Friday, January 30, 2009

American Express Will No Longer Use Spending Patterns To Slash Credit Limits


Anyone who has read my blog for any length of time knows about American Express's penchant for using "spending patterns" to justify credit-limit reductions (see stories here, here, here, and here). Now hear this: American Express has decided to drop this risk-management tool from its underwriting arsenal.

From the New York Times:

In some instances, if it didn’t like what it was seeing, the company has cut customer credit lines. It laid out this logic in letters that infuriated many of the cardholders who received them. “Other customers who have used their card at establishments where you recently shopped,” one of those letters said, “have a poor repayment history with American Express.”

It sure sounded as if American Express had developed a blacklist of merchants patronized by troubled cardholders. But late this week, American Express told me that wasn’t the case. The company said it had also decided to stop using what it has called “spending patterns” as a criteria in its credit line reductions.

“The letters were wrong to imply we were looking at specific merchants,” said Susan Korchak, a company spokeswoman. The company uses hundreds of data points in making its decisions, she said, adding that the main factor in determining credit lines “has always been and still is the overall level of debt, relative to the card member’s financial resources.”

I've railed long and hard about this metric. I've argued that American Express doesn't even need to rely on this tool to make credit decisions. Seems American Express has finally acknowledged what I -- and others -- have been saying for some time. It's about time.

This still doesn't address some of the other things that American Express uses to gauge limits: who originated your mortgage and where you live. But it's a start. One day at a time, I guess.

Read the rest of the story here (link).

Related Articles:

•Read More American Express Stories Here

67 comments:

  1. No way to prove it even if we don't. The excuse will no longer appear in letters. Only American Express will really know.

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  2. I just wonder why they chose to do this now. I am such a natural pessimist! :)

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  3. Wow - this is amazing!

    My question is this: how did AMEX think its merchants would react to this practice? Did they really think Walmart would like to pay AMEX an interchange fee for taking AMEX cards only to have AMEX customers get angry that making purchases at their store was blacklisting them has high risk consumers!!!!!

    They should have figured out that this was a big mistake.

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  4. They probably got sick of customers, news publications, and bloggers nailing them on a regular basis for the practice. Or not.

    I'd like to think that it was for the point that I always made: it's totally unnecessary to use this metric to make credit-limit assessments. There are other metrics that can be used.

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  5. No kidding. I would never use an Amex card at WalMart as long as I knew that Amex was monitoring my spending -- and trying to link my spending to other customers. I imagine that WalMart, and others, had something to do with this too.

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  6. That's just an amazing development. Maybe it was a condition of the TARP funding access they recently acquired? Kidding! ;)

    Seriously though, they've proven time and again during this credit crisis, that they're not the least bit concerned about offending consumers with their policy implementations. Therefore, the cynic in me believes this policy shift is the result of feedback from big customers like Wal-Mart, etc. Amex's bone-headed policy surely riled some big corps who were beginning to be portrayed as an "undesirable" place to shop with your Amex card. Ah, corporate power plays and pressure...you gotta love it. :)

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  7. I have no doubt that the WalMarts of the world put pressure on Amex. And it's really no skin off Amex's back. They've got a plethora of underwriting tools to fall back on.

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  8. Claiming now the limits were slashed because of 'overall' debt levels??? While that could have been ok to do as a precaution, honestly I think they are probably getting ready for the lawsuit that is coming, as am sure somebody, somewhere must have been offensed by it and rightly so, feeling discriminated against for shopping at Walmart or whatever other establishments. The cards did not come with a notice congrats here is your card however warning WARNING.. using your card at X, Y, or Z could terminate your accounts priviledges or subject you to reviews or etc. Am sure Walmart as a company must be looking for some compensation too.

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  9. Publicity bit them in the a**, which is good, but I suspect they're going to keep doing the same thing but they're not going to cite it as a reason. It'll take some time to recover the damage to their brand--they've gone in a lot of minds from "Don't leave home without it" to "Don't leave home without a backup card."

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  10. DM, indeed. That is their new slogan: don't leave home without it (a backup). Yup.

    I'd love to know -- for a fact -- that they are still using it. Love to work at Amex for a year.

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  11. Another interesting development at Amex in light of their recent 79% drop in income. As with most things I believe a contraction in spending on Amex cards hit their bottom line.

    Honestly I rarely believe in any corporation seeing the light so to speak. When they carefully cultivated a climate of fear in customers on where to use their cards. Customers like myself simply use my other cards and Amex only see's token use.

    Amex missed out on thousands of dollars in my personal spending over the last quarter due to their behavior. Who has time to give a darn what their issuer thinks about their purchases, I mean really I'm busy enough in life.

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  12. American Express is on welfare as far as am concerned, taking TARP money makes them look like they are on welfare. The prestigious 'image' gone POOF. Their image changed when they introduced revolving lines, that is what created this mess for them. Back when the card was prestigious a customer had to be able to pay balances in full, every month, or it was instantly closed. Had they kept those customers only they wouldn't be in the position they are today.

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  13. So I assume now Amex will reinstate those who were CLD'd... Just kidding. Those people are probably grandfathered in, or retro-screwed.

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  14. I doubt they "removed" it. This is just a statement to take hit off of them, if any. it's like saying STFU, we won't use it. But what they do and how they do it is no one's business but theirs.

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  15. Hk, I am with you. I'm just too cynical to think that they'll abandon it. Hence my comment about working at Amex for a year (in their risk-management department preferably).

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  16. Too little too late. I have blacklisted Amex. I was not closed by them for spending choices, They tried to F/R me after years of perfect payment, high credit scores. low usage etc. So I told them no thanks and I closed them.

    I don't trust this company.

    Nikky

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  17. Perhaps the most stupid part of this assessment tool is that it assumes people only have one card! Surely one could use their AMEX at Walmart by chance and use their visa next week at the same establishment. So what does this system prove about one's risk?

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  18. I just want a platinum card account for 10 days. Then I want to cancel it and keep the card, then I'll "flash" it at the bar.

    Any flaws in that plan?

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  19. Has anyone mentioned the recent Amex promo where they would pay you $20 to shop at WalMart? Entrapment anyone?

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  20. I remember that promo. I never took advantage of it. Never went to WalMart.

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  21. How do you like this idea:"Amex promo for $20 to shop at Walmart was initiated by confidential agreement between both companys to reimburse Walmart loss by Amex scaring people with spending choices"?

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  22. The Lion said "Wow. Do we believe them"? Ha ha, my thoughts exactly.

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  23. I got a good chuckle from the Lion, too. None of us believe them. Hehe.

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  24. I knew you guys loved me? You all know how to make a gal blush...

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  25. Informed and active consumers - that's the only thing that'll get any business to limit abuses. I'm amazed that so few consumers seem to pay attention. I've been with AmEx for longer than I want to remember. But I'm not afraid to let them know they're losing business by certain practices. For example, take currency exchange fees. I travel abroad extensively. I have a choice of cards to use while abroad. AmEx insists on trying to rape me with high fees on every exchange. So, when I'm abroad, I try to use only my Capital One Visa. That's tens of thousands of $ a year that gets charged to CapOne and not to AmEx. I called and informed them, but they just don't care. Why? Well, because not enough of us do call and too many just put up with whatever outrageous practice the companies engage. BE ACTIVE AND AWARE CONSUMERS, PEOPLE! That's our only leverage.

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  26. These reports about the 'evilness' of credit card companies are mostly only relevant to credit junkies. For those that aren't addicted to credit, you simply stop using the card and use a debt card if they do something stupid.

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  27. Carnap, if you completely stop using a card you run the risk that it will be closed for inactivity. Enough of your cards get closed and you could lose significant credit. What happens then when you need it?

    True, companies that abuse consumers can be "sock drawered" and only used for activity every now and then (and never for a significant amount).

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  28. "What happens then when you need it"

    The point is to remove your dependency on credit. People don't need debt to live, they want it. Credit card debt is particularly useless as its rather easy to live without and debt cards offer a good replacement in terms of functionality. The only sorts of debt that aren't easy to do without is the one time use of student loans or a mortgage.

    Regardless, I have both a personal and business American Express card and I don't care if they use purchasing information in their models. They are a private business, they can do whatever they want. Having a credit card with X limit at Y interest rate isn't a right.

    The fundamental problem here is that too people depend on things like credit cards and are therefore at the mercy of their overlord. Sucks for them, but its their fault. The only thing unfortunately about the situation from my point of view, is that I'm currently not profiting from it.

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  29. I hope that in the seven months that I've been here I've conveyed this: credit is a privilege -- not a right. Additionally, credit -- especially a credit card -- is a tool.

    As for Amex, if they wanted to use shopping patterns as a risk-management tool, that's fine. But all it did was create uncertainty. I don't like uncertainty. Therefore, just as Amex had a choice to follow my shopping habit, I had a choice in how much (and where) I would use my Amex card.

    In the end, I was content with that arrangement.

    Don't carry balances and you can't be at the mercy of these card issuers. For those who are carrying balances, work on getting out from under that burden. You'll be happy you did.

    I'll keep saying that until the day I shut down this blog.

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  30. Carnap - credit DOES NOT equal debt. Period. You need credit in life. You need it to buy a house, you need it to rent. You need it for some jobs - hell you need it for insurance.

    I am not talking about "needing" it as in to pay your bills. I am talking about needing credit to live - in general.

    Lets use an example. Person A has $30,000 in available credit. She never carries a balance, but charges about $3000 a month (PIF, of course). She likes the rewards. However, these balances report to her credit because she does not pay before the statement cut. It is alright because her utilization is 10%. Now lets say Person A stops using three of her cards. These cards have limits totaling $15,000. The banks that these cards are tied to close these accounts after a year of inactivity. She still charges the same amount each month, still pays in full and still has the balances reporting on her credit (because she pays on time but after the statement is generated). Now her utilization is 20%. Not as good. Her credit score is probably going to fall and may even cause her other credit cards to lower her limits. Then her utilization goes up further which causes her score to drop even further.

    Do you not see how having credit lines closed, even for good payers, can wreak havoc?

    As for credit card debt being useless, you are right! Everyone should always pay in full. But the point is to have more credit than you need (or typically use). And if you don't have credit cards - good luck getting a mortgage.

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  31. You don't need "credit in life", the importance of your "credit score" is pure marketing. Make everyone believe that you need "credit in life" and let the money roll in. It is seriously a brilliant marketing strategy.

    So long as your credit report is not damaged you can easily get an apartment, insurance etc. In some cases you may need longer down payments, but that is about the worst that will happen. If "having credit" was an actual need, one would have to wonder how the millions with piss poor credit get by every day.

    As far the example, a change in your utilization of 10% is not going to dramatically effect your credit score. And if you were really that worried about your credit score the solution is pretty simple - stop using your credit card.

    You can have a good credit score, and hence a mortgage, without having a credit card.

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  32. Carnap, you don't seem to have a firm grasp of FICO. That's OK, there was a time that I didn't either. I just educated myself and fixed that.

    Revolving credit lines (credit cards) are a HUGE part of the FICO equation. So is utilization (which is calculated mostly from REVOLVING accounts).

    How do you propose to have a high FICO score to get that mortgage without these lines?

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  33. Carnap, I don't believe that the importance of a credit score is pure marketing. Here's why. Lenders use scores as break points to determine interest rates. At some places, a 760 FICO score, or better, will yield the most attractive rates.

    Someone with high utilization -- but an otherwise perfect record -- could have a score of 650. Not only will this person likely need a bigger down payment (say for a vehicle), but this person will also pay a higher interest rate, which will end up costing the consumer more for the vehicle in the long run.

    Indeed, when you watch those commercials on television for auto loans, notice the fine print at the bottom says for "well qualified customers." This is the auto company's way of saying if you don't have a high score, you're not likely going to get the most attractive rate we're offering. Of course, debt-to-income ratio will come into play as well. But many of these offers are highly score driven.

    As for apartments, the score won't matter. The landlord will typically just make sure that you don't have any derogatory marks on your record.

    Insurance? Well, we know all that insurance companies use scores to gauge rates. Here's a recent story from North Dakota, where they are trying to outlaw the use of credit scores in the insurance process.

    http://www.creditmattersblog.com/2009/01/insurers-credit-score-use-criticized.html

    As for credit cards, they're an important component in the FICO equation. Utilization, which accounts for some 30% of your score, looks at revolving accounts as the most important part of that equation. If you don't have credit cards, you likely won't have much in the way of revolving credit history. You'll get dinged for that. That's a fact.

    As for a change in utilization to 10%, no one is likely to get hurt by that.

    I don't know anyone who doesn't have a credit card, so I can't tell you what kinds of scores are possible with an otherwise perfect credit history. Regardless, though, this hypothetical person's score is being depressed as a result of not having a single card.

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  34. CM, I must disagree with you. As a renter of many apartments in my day I can tell you that, at least in Oregon - they approve or deny on a credit score. Anything under 700 is denied automatically. Above 700 and it is dependant on your score, your file and your utilization. Again, this is just my experience.

    Carnap, I feel for you. You don't seem to grasp FICO's importance or how it is calculated. Keep reading and you will understand. I only learned from reading CM and Creditboards.

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  35. Lion, and I should note that scores are important in NYC as well. Not so much in San Diego.

    So let me rephrase: credit scores can be important in some rental markets. Therefore, don't care about scores at your own risk.

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  36. Also to add: scores are not the be all, end all of credit acquisition. But, unfortunately, it's a good part of the soup. Didn't want anyone to think that I was suggesting that a high credit score would open all doors. That's not the case. But it will definitely help.

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  37. Hats off to American Express. They got themselves into a nice and enviable position /sarcasm.

    They successfully earned the askance from merchants (who I'm sure that had a significant role in applying pressure to Amex, as others have suggested here).

    They've also instilled a culture of fear to their cardholders. Perhaps with the exception of the most naivest or uninformed of the bunch, even those who would normally be responsible, yet reliable users of their cards would've decreased the usage of their Amex cards as a precaution (certain degree of the decrease in card usage could probably be attributed to this).

    Ever since I got my first banking account (yes, even before credit cards), I understood and accepted the fact that EVERYTHING that I do that leaves some sort of paper trail (inherent nature of the banking and credit system here) will be scrutinized in some form. So, I try to be reasonably careful with where and what I use my cards for.

    With American Express being especially finnicky, I can safely say that in my particular case, they lost out on a fair amount of interchange potential to WaMu/Chase and FIA Card Services/Bank of America lately.

    After I graduate from college and am gainfully employed by the New York City Department of Education (for at least 3 years, since I do intend to honor contracts and all that), I plan to drop American Express.

    To me, they have been nothing but excellent. But, the saying goes: "Today, they came after my neighbors. Tomorrow, they'll come after me."

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  38. "Here's why. Lenders use scores as break points to determine interest rates."

    Of course, but if you aren't dependent on credit this doesn't matter at all. Remove your dependency on credit and you remove yourself from the cat and mouse games you have to play to keep your credit score high.

    "Insurance? Well, we know all that insurance companies use scores to gauge rates."

    The quantification here is vague (not sure if you mean "some" or "all"), its certainly not the case that all insurance companies use scores to gauge rates. Personally, I've never experienced it in fact. I've always gotten quotes before they had my details. Some what recently AAA did use my score to determine the size of my down payment though.

    "You'll get dinged for that. That's a fact."

    Feel free to show that its a fact. Its rather unclear how not having a credit card would increase your default risk in any sort of meaningful fashion. Will not having a credit card effect your score in some way? Sure, when it necessarily get dinged? No.

    Out of curiosity, I used bankrate.com's FICO estimator (which seems to be fairly accurate). I did two cases, one with a few credit cards at 10~19% utilization (0~9% seems to raise it by 10~15 points) and another with no credit cards at all. Everything else was the same. The result:

    No credit card: 710~760
    Credit card: 725~775

    A small ding.I did another example, with a longer credit history (first was 10~15 years):

    No credit card: 730~780
    Credit card: 735~785

    So it appears given a long credit history there is no noticeable "ding" if you don't have a credit card. Also, as your utilization gets above 20% (not uncommon at all) the person with credit cards appears to be worse off than the one with none.

    So, in some cases there is a small ding, but not in all. In fact, it seems in most cases there would be no noticeable ding. What is clear is that the sort of hyperbole expressed in the comments (namely, you can't hope to get a mortgage without having credit cards) is way off. Ironically, for stating something true that doesn't match the dogma here, I get told how much I don't know and that I need to "learn about it". Brilliant marketing. "The companies will be very pleased".

    Note: Just to be clear, I'm not trying to argue that credit cards can't be used to build better credit. Rather that you can build a good credit history and have a good credit score without ever having a credit card.

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  39. PS. About apartments. C'mon people. If people with FICO's lower than 700 couldn't get apartments there would be A LOT of homeless people. Renters tend to have worse credit than the general public too.

    Certainly, some apartments/landlords may require 700+ scores. But this is in no sense universal.

    I should add, that at least for the next 4~5 landlords with picky credit requirements are going to have a lot of empty units. The rental markets across the country are getting hammered.

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  40. Carnap, utilization (for FICO purposes) only uses revolving lines (credit cards) I believe - please correct me if I am wrong, CM. Therefore of COURSE the person with credit cards will be dinged more for higher util than the person without them.

    As for FICO estimators, they are sadly a very poor basis. FICO calculations are complex and they take into account your "bucket of peers" in a way that Bankrate cannot account for.

    You CAN build credit without credit cards, true, but your file will always be thin (unless you take out an abnormal amount of car, home and other loans) and that can hurt you in a manual review of your file (which is happening more and more often as banks realize that FICO is not the end all be all of credit).

    As for my comments being "marketing" not sure what you are getting at there. I don't work for a bank or for FICO so not sure how I can be marketing for them. I am just stating that you seem to have a lot to learn about how FICO works (as we all have at some point).

    And as for the "dogma" here. It is my understanding that the purpose here is to educate consumers about how to have a healthy financial life - part of that is fully understanding how FICO impacts that. Like it or not (I hate it), FICO is here to stay and DOES affect MANY aspects of your life.

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  41. Carnap, in your Bankrate.com FICO calculator experiment, what data did you use on the first page? I chose no credit card and no loan (after all, a loan implies you got credit somewhere. You seem to advocate not using credit). It won't let me even go to page two, saying I need some sort of history for it to calculate a score.

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  42. As far as apartments go, I assume it depends on the complex/PM company. When I applied for my last one, the lady said I had one of the better SCORES she had seen, and because of it I had zero deposits required. I put that money in a high yield savings account and let it sit. That was 4 years ago.

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  43. Clutch, it certainly does depend on the PM company. I am simply using my area of Oregon as an example. When I moved back in August my score was around 600 (eek) - I had years of quality rental history and great references and I still had to get a cosigner for my lease because not one of the over 20 places I applied to would take me with a score of 600. Every one of them said 700+ or a cosigner with 700+. We could be a unique environment but I doubt it since we are also a college town.

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  44. clutchcargo:

    Although, I do advocate a debt free life-style for individuals that isn't my point right now. My point is that you can have a good credit score without having credit cards. For the first set of numbers I selected "10~15 years" for the second "20+ years". For the other items I basically picked things that were favorable.

    "I don't work for a bank or for FICO so not sure how I can be marketing for them."

    "FICO" is not a business. And the point about marketing is pretty simple. If Fair Isaac, the credit card companies etc can get everyone to believe that "you need credit in life", "you need a credit card to have a good credit score", etc it increases their revenue. This is marketing 101 - Make people believe they need your product. Part of any successful marketing effort is word of mouth too, once you have converted someone you want them to convert others.

    But yes, its me that doesn't understand how "FICO" works.

    Oh, so now its that credit cards look bad under a "manual review". How many years have you worked as an underwriter?

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  45. Correction: "so now its that the lack of credit cards....." in the last paragraph.

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  46. I used a 2-5 year old loan, then everything favorable. Then the same with 2-4 credit cards and came up with:

    w/CC's: 765-815
    wo/CC's: 695-745

    The best you can hope for w/o a CC is 20 points below the worst you can expect with a CC.

    I don't necessarily believe Bankrate is all that accurate, but even in it's over simplification of FICO, it definitely recognizes the value of credit cards.

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  47. FICO is most certainly a business. It stands for Fair Isaac CORPORATION.

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  48. Carnap, I've found that, over the past five years, that my only dependency for credit has come in two areas: car purchases and home purchases. I didn't have the cash to buy either of them outright. For everything else, I have been fine. Because of my score, though, I was able to qualify for a 0.9% interest rate on a car.

    I try not to speak in absolutes, so let me say this: at least some of the insurance companies out there use credit scoring to assess premiums. Don't know which do or don't. I always assume, though, that they all do. Gives me an incentive to do all of the things that will yield a nice score.

    One only needs to look at the reason codes that FICO provides in the scoring process.

    1. Length of time revolving accounts have been established
    2. Lack of recent bank revolving information
    3. Lack of recent revolving account information
    4. No recent revolving balances
    5. No recent bankcard balances
    6. Too few bank revolving accounts

    Those are exact reason codes. It's difficult to get revolving history without credit cards. One can infer that these negative reason codes wouldn't be doled out if consumers had credit cards -- and used them. Even if you don't believe what I am saying, you can go out and do some independent study that will support what I am saying. Lack of credit cards on a credit report will result in a lower score.

    I'm not saying that you can't have a decent score if you don't have credit cards. I'm merely saying that you are being penalized -- and not receiving more points -- because of your decision to not have cards.

    I can't speak to the FICO estimator. Don't know exactly which bubbles were filled in and which ones were not.

    Utilization weighs revolving history more heavily. My homework indicates that it's worth 90% of the score. Installment utilization accounts for about 10% of the category.

    Regarding not being able to get a mortgage without a credit card on the report, not even sure who said that. But I didn't. I'd never make that kind of black-and-white statement. I'm only arguing that your score won't be maximized if the credit report is devoid of a credit card. That's my point.

    Finally, I'm not disagreeing with Carnap. One can still have a fine score without a credit card on the report. But, assuming that the person with a card keeps utilization low, that person will likely have the better score. Also, mix is another factor. Some 10% of FICO is comprised of mix. You can't max out all of the mix points if you don't have a revolving account present (a bankcard fits the bill).

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  49. clutchcargo:

    I never claimed that credit cards didn't play a role in your credit score, rather I stated that you can have good credit without having a single credit card. Credit cards can help establish your credit, but they aren't necessary.

    Also, I'm not sure what you picked but even with low utilization with a 2-5 year credit history I get 720~770 for the score with credit cards. But as a noted before, it appears that your credit score will be a bit better with credit cards when your credit history is relatively short and/or you keep your utilization below 20%. But if your utilization is higher or your credit history is long, the lack of credit cards does not seem to dramatically effect your credit score.

    Again, credit cards can be useful in building your credit especially when you are young and have none. I don't deny that. You are also likely to build a good credit score faster if you have credit cards. But the claim that in general you need credit cards to have a good credit score is just false and it ignores some real issues. Such as even with modest utilization (20+%) your credit score is likely to be better without credit cards at all assuming you have had other sorts of loans.

    As regarding the use of "FICO". Its now used to refer to the particular score not the company. Does "myFico" refer to "My fair isaac corporation"? No, not really. So if The Lion was using it as an abbreviation for the company thats fine, just don't blame me for the ambiguity.

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  50. Carnap, I agree that one can have a decent score without credit cards. But properly used, they are a great tool that will not only speed up the process of increasing your score but will ultimately make it higher. Why shun them entirely? The key here is the proper use of them.

    I ask about this because you seem to be extolling the virtues of the Dave Ramsey plan. That's fine if you are, but his plan ignores the fact that credit cards can be used responsibly. It takes a little more effort to understand them than "just cancel all of your accounts and never use credit cards", but hey, doesn't everthing good take a little effort?

    As far as the FICO thing, I assumed Lion meant the company not the score, as I don't know how one can be employed by a score.

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  51. "Because of my score, though, I was able to qualify for a 0.9% interest rate on a car. "

    Sure, but a cash buyer would've gotten a discount on the car equal to their interest rate subsidy. So, this just reiterates the point that if you need to go into debt than having good credit is helpful.

    "you can go out and do some independent study that will support what I am saying. Lack of credit cards on a credit report will result in a lower score."

    1.) Don't tell someone to research your position when they don't agree with your position. Its fallacious and banal.
    2.) Don't reiterate your claim to establish your claim.

    So remove this and you have establish your position with the following (in gross form):

    1. There are scoring codes related to the lack of revolving credit.
    2.) Credit cards are the primary source of revolving credit.

    Therefore: Lack of credit cards will result in a lower score (assumed universal statement? Don't know...ambiguous quantification).

    Now, if you don't mind me asking where is the entailment here? How does your conclusion follow from your premises? It doesn't.

    If you don't want to support your position don't support it, just don't give poor arguments and pretend to be a sage.

    "I'm merely saying that you are being penalized -- and not receiving more points -- because of your decision to not have cards."

    Again a universal statement or not? I disagree with the universal claim, I have stated more than once I agree that in some cases you may be penalized to varying degrees.

    Anyhow, FICO is a black box and at best you can game the system. The algorithm is not nearly as simplistic as so called "credit experts" pretend it is (if it was why would you need the researchers at Fair Isaac?). The fundamental question is under what situations does the lack of credit cards increase default risk? Trying to understand how FICO thinks about this in terms of the "what makes up your fico score" isn't particularly interesting.

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  52. Since you are replying to CM and not me, I will only comment on one thing you keep repeating:

    "Therefore: Lack of credit cards will result in a lower score (assumed universal statement? Don't know...ambiguous quantification)."

    Using your own estimator (Bankrate.com) I cannot make not having credit cards result in a better (or even equal) score. The only way I can do this is by changing utilization, late payments etc. These are all considered non-responsible use of credit cards.

    Apples to apples comparison shows that you will get a much higher score if you have credit cards and use them correctly.

    Assuming the metric you introduced is correct, it sounds like:

    "Lack of credit cards will result in a lower score."

    qualifies as a "Universal Statement".

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  53. "Carnap, I agree that one can have a decent score without credit cards."

    So you changed your position, because you rather clearly didn't agree just a bit ago. Nothing wrong with changing your mind, but again you didn't agree and the whole reason I stated to talk about this was your and Lion's comment.

    "I ask about this because you seem to be extolling the virtues of the Dave Ramsey plan. That's fine if you are, but his plan ignores the fact that credit cards can be used responsibly."

    I don't read or pay attention to Dave Ramsey. But I'm not ignoring the fact that credit cards can be used responsibly, rather I'm not ignoring the fact that they usually aren't.

    I think the ills of credit cards are pretty well documented (If I recall CM has posted a number of articles about their damagers), but again people always think "well I'm super smart I wouldn't spend more just because I have a credit card". Everyone thinks they are the exception, but the reality is most aren't. The best and easiest way to avoid the damagers of credit cards is to avoid them.

    I'm not completely against credit cards, I do have some after all. But I don't really use my personal cads anymore and have been slowly closing my accounts. I plan to keep one of my cards. I'm completely against students getting credit cards though even though its likely to help their credit scores. I haven't known a single college student that isn't from a wealthy family that correctly manages/managed their credit cards (I include my past self here too).

    Also, you can say that 20%+ utilization is a non-responsible use of credit cards yet its rather common. If any universal claim can be made its:

    "Lack of credit cards will result in a lower score if your credit history is relatively short and/or your utilization is below 20%". I'm sure there are a number of other conditions too.

    Since, most people don't satisfy these conditions, I would suggest a more fitting statement is:

    "Lack of credit cards will result in a higher score".

    Its likely to be applicable more often than the opposite.

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  54. I didn't really change my position at all, I used your calculator to prove that responsible use of credit cards would result in a higher score. Yes, you can have a decent score without them, but your calculator "proved" you will have higher score with them.

    The rest of what you say makes sense if one does not educate themselves about finances and the proper use of credit. The whole point of this (and other pro-credit) sites is to educate consumers, not assume dumbness with "just do this simple thing and you will be ok" advice.

    Not all of us want a security blanket, we want knowledge and are willing to put forth the effort to "learn the system" and not be victims.

    I just don't agree with your own Universal Statements that include things like "most people" this and "most people that".

    With education, "most people" will be... educated.

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  55. "but your calculator "proved" you will have higher score with them."

    Ugh, it did no such thing. To what degree having credit cards or not effects your credit score depends on a number of factors. You simply cannot make the general statement that "Having credit cards will improve your score".

    "The whole point of this (and other pro-credit) sites is to educate consumers"

    The fundamental problem is that you are educating the wrong part of the brain. Your brain stem and related primitive structures doesn't care about what you know about credit. Marketing doesn't try to lure you in with your frontal lobes....

    This is just part of the "I'm smarter than that" idea and I claim more often than not...you aren't. It isn't about intelligence. Its about human/mammal psychology.

    "I just don't agree with your own Universal Statements that include things like "most people" this and "most people that".

    Thats fine don't agree, but my claims aren't universal. "Most people" = 51% or more. Universal = 100% of the domain in question.

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  56. Carnap, you are giving up on humanity. To you we are all a quivering mass if brain stem. I for one consult my frontal lobes from time to time.

    In fact, I enjoy controlling my reptillian ancestor brain parts. I do this through education.

    Not only that, but I have successfully earned all kinds of points/cashback, have never paid a dime in interest and have never had my debit card debited hundreds for renting a car. I even get to skip the insurance when I rent said car... MasterCard pays or that.

    I also have never had to worry about how much the gas station is freezing on my debit card when I gas up.

    You can reduce the public to the lowest common denominator if you want. I get Skymiles for understanding things.

    I appreciate what you are trying to say... I just prefer "smarting up" the public, not "dumbing" them down.

    And as far as your "ugh" goes, I hope you came to a pro-credit site expecting healthy debate. You will get that here. We are a civil bunch.

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  57. "I haven't known a single college student that isn't from a wealthy family that correctly manages/managed their credit cards"

    /me waves at carnap.

    Junior in college. 3 years of staying on top of my credit and not spending beyond means... even in "emergencies."

    My family household income is less than $30k unfortunately. Can't say the same about the health of my parents (which is responsible for lowering our income for several years), but credit wise, they're doing fine. PIF culture emanates well around here.

    Better be careful with your universal statements!

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  58. "Better be careful with your universal statements!"

    I was, hence why I said "I haven't known a single..." instead of "No college student". You may perfectly well manage your credit cards well, I wouldn't know. But as a group college students mismanage credit far too much. This includes not only credit cards but also student loans. So as general advice, I much prefer "Don't get a credit card while you're in school".

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  59. It might just be because they aren't educated in personal finance.

    I guess we could just use your plan:

    "don't do it because I said so."

    How often does that work with kids?

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  60. clutchcargo:

    If you think I'm trying to insult you guys with my comments you aren't understanding my claims.

    Running a balance is not the only way to get suckered by credits cards. Perhaps even more dangerous is the effect it has on people's spending habits (I believe, CM posted recently on this topic).

    The problem with credit cards is it requires that people be completely diligent with their usage on many levels. The majority thinks they have the sort of diligence to manage them, yet the vast majority doesn't.

    The more you think you are above the effects of marketing the higher chance you are going to get suckered by it. There are a large number of researchers out there that are doing nothing but thinking about how to trick you out of your money.

    "In fact, I enjoy controlling my reptillian ancestor brain parts. I do this through education."

    Well, you can certainly pretend to control it? Reality, works in different ways on the other hand.

    "You will get that here."

    Well, I'm waiting. So far I haven't seen it, I've seen a self feeding group-think that isn't able to defend itself against dissonance without appeal to blatant violations of logic both formal and informal. You guys are fairly civil though, I'll give you credit for that!

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  61. "don't do it because I said so."

    I have no delusions about the fact that the vast majority are going to ignore my advice. No amount of logic is going to compete with billions of marketing dollars geared toward the more primitive impulses of mankind.

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  62. Hmmm... 20 years of proper use and thousands in cashback and other benefits. I guess that's a blatant violation of logic.

    My spending habits are no different then if I used a debit card. Why? Because I use my credit cards as if they are debit cards. I feel the pinch of every dollar I spend with it just as if it were a debit card... I have developed the ablity to realize it IS a debit card, only deferred by 20-45 days.

    I don't know what you are talking about with all this marketing-speak. I usually buy generic because it is cheaper. If the name brand is a better value than so be it, I will buy it. I sometimes glance at commercials when they are funny. Other than that, they make my TV viewing free.

    We are not all robot slaves to marketing.

    I'm sorry that you feel we are.

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  63. FICO is also an abbreviation for Fair, Issac Corporation. I was not ambiguous. You simply assumed, incorrectly, that I was ignorant of my own statements.

    What, exactly, is your agenda? You come to a pro-credit site and slam on the use of credit cards? You come to a site that seeks to educate consumers in order to improve their credit life and call us out as shills for banks and FICO?

    In the end though, you give up on humanity and I give up on you. Not only are you not willing to listen to another viewpoint you do exactly what you accuse others of! So good luck. I wish you well and I hope you either learn or life teaches you.

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  64. "Hmmm... 20 years of proper use and thousands in cashback and other benefits. I guess that's a blatant violation of logic."

    Ugh. Making a statement whether true or not is not a violation of logic, logic after all refers to the laws of inference. My comment was regarding the lack of sound arguments and the common use of fallacies both informal and formal.

    "I have developed the ablity to realize it IS a debit card, only deferred by 20-45 days."

    In other words you realize its not a debit card.

    "We are not all robot slaves to marketing."

    We are slaves to our biology, which makes us slaves to those that know how to manipulate it.

    Regardless, I don't know how you have managed your credit cards over the last 20 years nor do I really care. My main claims here have been:

    1.) The claim (made by you and others) that you can't have a good credit score without credit cards is pure hyperbole. The claim that there is even a meaningful ding in most cases its also hyperbole.

    2.) As a general rule I suggest its better if college students stay away from credit cards and keep student loans to a minimum.

    None of my claims have been about you personally or any other particular person.

    "Not only are you not willing to listen to another viewpoint you do exactly what you accuse others of!"

    Don't mistake disagreement with not listening, its rather banal.

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