know, we'll apparently learn more in the terms and disclosure area of the application.
Next, we learn that the standard APR for the card is 9.99% for Platinum Plus accounts. However, there is also a rate for Preferred accounts, which is 15.99%. Because we're applying for the Platinum Plus account, we'll just ignore the language about the Preferred card. Right? Wrong. We need to figure out what this Preferred account is; we need to figure out why Bank of America is disclosing it to us. We'll get to the bottom of it before we apply for the card. For now, it's enough to know that we've got two potential APRs that we could qualify for. After the expiration of the introductory period, the standard APR will apply to purchases, cash advance checks, and balance transfers. Wait. Does that mean that the introductory APR also applies to purchases? After all, there was no mention that the 0% rate applied to purchases. We were told only it applied to cash advance checks and balance transfers. This is something that we'll need to figure out. And we will.
Finally, we get to the balance transfer/cash advance check fee disclosure. The cost to do either of these is 3% -- with a $10 minimum. What's more, there isn't a maximum fee. Sigh. Seems more and more creditors are turning to these no-maximum balance transfers.
Having perused the "card at a glance" section, it's time to click through to the terms and conditions part of the application.
Here, we get a little more texture on the fees and APRs. We also get closure on the difference between the Platinum Plus and Preferred account. Turns out that someone could, if they're not worthy enough, get the Preferred account instead. In other words, there's no guarantee that you'll be getting the Platinum Plus card. It's a roll of the dice, then, if your credit is a bit shaky. I guess Bank of America will have to be the judge of that.
Moving on, we get more details on the balance transfer and cash advance fees. The balance transfer is good for the first 12 months after the account is opened. Quite simply, the longer you take to do a balance transfer, the fewer months you'll enjoy it. Thus, if you waited six months to do a transfer, the introductory rate would be good for only six months. Wait eight months, and the introductory rate at 0% would be good for just four months. You get the idea. Compare that to Citibank, which has one of the better balance transfer deals. There, you have twelve months from the time of the transfer -- not from the time of opening the account. That means that you could theoretically do a balance transfer during the 11th month after you open the account. You'd have that 0% for the following 12 months. Pretty cool if you ask me.
Meanwhile, the standard rates apply at Bank of America once the introductory offer ends. For balance transfers, the rate will be 9.99% on any remaining balance. For cash advances (or similar transactions) done after the introductory rate expires, you'll be assessed a 24.99% rate. Yikes. Best to avoid those at all costs.
That's enough for today. Tomorrow we'll look at the rest of the terms and conditions section.
Friday, July 18, 2008
It often makes sense to transfer a balance from one card to another -- especially when the "another" is one of those 0% interest deals that's good for a year. But before you do that balance transfer, it pays to know the rules of the game first.
There are several pitfalls awaiting our unsuspecting credit card customer, so let's start from the top. First, that 0% offer is only good as long as you don't go over the limit and are never late on the bill. If you breach either of those agreements, you can kiss your 0% offer goodbye.
Indeed, not only will you lose the 0% deal, the credit card company (we'll use Bank of America for illustrative purposes) will assess the standard annual percentage rate on your balance. Miss a payment or go over your limit twice on any two occasions within twelve consecutive months, and Bank of America could hammer you with the default rate. Ouch. Instead of enjoying 0% for 12 months, you could be saddled with a hefty balance that's accruing at 29.99%. In other words, don't be late and don't go over your limit.
See Bank of America's boilerplate warnings here:
And the default rate here:
See Bank of America's standard boilerplate language regarding the penalty that faces someone who doesn't fulfill his or her balance transfer obligation here:
In addition to the warning about going over your limit or missing payments, notice the language about applying payments to lower interest rate balances first. This is one of the biggest mistakes that I see people make with balance transfers. What many people don't realize is that higher interest balances get trapped by 0% balance transfers. It can happen two different ways.
You've got a $12,000 balance at Chase -- on a card that is nailing you for 20.9% a year. Eager to chip away at that balance, you decide to take advantage of your Bank of America card, which is now offering a sweet 0% deal (Bank of America made you aware of the deal through your email account). Your Bank of America card has a $22,000 limit and it currently has a balance of $4,700 on it. That $4,700 balance has an interest rate of 13.9%. You decide to move the entire $12,000 balance away from Chase and over to Bank of America. This brings your entire balance to $16,700. What happens from here is that you pay down the balance every month -- and your payments are earmarked for the lowest-interest debt first. Thus, your $500 payment is applied to the $12,000 balance first (the 0% debt) and does nothing for the $4,700 that's now trapped and accruing interest at 13.9%. Until you get that $12,000 at 0% paid off, that $4,700 will continue to amass interest.
The second -- and most common -- way to trap a balance is to make purchases after you've done a balance transfer to a card. Suppose that we take $12,000 from one card (where the interest is sky high) and move it to a brand new card that is offering 0% for a year. That new card, along with the new balance transfer, would be well situated if you did nothing with that card from then on. You'd accrue no interest on the balance for a year. Perfect.
Often, however, that's not what happens. Instead, borrowers do the balance transfer and then start using the card for everyday purchases (at whatever rate that happens to be). If you're not getting 0% on everyday purchases, you've just started trapping those purchase balances. Remember, payments go to lower interest-rate balances first. Imagine putting $8,000 in purchases on a card that already has a $12,000 balance at 0%. You can see the problem. The $8,000 balance, which could be getting hammered with a high interest rate, is now trapped until you get that original $12,000 (at 0%) balance paid off.
To avoid these errors, here's what you should do with your 0% balance transfer cards. Never miss a payment (no brainer), never go over the limit (also a no brainer), and don't use the card. That's right. Simply put the card away in a safe place until you've paid off the balance. (Disregard this advice if your everyday purchases are also at 0%.)
By the way, while we're talking about balance transfers, always remember that fees can be waived. If you're doing a balance transfer and the fee is 3% (with no maximum) feel free to call and see if the card company will put a cap on the fee. If there is a fee of $75 (as there is with Merrill Lynch) call and see if the company will waive the fee altogether. You'd be surprised by what you can get by simply asking for it. These companies want your business and they're willing to eat the fees in some cases.
Using credit cards should not be difficult. Read the rule book before taking the field, and things should be A-OK.
Thursday, July 17, 2008
My best friend once gave me this advice: you can't think clearly if your workspace isn't clean. The same advice is applicable to managing your credit cards as well. Keeping track of due dates, statement dates, annual percentage rates, and utilization ratios, for example, requires a management tool. Without one, I'd argue that you're no different than the kid who can't think clearly because his desk is cluttered with a bunch of garbage.
Because I have a host of credit cards, with different pay dates, it's imperative that I track my cards closely. To do that, I use an Excel spreadsheet. The spreadsheet should track pay dates, annual percentage rates, utilization ratios, credit limits, credit balances, etc. I use a spreadsheet that was created by a member of creditboards.com. It's the best spreadsheet I've ever seen. And I use it religiously.
Given how important it is to never be late -- especially in the current credit environment -- having a spreadsheet that tracks your financial life is a no brainer. Let's face it, without a spreadsheet that keeps track of our various credit cards, it's easy to miss a payment. It's just the nature of the beast (and it's the nature of having a bunch of cards without also having a plan to keep track of them). None of us are infallible. Using a spreadsheet, however, minimizes the risk for us. It ensures that we won't have an excuse for ever being late.
Now that I have sold you on the idea of tracking your credit card portfolio, head over to creditboards.com to download a copy of the spreadsheet I use. It's free and it's not a commercial product. I'll let Joe -- the creator of the spreadsheet -- know that all of my readers thank him for the new tool.
Without further ado, then, the spreadsheet can be found here.
Wednesday, July 16, 2008
Over the weekend I had an opportunity to speak with a young adult about credit issues. During the course of my discussion, a few things became clear. Not only did I realize that young adults don’t know much about credit, I also realized that my columns have largely been written for a different group of readers. Indeed, at the end of the day, I’ve been ignoring the young-adult population here at CreditMattersBlog.com. I told the kid about my realization and said that I would write a column for him – and every other young adult who is similarly situated. So, if you’re out there, Michael, this blog entry is for you.
Michael, soon you’ll be applying for your very first credit card. Because you’re just now starting college, your first credit card offer will likely be pitched to you from some representative peddling a credit card on campus. Beware.
That first credit card probably won’t be difficult to get. But do note: even though you won't have a credit history to rely on, don't sell yourself short by applying with credit card companies that cater to customers with poor credit. Indeed, there is a significant difference between someone who has poor credit and a young adult who doesn't have any credit. As such, stick with mainstream card companies such as Chase, Citibank, Bank of America, American Express and Discover. Chase and Citibank seem to be more lenient, while Bank of America is hit or miss. American Express and Discover, meanwhile, seem to be more difficult nuts to crack.
Though you'll likely get approved for a student card, with a limit ranging from $300 to $500, don't be tempted to run out and buy a bunch of things that you can’t afford to pay off now. You’ll likely reason that you’ll pay the card over time – while being assessed a little bit of interest each month. Credit card companies would love nothing more than for you to keep balances month after month. They’d love for you to pay interest each and every month. Don’t fall into that trap.
Instead, use the card sparingly. Don’t allow balances to sit on your card from month to month. Never get into the habit of paying interest to the credit card companies. Paying in full is the mantra that you want to live by. The goal for you is to parlay this first credit card into something more substantial down the road. This first card, then, is simply a means to an end. Use it for the tool that it is. By not using all of your available credit – and by paying your balances in full each month – you’ll be showing the credit card company that you are responsible. The reputation that you build with the card company today will pay off in spades tomorrow.
Your good reputation will be used to get more credit cards – with your first creditor as well different creditors – in the future. What’s more, you’ll likely need strong credit to land your first job (and your second job, and your third job, and your…). Employers are increasingly pulling credit reports to vet would-be employees. Additionally, if you decide to attend graduate school after college, you may have a need for a private loan to help finance part of that education. If that’s the case, you’ll need good credit to land that loan. Beyond that, there will be mortgages and auto loans. In other words, the need for good credit is never ending. A person who doesn't understand or appreciate how important good credit will be in the future is an idiot, indeed.
Have no fear, though. Your good credit is going to be a valuable asset that works for you. You’re not going to be one of those kids who fluffs off his financial responsibilities. You’re not going to be the roommate in college who has all of the maxed-out credit cards. You’re not going to be the kid who pays a ton of interest to the credit card companies every month. You’re not going to be that kid who wants to go to medical school but can’t go because he can’t get the extra financing that he needs to make ends meet. You’re not going to be that kid who has a bunch of late payments strewn about his credit report. You’re not going to be that kid who misses out on opportunities.
How do I know all of these things? I know these things because you were willing to sit with me for nearly two hours. You were willing to listen to me even as I waxed philosophical about the need for strong credit. Even though you had better things to do (on a weekend no less), you asked me tons of questions. Most of all, I know you’ll succeed because most kids your age are interested in other, more exciting topics. They’re sure as heck not interested – especially at your age – in credit matters.
But that’s OK. We’ll let those other kids give you an update on the Real World or the latest edition of Viva La Bam. Meanwhile, you’ll be the kid that everyone comes to for financial advice. What’s more, you’ll be the guy who gets the highest credit card limits, gets the best loan terms, gets the first job, and never misses out on financial opportunities.
You’re well on your way, Michael. Best of all, you’ve already got a head start on the rest of your peers.
Tuesday, July 15, 2008
I'm amazed that more customers aren't proactive with their credit card companies. About every four to six months, I contact all of my credit card companies to see about cutting my APRs and upping my credit limits.
I have rewritten this story. In light of the changing credit environment, you should read the new story (link here).
It's really quite simple. Call the 1-800 number on the back of your credit card. When you get a customer service representative on the phone, simply ask if your account is eligible for an interest-rate reduction. Here's what you say: I'm a good customer; I have a great payment history; I'd like to have the APR reduced on my credit card. The service rep will be able to adjust your rate right on the spot if your account is eligible. The worst thing that can happen is the rep will say no. You have nothing to lose. The companies that I have found most receptive to APR changes are Citibank and Bank of America. Chase is the most stingy.
You don't carry a balance, you say? Doesn't matter. It's the principle of the thing. You're a great customer who should be getting the best rate. Low APRs demonstrate your creditworthiness. What's more, if the credit card company is unwilling to lower your APR to a reasonable level, then they might be telling you something. You may want to take a look at your habits to see if there is anything that needs changing.
(By the way, you shouldn't expect low APRs on some of your rewards cards. Those cards often charge higher interest rates. You may already be at the lowest rate for that card, even though it's relatively high.)
While you have the operator on the phone regarding your APR, you may as well ask about credit line increases as well. But take heed: some card companies are unable to give you a limit increase without pulling a new credit report (Chase is notorious for pulling a credit report that results in a hard inquiry). I avoid those. Instead, I am looking for guideline increases that are already built into the system. Bank of America, meanwhile, allows you to request a credit-line increase online. It will be a soft inquiry unless Bank of America tells you otherwise (its disclosure says that it will not do a hard pull without first notifying you). I'm talking about getting limit increases without it resulting in a hard inquiry (which stays on your credit report for two years). When you get on the phone, simply ask for a guideline increase. Be sure that the customer service rep understands that you do NOT want an increase if it's going to result in an inquiry that dings your score. At most, you're looking for nothing more than a soft pull -- which is an inquiry that does not result in an inquiry that hurts your score.
When it comes to credit cards, be proactive. Get on the phone and get everything that you and your account deserves. If you're a model customer, your APRs and credit limits should reflect it.
American Express Appears to be Stepping Up Its Slash and Burn Campaign
American Express Rates Credit Risk By Where You Live, Shop
Monday, July 14, 2008
On Friday I heard some of the stupidest advice about credit card limits. On one of my favorite credit message boards, some guy (no doubt a troll) suggested lowering your credit limits so that you could avoid the "credit trap."
(Editor's Note: If your limit is being lowered by your credit card company -- to just above your current balance -- then you are interested in my "chasing the balance" story (link here).)
The guy didn't do a very good job of explaining what the so-called credit trap actually means, but I inferred that he meant many consumers have high limit cards that are maxed out. Those maxed-out cards, meanwhile, are accruing interest at a hefty rate. This guy's solution, then, was to reduce the limits to insignificant levels. He said that he originally had a $5,000 limit card but that it was now at $500. Another card was originally at $1,000 but was now only at $300. He says now that he rarely uses those two cards. Bully for him. Personally, I think his advice was absolutely lame and reckless. I also got the impression that he was utilizing cash a lot more.
(Without knowing much about this person, I suspect that the guy got into some serious problems with his cards in the past. He probably couldn't control himself or his spending. Now, after recovering from that situation, he's gone all the way to the other side. He's probably on an all-cash diet and uses the cards only when it is absolutely necessary.)
In a previous post, I talked about the perils of using cash only. It seems to be the blueprint of choice for those who don't understand credit or for those who can't control their spending. But that's the topic of my other blog entry. Read it here.
As for lowering your credit limits, here's why it doesn't make a lot of sense. Assume that a person has $20,000 in available credit limits spread over four credit cards. Imagine further that this same person makes about $2,000 a month in charges on those four cards. The amount of usage equals 10% of the person's available credit. The good news is that the utilization (subject of a previous blog entry that can be found here) is low and it's something that FICO will appreciate.
Now let's see what happens if we do what our friend who worries about the so-called credit trap advocates. Instead of having that $20,000 in available credit, he'd advise you to take each of your four cards to limits that are just $500 apiece, which would give you available credit of $2,000. Here's where the situation gets dicey. Assuming our fictional person was still charging $2,000 a month, this person would be maxed out on the cards each and every month. This person's FICO score would be in the trash as well. That's because every card would be at 100% utilization.
Worse, imagine if our fictional character ran into an emergency during the month. Aunt Sally died and we need to get to her funeral in five days. We'll need an airline ticket on short notice and we'll need a rental car as well. Also, because so many people are staying at Aunt Sally's house, we'll need to stay in a hotel as well. It doesn't take a genius to realize that our $2,000 in available credit is woefully low. We'll never be able to put all of these short-term expenses on our cards (after all, we're maxed out just from our regular expenses during the month).
No problem, you're thinking. We'll just use cash to fund these emergency costs. Let's take a look at that idea for a moment. First, your rental-car company could pull your credit report because you want to use your debit card. The car company may also put a hold on a portion of your bank account balance (maybe as much as $300). The hotel, meanwhile, doesn't like you using debit card, either. It decides that it will be putting a $100 hold on your bank account balance as well. I've never bought an airline ticket with a debit card, so I am not sure about hold policies there. But I do know this: Aunt Sally lived in New York City. You live in Los Angeles. That short-notice ticket is going to cost you about $1500. You could have used miles that you earned from your credit card purchases over the years, but you've sworn off credit cards, which means that you probably don't have that option.
As you can see, our poor slob who has decided to slash limits to the bone is now unprepared for an emergency. Worse, all of this pain was self inflicted. That's lame. And it was so unnecessary.
The smarter person -- that's you -- won't be running into any such trouble. Indeed, you'll be prepared for a rainy day because you'll have credit limits that will serve you well. Your limits will be high enough so that emergencies don't max your cards out. What's more, you won't have to turn to your cash reserves prematurely. Your cash will be sitting in your interest-bearing account for as long as possible. Importantly, your FICO score won't be taking a hit on a regular basis. You'll be using your credit on a regular basis, showing that you can handle it responsibly, and you'll be keeping your scores high.
Sadly, I imagine that there are a lot of people out there who think just like the guy who was talking about the credit trap on Friday. They're woefully underexposed to credit and they're one emergency away from having to scramble to make things work. What's more, they're moving from one perceived credit trap and jumping into a new credit trap (where they have no available credit).
Fortunately for you, you're not going to be one of those guys. Keep your limits high and don't sweat the small stuff.
Friday, July 11, 2008
Although today's blog entry is what I like to call quick and dirty, it's chock full of useful information. Read on.
If you're anything like me, you hate sitting on hold when you call your credit card company. Am I right? I've got better things to do and so do you. I'm here to tell you, though, that your waiting days are over.
The next time you call Citibank or Chase or (insert your credit card company here), instead of sitting on hold after you make your way through queue hell, you're going to breeze right through. Ever notice that one of the very first options you get is to choose between english or spanish? If you want an english speaker, press button one. If you want a spanish speaker, press button two. You know the drill. Well, instead of hitting one for english, choose two instead. You'll be sent to an operator who handles spanish-speaking clients. But that doesn't mean those operators only speak spanish. In fact, those operators also speak english; they're bilingual. Best of all, they're not going to hang up on you -- or tell you to call back -- because you don't speak spanish. They'll handle you and your account without a fuss.
Choosing to speak with a spanish-speaking representive accomplishes two things. One, your wait times are drastically reduced. Indeed, my calls usually go straight through -- with little to no wait. Two, you won't have to worry about getting your call offshored. I have nothing against offshoring, but if you're going to offshore me at least send me to someone who I can understand. Oh, sure, occasionally I get an operator that speaks english pretty well, but usually I get someone who is struggling with the language. It makes for a bad experience. And I'd rather avoid it if I can. Going the spanish-speaking route accomplishes that.
This same tactic, meanwhile, also works with your cell phone and computer companies -- it's not just limited to credit card companies. Almost all companies have an option to speak with someone who speaks spanish. And almost all of these people speak english. If you're smart (and I know you are), from here on out you will stop requesting the option to speak with someone who speaks english.
Se Habla Español (translation: spanish is spoken here) is now music to my ears. Make it music to your ears as well.
Thursday, July 10, 2008
I can only wonder how many people think they're getting legitimate scores (ones that lenders actually use) when they use services such as TrueCredit, Chase ID Protection and the like.
The industry has done a terrible job of educating consumers. These services -- usually the ones that allow you to pull all three credit reports on a daily basis -- often provide "credit scores" in addition to the credit reports. What consumers don't realize is that the scores are meaningless. They're completely, utterly useless. And yet the companies that peddle these so-called 3-and-1 credit reports tout the credit scores as though they were actually worth something. They're not.
If you're ever interested in seeing just how pathetic some of these scores can be, just compare them to your actual FICO scores (which can be purchased from myfico.com. It's not unusual to see a 100-point difference between the scores generated by the 3-and-1 products and FICO.
Many consumers -- believing that these fake scores have some kind of value -- base their credit decisions on them. Sad. I figure that my little area in Cyberspace (aka CreditMattersBlog.com) can do its part to dispel the notion that those fake scores are worth the proverbial paper that they're written on.
The three credit reporting agencies, meanwhile, have come up with their own scoring model (called Vantage). Though TransUnion, Equifax, and Experian have been actively marketing the score to lenders, it has yet to take off. It's still a bit player to Fair Isaac's FICO score. I imagine that'll be the case for some time. Until it gains some traction, the Vantage score will be novel at most.
Ditto for the scores you get from CreditSecure, which is a 3-and-1 credit monitoring system that's only available to American Express customers. The scores you get from there are called PLUS scores, which was created by Experian. The scores range from 330-830. Again, these scores can be ignored as well. Lenders just don't use these scores. Indeed, you'll notice that Experian says that they are for educational purposes only. I've addressed the PLUS score before. You can read about it here (link).
You can get real FICO scores in several places. Equifax's Web site (wwww.equifax.com) sells a genuine FICO score. Ditto myfico.com. Same goes for TransUnion's Consumer Solution site (https://www.transunioncs.com). Additionally, Washington Mutual provides a free FICO score to its credit-card customers (you can find that score using your online access). Two things you should know about Wamu's product. One, it's the Bankcard Industry Option FICO score (link here) (it's not the classic FICO score) and, two, it's a snapshot of your score as of the first of the month.
Before wrapping up this post, I'd be remiss if I didn't mention that Fair Isaac has products that are geared toward specific industries. For example, the automotive industry uses the Auto Industry Option FICO score (link here). The mortgage industry uses another FICO model. Because these models weigh some factors differently, the scores won't normally be the same. Indeed, the score that consumers get at myfico.com is called the classic FICO score. It, too, uses different factors to generate a score. (Note that American Express does not rely on FICO scores exclusively to approve cardmembers; instead, it uses its own internal scoring system, which gives FICO between 20% and 25% weight in the internal-scoring model. The source for the 20% to 25% figure comes from American Express's August 6, 2008, Financial Community Meeting. The figure was given during the Question and Answer portion of the conference call.)
At the end of the day, the classic FICO score that we get from myfico.com still represents the closest thing approaching the scores that lenders pull when we apply for credit.
Anything short of a FICO score -- at least for now -- is simply a waste of money.
Wednesday, July 9, 2008
You know the type. We've all got at least one of them. I'm talking about the friend who refuses to get a credit card (or any other kind of debt instrument) -- because he'd rather use cash. Credit, after all, is bad. At least that's what my anti-plastic friends tell me. Alas, I guess some people just have more money than sense.
Don't get me wrong, though. I understand their reticence. They're afraid of accumulating a bunch of debt. They're worried about not being able to control their spending. They're just plain worried in general. But they don't have to be.
If these people would simply open a few credit cards right around the time they become young adults, they'd have little to worry about. That's especially true if they don't carry balances on their credit cards. Indeed, there is no reason to worry about credit cards if you're not paying interest on your charges. My suspicion is that a lot of these anti-plastic folks are afraid of not being able to control themselves. By not getting credit in the first place, they're saving themselves -- from themselves. If that's the case, then they've got bigger problems than credit.
Still, having a credit card (or several cards) is extremely important. When was the last time you bought an airline ticket with cash? How about renting a car? Are you aware that many rental-car companies pull your credit report if you use a debit card for payment? That credit inquiry, which is usually a hard inquiry, remains on your credit report for two years. Additionally, by using a credit card, you'll have a lot more buyer protection.
Oh, before I forget: even though banks tout the benefits of using debit cards, the funds are still tied to a bank account. If someone ever compromises your debit card number -- and plunders the bank account -- don't expect to be made whole the next day. It can take as many as ten days for your bank to reverse the funds -- and get them back to your bank account. In the meantime, you'll have to move fast to notify people you've written checks to. If you're not fast enough, you'll also be dealing with bounced checks and fees. It can become a nightmare posthaste. I could go on, but you get the point.
Building a credit history is also important for two more reasons: eventually you'll be in the market for a house or a car. These major purchases are rarely done in cash. Good luck trying to buy one of these big-ticket items without a credit history. Even if you manage to get approved, you'll being paying a hefty interest rate, which is used to compensate the lender for the additional risk you represent. Remember that it doesn't matter how responsible or nice you are. If you don't have a credit history that proves your creditworthiness, you'll pay for it in the form of higher monthly payments.
I'm certainly not against using cash -- and staying out of debt. But a more reasonable (and balanced) approach would be to have a few credit cards that you use on a fairly regular basis. Pay those purchases off in full each month (to avoid interest). You will have benefited from an interest-free loan for nearly two months (the billing cycle plus the grace period) and you'll be building up a credit history that will absolutely come in handy later when you call that mortgage lender or walk onto the dealership's car lot.
In other words, use cash -- and cash alone -- at your own peril.
Tuesday, July 8, 2008
I get this one a lot.
Just yesterday a friend of mine sent me an email regarding this very idea: that having too many credit-card accounts is bad. No doubt that my friend had been taught this lesson by a well-intentioned family member or friend. However, it's been my experience that having a lot of accounts does not mean that you're in trouble -- or on your way to trouble.
I have more than 15 credit cards. My credit score has never been better. What's more, all of these credit cards give me plenty of options. Think about it for a second. If you had just one card -- with one creditor (Citibank, for example) -- what would you do if Citibank raised your interest rate to some outrageous figure? Worse, what if you were carrying a significant balance on the card (as many Americans likely do)? Assuming that you had a $5,000 limit, and you were using $4,000 of that limit, you would be using some 80% of the credit limit. I'd be willing to bet that your FICO score, because of that kind of utilization, would not be strong enough to allow you to quickly apply for a new card (with a different creditor) in the period of time that would be necessary for you to avoid the impact that the new interest rate would have on your balance. Instead, you'd be stuck -- even if temporarily -- with a rate that packs a wallop in your pocketbook.
However, for those of us who believe in diversifying our credit-card holdings, we've got plenty of options in reserve. Indeed, I have cards with Chase, Citibank, Nordstrom (a great creditor, by the way), BMW, NASA, Pentagon Federal, HSBC (Saks Fifth Avenue Mastercard), Juniper, and Bank of America. All of these options mean that I don't have to worry about a particular creditor going psycho on me. Any creditor that pulls any funny business on me gets thrown in the sock drawer (timeout, if you will) until I decide it's time to use it again.
The trick to accumulating several cards, though, is doing it judiciously. Don't run out and apply for a host of cards on the same day. That's just plain stupid. Instead, get a few cards each year. Before you know it, your portfolio will be diversified. What's more, spreading out your applications over a period of time will also help keep your credit score intact. Applying for a bevy of cards at once is almost certain to result in a lower score and some denials as well. That's because the average age of your credit history is worth 15% of your FICO score. Thus, be smart when you begin to add new holdings to your credit-card portfolio.
Does having too many accounts really equal bad news? That hasn't been my experience at all. I've been able to diversify my card holdings without any trouble at all.
The real trouble that most people have is that they carry too much credit card debt. Having a host of cards with no balances, but plenty of usage, isn't a cause for concern.
Mom and dad were well intentioned when they gave us tidbits about credit -- but when it comes to credit cards, they missed the boat when they told us that having just one or two cards was all that we'd ever need. Tell that to the guy who only has one card and no options -- and very little available credit. If you ask me, that's the person who is playing dangerously.
Me? I'll take an option every day of the week, thank you very much.