Gaming the Credit System

Welcome clickers from Train Wreck Central

2007-06-14T01:49:00.000-05:00

aka IAmFacingForeclosure. I've decided to do this post backwards. The meat is up front. Introductory/explanatory stuff is at the end. Since you're here, read these "Intro to Credit Score Gaming" articles: Part I - Payment History, Part II - Balance to Limit Ratio, Part III - Length of Credit History, Part IV - Types of Credit Used, Part V - Recent Inquiries and Recent Credit. That's the core info. Other highly relevant posts: FICO vs. FAKO (I got "FAKO" from a commenter on IAFF. Thanks, whoever you are!). What to do if you're young and trying to establish credit. Get your credit reports (not scores) yearly from the government, but be aware of how the "annual" part works. I also discuss recent inquiries in more depth.

If you've read some or all of the above posts and want to find out your FICO score and maybe track it over time, please use this link to MyFICO.com (the best place to get your real FICO scores) which can also be found at the top and sidebar of every page. Oh, and there are coupon codes out there for MyFICO.com. Just use Google and you'll find them.

(Now the introductory/explanatory stuff -- I originally had this part at the beginning, but it started to run pretty long...) I have been keeping up with Mr. Serin's situation for quite a while now, and I had to temper my disgust at Casey (especially with this recent Australia bit) with my greed and desire to make some more money from this blog. I have mostly stayed out of the comments at IAFF, because you guys can be awfully intimidating.... but I've read a lot of the stuff on Exurban Nation (Duane posts especially), Nigel Swaby's blog(s), Caseypedia, etc. Anyway, back to my motivation in becoming a "Supporterz" (although if I had to, I'd say I'm a Haterz(TM)). That MyFICO.com referral link that you see at the top of the page is actually making surprisingly good money, even with the minimal amount of traffic that I'm already getting. I'd like to see if I can increase that, at least temporarily (who knows how long IAFF will be up).

Anyway, this blog has been fairly dormant for the past couple of months, for several reasons. One, my wrists are hurting, and I already have to spend most of my day at the computer for work (not a W-2 -- ha!). But really the main reason is that I'm pretty much out of stuff to say about FICO scores and how to improve them. I'm not one of those guys who can just retread the same old topics over and over when nothing has really changed. There's only so much to say about FICO scores, but I'm constantly surprised at how little people know. There are many misconceptions out there. I probably still have some misconceptions myself! I'm just one guy, and I don't know everything. So I may have gotten some stuff wrong, but I've been tracking my FICO score monthly for upwards of 3 years now, so I probably have a better grasp on it than most. If you disagree with anything that I've written about FICO scoring (or just have better information) then please leave a comment correcting me.

So, that's that. I hope you at least learn something while you're here, even if you don't get your FICO score at MyFICO (mercifully unlinked for your mental health).

Apologies and a Break

2007-04-24T18:04:00.000-05:00

I apologize for the lack of posts lately. On top of being particularly busy (just bought my first real estate, which I may write up later), I also have started to feel symptoms of either carpal tunnel syndrome and/or tendinitis in my wrists. As my job requires me to use the computer, I am curtailing all non-job-related computer usage as much as possible. I am experimenting with different keyboards, trackballs, etc. and my wrists seem to be getting better. But still they start to hurt after a day at the computer.

I will still be reading other PF blogs, sometimes commenting, sometimes maybe even writing something here. But you should consider this blog on hiatus until further notice. Please continue to use it as a reference, as the important stuff (e.g. the Required Reading) will continue to be relevant.

GCS Required Reading

2007-04-05T13:01:00.000-05:00

If you're a new reader, you should be sure to read through these "Intro to Credit Gaming" articles: Part I, II, III, IV, V.

These articles cover the components of the FICO score, which forms the basis of any advice that I might give. They really encapsulate the bulk of what I wanted to say when I started this blog. There is too much disinformation out there about the FICO score (which is the only score that matters). The most common advice that people will throw around in terms of gaming your FICO score is not to get new credit inquiries, which has a grain of truth but is hugely overestimated in terms of importance (as you'll find in Part V linked above).

I apologize for the infrequency of new posts in the past month or so. My job has kept me really busy, and then there's taxes, buying a rental condo, visiting family, and all kinds of other things going on. For now I am pretty much only writing new content when I have insomnia. Which, thankfully, isn't that often.... but that also means that I haven't been writing very often. Over time, my schedule will even out, and so will my blog activities.

The "Inverse Rule of 72" for Mortgages

2007-04-03T00:40:00.001-05:00

Golbguru of The Tao of Making Money recently posted about the common "Rule of 72" for figuring out when your money will double, based on making an investment that makes a particular interest rate. If your rate is 7%, it will take roughly 10 years to double your money, etc.

Well, that got me to thinking, particularly when I had a conversation with my dad today about my parents' house. They have been in the house for about 10 years and have a typical 30-year mortgage (although they are making payments every 2 weeks in an accelerated payoff plan). We were wondering how much they still owed on the mortgage, and unfortunately such calculations don't come quickly in our heads, and I had no quick shortcut. I wondered: What if there is a quick "Inverse Rule of 72" out there? How long would it take to halve the principal when we're paying interest?

So tonight I used Bankrate's Mortgage Calculator to figure out a few tricks. In line with the "double your money" idea from the Rule of 72, I wanted to know how long it would take to pay off half of the mortgage. Taking it one step further, I wanted to see how long it would take to pay off just 25% of the mortgage. The formulae for the final approximations here are not exact, but they are quite easy to calculate and good enough for casual use. All of these figures are based on a standard 30-year mortgage. First we have a table of the actual values for the month/year when the mortgage will reach a certain paid-off point:

1/4 paid off
0%	6/07
1%	6/08
2%	5/09
3%	5/10
4%	6/11
5%	7/12
6%	8/13
7%	9/14
8%	9/15
9%	8/16
10%	7/17

1/2 paid off

0%	1/15
1%	2/16
2%	4/17
3%	4/18
4%	4/19
5%	3/20
6%	1/21
7%	10/21
8%	6/22
9%	1/23
10%	7/23

The 0% part is fairly obvious, and it forms the basis of our estimation formula. A 30-year 0% loan will be paid off halfway at the halfway point of the loan, or in the first month of the 15th year. One-quarter of the initial principal will be paid off one-quarter of the way through, or 7 years and 6 months into the loan. These form the baselines, and all other dates will be calculated from there. Now if you look at the tables, as you move up a percentage point, the target dates are pushed back by about a year per percentage point. At higher interest rates, there is a bit of compression at the back end of the loan, but a year is still a good estimate. There is only a 6-month difference between 9% and 10% to reach the halfway point (both occur in the 23rd year of the loan), but it is still 9 months between 6% and 7%. So as your interest rate gets above the "normal" threshold, the approximation will get less accurate for the half-paid scenario. For paying off one-quarter of the principal amount, each percentage point between 0% and 10% makes a difference of between 11 and 13 months, so one year is a very good approximation in that case.

So our final formula is:
1/2 Paid off: 15 years + 1 year per percent interest
1/4 Paid off: 7.5 years + 1 year per percent interest

Remember, these are all for 30-year mortgages! So, it will take roughly 22 years to pay off half of a 30-year mortgage at 7% interest and roughly 18 years at 3% interest. It will take roughly 10.5 years to pay off 1/4 of a mortgage at 3% and roughly 14 years at 7%. If you are interested in 15-year mortgages then you can just use the above formulas and divide your final answer by half.

Who just wants to be a millionaire?

2007-03-27T12:03:00.000-05:00

A popular article on CNN.com talks about modern-day millionaires. And to that, I say: Who just wants to be a millionaire? The term has lost all of its cachet. Not to say that millionaires are losers; obviously they're doing much better than most of us.But it certainly doesn't mean what it used to.

The Oxford English Dictionary lists the first documented usage of the word "Millionaire" coming in 1816 from George Gordon, Lord Byron: "He is still worth at least 50,000 pds being what is called here a 'Millionaire' that is in Francs and such Lilliputian coinage." It is interesting that even back then, there was a question over what might truly be considered a "worthy" millionaire. Obviously currency conversion rates can wreak havoc with the term. you can be a Yen millionaire for roughly $8500. That's a pretty low bar to pass.

So, what's your own definition of a millionaire? Personally, I look back to roughly 1900 to 1920. The age of Robber Barons and The Great Gatsby.... the age when the term "Millionaire" was extremely impressive. Using the Inflation Calculator we can see the following current values for previous millionaires:

1900 Millionaire: $23.3M 2006 dollars
1910 Millionaire: $21.6M 2006 dollars
1920 Millionaire: $11.3M 2006 dollars
1950 Millionaire: $ 8.2M 2006 dollars
1970 Millionaire: $ 5.3M 2006 dollars
1980 Millionaire: $ 2.7M 2006 dollars
1990 Millionaire: $ 1.6M 2006 dollars

Based on this, I'd have to go with the nice round figure of $10M to be what I would personally consider to be a "modern-day millionaire." That's the kind of money that you can't get by being an extremely frugal teacher or janitor like those described in The Millionaire Next Door (the very fact that there can be a "Millionaire Next Door" is an indication of how much the term has slipped). That kind of money almost requires that you be very successful in what you do. Of course, there will always be lucky people like heirs, lottery winners, and early employees (as opposed to founders) of startups who end up with $10M+ net worth. But it's still a very rarefied group, and it's my goal to end up there.

Re: JLP's Subprime Lender Mess Question

2007-03-27T01:27:00.000-05:00

In QotD: Subprime Mortgage Mess - Who's to Blame?, JLP at All Financial Matters poses the question: "Who’s to blame for the subprime mortgage mess? The lenders or the borrowers? Or, should the blame be shared?"

He got a lot of interesting replies, and this was going to be one of them, but I started writing and it got very long, and then I got pulled away and ... blah blah blah. The point is, my answer is here now.

They're both to blame for their own part of the problem.

Anybody who defaults on a loan is obviously to blame for 1) overextending themselves and/or 2) not understanding what they were getting into. That is an individual problem, and each individual is responsible for their own problem.

Lenders are at fault for the bigger, aggregate problem. They made stupid loans, quite simply. They made loans that they couldn't cover. Millions of them. Millions of poor business decisions, pure and simple. They are totally at fault for that and therefore bear the majority of the responsibility for this whole thing. Loaning to subprime borrowers is inherently risky. You go into it knowing that some percentage of them will default. It is the job of the lender to figure out that percentage and set their rates accordingly to keep from going bankrupt.

Your average individual American cannot really tell you how much house they can afford and how much they will be able to afford 2, 5, or 10 years down the road. A bank, with lots of smart people working for it, using tons of actual data to make predictions, can. The credit game is one of "if you build it, they will come." If you decide to loan money to people with poor credit, people with poor credit WILL decide to borrow money. If they default (which some will, no matter what) then you have nobody to blame but yourself for lending them the money. If you create lending programs specifically for people with poor credit, and then advertise them in every newspaper and every other broadcast medium, guess what? People with poor credit will apply for that credit! And if the company is stupid, it will approve more than it should at lower rates than it should.

We are all familiar with the typical bad image of a company with more marketing acumen than actual good products. They come up with something stupid, and then, in order to sell it, they use marketing to "create the market." They generate demand to meet their supply of the product -- demand which, like the product, was nonexistent before. And then millions of people end up with Pet Rocks or Food Dehydrators feeling like idiots, while the marketers of the product are laughing all the way to the bank. This current situation is a case of the lending companies "creating a market" that shouldn't have been created.* And in this case, there are some "just desserts" being dished out in the form of crashed stock, some ethics investigations and maybe even some criminal prosecutions.

(*Note: I'm not saying that lending companies created the demand here. There is always a demand for free money or easy credit. Lenders created the supply, and thus created the market. You could set up a business to lend million-dollar unsecured loans with no credit checks, and I'll bet you'll find pent-up, currently-unsatisfied demand from several billion people -- but obviously it would be a bad business decision to enter that market. All of this comparison to Pet Rocks and the like is just to connect the two different shady kinds of business. In the Senate hearings on this fiasco, I bet we will hear time and time again from lending execs that they were just "trying to meet the market demand for this kind of loan product." And guess what? I just did a Google search for lender trying to meet market demand. The first result was (I admit, this amuses the hell out of me) a recent speech by Sen. Hillary Clinton:

According to most recent statistics, delinquent payments now affect more than 13 percent of subprime loans in our country. That's the highest level in four years. Now, many would attribute this rise to unsophisticated homebuyers, even irresponsible buyers, or the subprime market itself. But the foreclosure rate for all mortgages increased by more than 17 percent in the last quarter of 2006. That's the highest foreclosure rate in four decades.

So when somebody tells you this subprime market thing is no big deal, or maybe, you know what, let the buyer beware, these folks signed on the dotted line, it's their responsibility. Ask them why the rate for all homeowners is so high. Because the economy is not supporting homeownership the way we need it to. And after all, in the absence of an alternative, the subprime market has opened the doors to millions of families and responsible lenders and the market are rightfully casting out some of the worst actors in the subprime industry. But the market will not address the millions of families trapped in unworkable mortgages, hounded by delinquency and facing the grim possibility of foreclosure.

...

We need to expand the role of the FHA to issue more mortgages at better rates to these homeowners. We need to give consumers more counseling and information, prevent families from being trapped in high interest loans with pre-payment penalties and in some cases, allow more breathing room from foreclosure.

...

Now, I will soon be reintroducing my 21st Century Housing Act, which will take steps to modernize the agency by allowing the FHA to reinvest a portion of its revenues in new employees and information technology; to develop new mortgages to meet market demand and to position the FHA to work more efficiently with lenders and to serve more borrowers.

Guess what, JLP? It's neither the lenders' nor the borrowers' fault! It's the economy's fault, stupid! Ok, that was a bit longer diversion than I meant to take, but I was just so amused by that.)

Tech blogger and Yahoo Jeremy Zawodny blogged a couple of weeks ago about New Century Financial Corporation's website and the dangers of having a live stock quote on your company's homepage. I'm sure the slide from $30 to less than $2 in two months is something that NCFC really wants to promote on their front page! (And I'm really surprised that they haven't taken it down yet). That stock is no longer listed on the NYSE.

Are the individuals responsible for their own individual problems? Of course. But they're basically too stupid to keep themselves from getting into these problems. That's an assumption you can always bank on (pun intended). "Nobody ever went bankrupt underestimating the intelligence of the American public." This is pure statistics, and (as I have written before) it is the thing that has driven the success of Dave Ramsey's philosophy more than anything else: you simply can't trust the majority of people to make good decisions about money. People are short-sighted. The story of Faust is resonant for a reason.

I read stories like this one and I find it hard to place the blame in any particular place. First off, the people sound like idiots because they knew they were signing for a more expensive mortgage than they wanted. Secondly, the real estate agent sounds like a scumbag. Thirdly, the loan originators sound just as stupid as the borrowers for lending to people skating so close to the edge, without requiring enough equity to be able to withstand a hit if the local housing market dropped. The kind of loan that these people got (100% financing) sounds like the kind of loan I'd only give to somebody with A to A+ credit. And then there's Wall Street, which seems to gobble up mortgages like there's no tomorrow. I've actually read (and thought it was reasonable) several authors writing about investing in REITs (Real Estate Investment Trusts) because they produce a good rate of return and their loans are backed by actual assets. Well, New Century Financial Corp. was an REIT. There are undoubtedly some good (non-subprime) REITs out there, but this whole thing leaves a bad taste in my mouth. Also, the "backed by assets" promise doesn't seem so great any more.

There's also the matter of subprime loan recipients. Think about it: if you're applying for this kind of loan, you're already desperate. Your credit sucks. Do you really care that much about a foreclosure if you're already so badly off to begin with? At that point, taking on a mortgage is just a gamble, and you probably realize it. You think "Well, I know I probably won't be able to make my payments for the next 5 years, but I'll just enjoy the house while I have the chance." So you're sitting there, you found a house and this guy is telling you that you can qualify for a loan. The terms are ridiculous, but who cares? You'll be no worse off than you currently are if you default on the loan. And if you happen to keep a good job and pay off the loan eventually, hey, great. It's other people's money anyway, right? And there's never been a better opportunity for these people (in terms of interest rates and the housing market) than there was two years ago. Is it any wonder? Can you really blame these people for taking out these mortgages? They took a risk, sure, but it really wasn't terribly risky for them. They weren't even going to lose their down payment, because they didn't make one.

Anyway, I'm just rambling now. My main point: Everybody has their share of the blame. Individual borrowers: to blame for their individual loans, taking out too much in loans, not reading or understanding the loan documents properly. But we're talking about millions of individuals here. On the corporate side, we're talking what, maybe a hundred (order of magnitude) companies all originating these loans? Shouldn't these companies with billions of dollars at their disposal have been more prudent than the unwashed, credit-less masses? (I do realize that I'm probably giving too much credit to these corporations.) Moving on upward through the chain, I have a pretty hard time blaming the government at this point, although the government will be to blame if it bails out any of these bankrupt companies or encourages any more of this kind of loan. On principle, I'll rarely argue for more regulation, and if the further regulation goes the way that Senator Clinton is proposing, it will just make things worse.

A Question and an Example

2007-03-13T14:11:00.000-05:00

First off, the example: golbguru has documented the effect of credit utilization (what I usually call debt (or balance) to credit ratio) on his FICO score. To sum up, his score went from 771 to 737 when his credit utilization went from 2% to 23%. He did this as part of a credit card arbitrage plan.

This is the kind of thing I love to see. I am just one person with one FICO score. I have tracked my score for about 3 years now, and I have seen the effects of various financial decisions on it. But I necessarily have a limited set of experience there. Seeing how other people's FICO scores change in certain situations is more data that helps up to confirm our model of the FICO score and how to properly game it. If any other readers have similar experiences (with before-and-after FICO scores) to share, I would love to have you leave a comment about it!

Now, on to the question part. A reader wrote in recently with a question about student loans for an MBA student. I am doing some research for the full answer, which I will post here soon; part of this research involves getting info from others. Namely, have you (or somebody you know) ever been turned down for a student loan? What kinds of student loans, e.g. Stafford, Perkins, etc.? For what purpose were the loans, e.g. undergrad, grad school, med schoool, law school, business school?

When I went to college, I got Stafford and Perkins loans. My parents also got PLUS loans for my education, even though their credit was in pretty bad shape at the time. I was (and still am) under the impression that it is very difficult if not impossible to be turned down for these loans; I'm not sure if your FICO score ever even enters the equation. Student loans are heavily regulated and sometimes even backed by the federal government. Plus, they seem like a pretty safe loan. Education is a proven good investment, and after graduation, one's income is almost guaranteed to go up. Plus, student loans can't be wiped out by bankruptcy.

But, my knowledge is once again limited to my own experience. I have no idea what the loans are like for graduate school or professional school. So I am asking you to please leave a comment so I can find out more. If you have ever had student loans, I want to know about them.

Risk, Freedom, Security, and the Majority

2007-03-09T11:12:00.000-06:00

Over at All Financial Matters, JLP has made a couple of heavily-commented posts about paying off a mortgage early vs. letting it run for its full term. (If you haven't read these posts along with all the comments, please do so! A lot of what I'm going to say relies on the context from those comments.) This is another thing that Dave Ramsey harps upon, and his followers also feel strongly about it.

I have been reading a book by Robert Kiyosaki (hear me out here) called Rich Dad's Prophecy. I borrowed it from the library, and I am not yet done with it (actually I'm only about a quarter of the way through it). I guess I will get more into Kiyosaki on a later entry, although I'll note now that I generally "drink the Kiyosaki Kool-Aid." I can't yet comment too much on this particular book, as I'm not too far into it and he seems to be making more claims than he generally does.

At the point in the book where I stopped last night, RK spends a lot of time talking about freedom vs. security. A lot of time. He can be very repetitive, although I can't really begrudge him that. Some ideas just need to be hammered away. Anyway, most of the discussion is couched in terms of retirement accounts and how most people are counting on their retirement to be secure (like the old-style defined-benefit pension plans) while they are actually nowadays more free and hence less secure (401(k)s etc. are usually invested in the stock market, leaving more choice to the individual holder, but the stock market has its inherent risks). If the supposed Social Security Reform ever goes through, this trend will just continue.

It is very clear that the majority of people will opt for security over freedom, both in the political arena and in the realm of finances. Most people are not risk-takers. They want their money invested safely. That is why they want to do things like pay off their mortgages early. And this is where I am slowly coming around to Dave Ramsey's point of view on certain things. The majority of people cannot be trusted (and cannot trust themselves) with absolute freedom. It is all too easy to ruin your life and run your finances into the ground. So many people do it all the time. So I can see why DR needs to be dogmatic about it and basically force people into having security by locking themselves into a 15-year mortgage, even though they lose the flexibility to do something else with that money.

But, there are people who have self-restraint, live well below their means, and save a lot of money without being forced to do so. I believe myself to be one of them... we'll see in 10 years where it's gotten me.

Follow-up to earlier posts

2007-03-07T09:48:00.000-06:00

I got the following questions from sm in response to Part V of the Intro to Credit Gaming series, which covered credit inquiries and new credit:

Do you know a general rule of thumb for how long one should wait between applying for credit cards? How many credit applications is OK per year? Also, does pulling your own FICO score show up as a credit inquiry?

Sorry it took so long to reply -- somehow this comment slipped through the cracks (I wish that Blogger had a "new comment" notification!). As a rule of thumb, I typically don't apply for new credit within 6 months of receiving other new credit. However, this rule was made to be broken. I would try to wait 6 months between credit cards. However, mortgage and auto loans are handled differently.

MyFICO.com (please use that link if you want to use MyFICO to buy credit scores) has a fairly comprehensive page on credit inquiries. In particular,

For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all. For others, one additional inquiry would take less than 5 points off their FICO score.

Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.

So for most people, inquiries will have an extremely minimal effect on your credit score. As long as you have a good credit history and lots of credit to begin with, inquiries will barely affect your score. If you are just starting out and have no history or established credit, your score will be affected more. This also answers another question: try not to have more than 4 or 5 inquiries in a year if at all possible. Inquiries stay on your report for 2 years, but they only affect your score for 1 year. This is why I recommend that young people starting out with their credit limit their credit card applications to one every 6 months. Of course, if you don't have a mortgage application or other big credit need coming up within the next 12 months, you can choose to go wild with the credit apps and everything will disappear from your score when those 12 months are up.

This connects to a discussion between golbguru and me in the comments of an entry at The Tao of Making Money, which I also wanted to touch on in this post. A little further down on the MyFICO.com page is this:

Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though youre only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks on your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score.

Ok, that's a big chunk of text. Let's look at exactly what it says, because although it's all connected, there are two main points here.

1) While you're shopping for an auto loan or mortgage: None of your recent (within 30 days) auto loan or mortgage inquiries will show impact your credit score. You can go to 4 different lenders, each a week apart, and your inquiry with the first lender will not affect the score that the 4th lender sees. This is plenty of time to find a mortgage or auto loan. Note that this only pertains to these particular kinds of loans. Recent credit-card inquiries will still show up and affect your score.

2) After you're done shopping for an auto loan or mortgage: All auto-loan or mortgage inquiries within a 14- or 45-day span (depending on what scoring method the lender uses) will be consolidated into 1 inquiry for the purpose of your credit score. So you could shop around at 20 different lenders for your mortgage, and have all of them pull your credit score with a "hard" inquiry, and it will show up as 1 inquiry on your score after you're done shopping. Obviously you should try to limit your shopping periods to 14 days, because you have no way of knowing which method any future lender will use.

And finally, to answer sm's last question, no, checking your own credit score does not result in a "hard" inquiry that will show up on your credit score.

And finally-finally, I wanted to clarify about the Washington Mutual credit card that I use to keep track of my credit score. It is not an annual free trial or anything like that. As long as I have the card, I will be able to log in to the site and check my credit score. I assume that this is actually a near-costless benefit for WaMu because, as a lender with which I have an open account, they are checking my credit score for their internal purposes on a regular basis anyway. All that they have to do is take that score (which they're already pulling) and put it up on the website. It is accessed through the account management website, as just another part of the site. There's the typical "View Statement", "Pay Bill", etc. and then there's the "Credit Profile" page. If anybody wants me to create a post with screenshots, etc. then I will be happy to.

Why I Disagree with Dave Ramsey

2007-03-03T23:42:00.000-06:00

The other day, I was driving a lot and happened to catch a couple hours of Dave Ramsey's show. I think I've got a bit better read on him, and I know now that I disagree with him on a super-fundamental point.

Some chick called in from Houston talking about how she had been in a lot of credit card debt, but she pulled herself out of it and was now using them responsibly, turning the tables on the credit card companies by putting them to use instead of the other way around (as I advocate). Well, Dave Ramsey would have none of it. He gave the oft-cited statistic that people spend 15% more when they have a credit card than they do when they pay cash. He cited a study by McDonald's that said that people spend more with credit cards than with cash.

(Brief aside: I couldn't find anything specific about the way these studies were conducted, but really quickly I can come up with a way that they might be flawed: Cash is obviously limited. People who carry both cash and credit cards might try to pay with cash but be forced to pay with the credit card when the transaction size gets too large. Also, I think that many people (like myself) are reluctant to use the credit card when it's just a small transaction amount. So you have to turn the question around: what if, instead of credit cards "making" people have larger transactions, having larger transactions "makes" people use credit cards? This is an easy way to get the same result. As everybody learns in Statistics 101, Correlation Does Not Imply Causation. And even if it does, the direction of the causation is often up in the air. If anybody's got a link or further info on any of these studies, please let me know! There's got to be a journal article somewhere.)

Dave said that he had an "emotional attachment to cash" (and implied that everyone else in the world does too). He said something to the effect of "when you pull out old Uncle Benjamin and lay him down on the table to pay for a meal, you have a little heart-to-heart." This is absolutely false for me. I have never been too good at holding on to cash. To me, cash is meant to be spent. If I didn't want to spend it, it wouldn't be in my wallet, or even in the form of cash at all. It'd be in the bank. Some people talk about credit cards as a contrast to "money in the bank" (e.g., when distinguishing between credit and debit cards and why they prefer the latter). In my case, cash is "money already out of the bank."

When I lay down the credit card, I know that I'm still going to have to pay for it when the statement comes. Using a credit card obliges me to carry out a future action. This adds certain weight on the mind. Cash has no such consequence, and carries no such weight. In fact, when I use cash, I get the opposite emotional effect from what Dave describes. I feel carefree. Sometimes (if the amount is large) I even feel powerful. Spending cash gives me a high, even if it's just $5 at the sandwich shop. Spending on credit gives me the opposite effect. It is literally a burden, and it is felt as such. This is one thing that helps me keep from over-spending on my credit cards.

Insurance: Never a Good Deal

2007-02-22T00:45:00.000-06:00

Insurance. It's one of those things that most of us just see as necessary. In fact, in many cases, carrying sufficient insurance is mandated by law. You can't legally drive a vehicle without insurance, and I think that most of us would agree that it would be stupid to do so, regardless of the law. A single car accident could easily cost in the hundreds of thousands of dollars after property damage and medical care are taken into account. Most of us can't afford to pay hundreds of thousands of dollars on the off chance that such an accident occurs, so we pay our monthly premiums for a service that we rarely, if ever, use.

Insurance is one of those things where we consumers really don't have a whole lot of choice. Insurance companies are VERY good at being profitable, which is to say, taking in more money than they pay out; in other words, over-charging the customer to a large degree. If those profit margins start to slip, they can just raise the premiums. You don't have to be a rocket scientist to make big profits in the insurance industry, but they've got rocket scientist actuaries working there anyway.

Anyway, all of this is to say that the formula used by all insurance companies is like this:

(Sum of all money you pay to the company) < (Sum of all money you receive from the company)

Which in itself is just a complicated way of saying that insurance is never a good deal. At its basic level, you are not paying for a product or service from an insurance company. You are paying for money (actually, the chance at some money). Pure and simple. Yes, there is a bit of service involved, but this is pretty minimal.

In many ways, insurance is like the lottery. You buy a ticket for $1. So do a whole bunch of other people. Then the lottery pays one person a whole lot of money, and a few other people smaller amounts of money.... and most of the people end up with $0. But they still keep pumping their money into the lotto, because there's always that chance that they'll win.

In fact, at least the lotto has something positive for it. People play the lotto because they want to win. People buy insurance because they don't want to lose. At root, insurance is the industry of fear. "How afraid are you of losing $100,000? That's okay, just pay us $X per month and we'll make sure you never lose that $100,000. Only we've looked at the statistics and cooked the numbers so that we'll take in 3 times more than we ever have to pay out."

But of course, we all have fears, and it feels good to put them at ease. Also, bad things DO happen, or else insurance companies wouldn't be around at all. So it makes sense to have at least some sort of insurance. But you have to look at it from a rational, economic perspective.

In a recent post, Foobarista wrote about "cashflow preservation insurance" versus "wealth preservation insurance". I had never heard of this differentiation before, but it struck an immediate chord with me since a similar idea had been developing in my head for a long time (basically my idea was "certain kinds of insurance are a rip-off, but others make sense." I never had a rubric for separating the two other than my gut reaction).

o Wealth preservation insurance. This is a hedge against big, unknown expenses like getting sued or enormous medical bills.
o Cashflow preservation insurance. This is a hedge against "bump in the road" issues like car repairs or replacement of electronics or appliances.

Once it's put into such simple terms, it's easy to see what kind of insurance you should and shouldn't buy. "Wealth preservation" insurance: buy. "Cashflow preservation" insurance: don't buy. So do buy catastrophic medical insurance, malpractice insurance, auto liability insurance, landlord insurance. Don't buy comprehensive auto insurance, renter's insurance, extended warranties of any kind, etc. Things like homeowner's insurance (or maybe auto insurance for a really expensive car) sort of fall in between: get them, but with very high deductibles.

But again, insurance is never a good deal, even the "wealth preservation" kind. The game is still set up to take more money from you than it will ever give back. Really, the demarcation line between cashflow and wealth preservation insurance is simply a matter of your cashflow itself. As you get richer, you can afford to self-insure more and more of your things. For example, if you own 20 rental houses, you have much less need to insure them because you can afford to take a complete loss if one of them burns down (assuming that they're not all located right next to each other!). But if you own just one rental house, it represents a large part of your holdings, and you would be financially devastated by its loss. If your cashflow (aka disposable income) is $2000 a month, you are probably not going to want to insure your car with a $200 deductible. On the other hand, if you usually find yourself with $100 left over at the end of the month, a $200 deductible might seem reasonable.

Sorry for the long delay between posts. And sorry for the somewhat off-topic nature of this post. I'm really finding myself scratching my head to come up with more credit-related topics. I'm welcome to any suggestions. I don't mind covering more general personal-finance topics, but I would like to try to keep up the credit posts, if at all possible. But to be honest, from the beginning, I really saw this as more like a book than a blog. I only know so much about credit scores. I just wanted to take my knowledge and put it out there as sort of a reference. I really don't feel like repeating myself or beating a dead horse just to come up with new posts. So, readers, I ask you: what do you want to see out of this blog in the future?

Credit Cards for People without SS numbers?

2007-02-13T15:59:00.000-06:00

Unbelievable, but that's what Bank of America is going to offer soon. I'll refrain from getting into a political discussion here, but I'll just cite this as more evidence that banks are bending over backwards to give people credit. Whether it's a pre-paid credit card, a bank line of credit, or what have you, there is always a way to get credit if you don't already have it.

Yes, it is possible to have credit ruin your life. But fundamentally, that is your choice; you ruin your own life through credit. You can't blame a credit card company or anybody else if you run up a boatload of debt. It isn't hard to take personal responsibility and manage your credit successfully. If you do, you can profit in many ways. From gift certificates to airline miles to lower interest rates on your mortgage. You can work within the system and work it to your benefit. It just takes a little self-discipline and getting over your fears about money.

If you don't have a credit history, get started now. I'm not the only one saying so; there is a new blog out there called CreditPro, run by a professional credit counselor. To my chagrin, the topics are pretty similar to what I've covered here, yet it seems to be much more popular (69 comments on one entry!) despite only being around for about a week. Anyway, enough jealousy; the CreditPro blogger seems to be pretty good, so if you read my blog, you should check out that one too.

Easy First Credit Source: Checking Overdraft Protection

2007-02-13T14:34:00.000-06:00

This is a quickie tip that I've mentioned in passing before.

If you're young and credit-less, getting your first credit card may be difficult. One alternative is to get a line of credit at your bank. Usually this will be called something like "Overdraft Protection" or "Checking Plus". This is usually just a $500 or $1000 line of credit that is linked to your checking account; it should go unused, assuming that you manage your checkbook properly. But it should, in most cases, also go on your credit report as a revolving line of credit. The banks that I've had have put it on the credit report; some banks might not, so ask to be sure! If you've got a checking account in good standing, it should be pretty easy to get this.

Remember, Establish credit - now!

A Simple Life Hack: Sort Coins in your Car

2007-02-09T14:22:00.000-06:00

If you're like me, you accumulate spare change. I don't get a whole lot of it, but it's enough to overwhelm the little coin-holder tray in my car a couple of times a year. Once it gets full enough that the coins slosh out onto the floor when I take a corner too hard, I know it's time to clean it out.

Mentally, I sort change into two categories: useful (quarters) and non-useful (dimes, nickels, and pennies). (Other pieces such as the half-dollar or dollar coins are sufficiently rare in my life that I usually just put them aside as a curiosity until they can be spent.) Quarters can be used at the laundromat, to pay the toll on toll roads, in vending machines, etc. The rest of it is pretty much useless to me. I usually don't have the time to count out a bunch of coins to pay for something. It's good to have a few nickels and dimes on hand for the odd stuff at the vending machine, but no more than that.

So I periodically go through and sort the quarters from the non-quarters. I happened upon a trick that makes this job very easy to do, even while driving. Your standard plastic drink bottle (I used a 1-liter water bottle; a soda bottle would work just as well, but you'd want to wash it out) has a mouth that is smaller than a quarter but will accommodate any other common U.S. coinage. My procedure is to set the empty (and well-dried-out) bottle between my legs while driving down the highway, and use my right hand (the left stays on the steering wheel) to grab small handfuls of change from the tray, and use my fingers to guide the coins into the mouth of the bottle. Since quarters don't fit, they are easy to sort and put into my special quarter space (inside the center console). The rest of the change lives in the bottle, which I usually keep under the front seat (with the lid on) until it's needed again. Occasionally I'll empty out the bottle and take the coins to my bank. Note: the coins don't come out the mouth of the bottle very easily, so I'd suggest that you simply cut open the bottom of the bottle.

When I'm driving, it's not like my brain doesn't have a little extra processing power that it could put towards something else, but such things are usually pretty unsafe (e.g. I refuse to read while driving, unlike some people I know). This task requires just one hand and does not require you to take your eyes off the road for any appreciable length of time. You can do the whole thing mostly by feel, and once you're done, your coins are sorted and your change tray is clean.

If you like to sort your coins for rolling, you could even take it a step further and use 3 separate bottles (still enough to fit between your legs or maybe squeezed in next to the seat) and use your fingers to feel the difference between the coins and put them into the correct bottle. Obviously this would go much more slowly (as each coin would need to be handled individually), but if you drive a lot, it shouldn't be too onerous.

Credit Score and Payment/Balance Timing

2007-02-07T17:24:00.000-06:00

Given that your credit score depends highly on your balance to limit ratio, you will want to do some planning before applying for something big like a mortgage or a car loan (although I recommend against getting car loans). In particular, if you do as I do and put most of your purchases on credit cards that you pay off monthly, you will probably want to stop this behavior for a month or two leading up to the mortgage application. This is because of timing issues with your credit report.

First off, companies are always on a delay when it comes to reporting your credit status. When I last looked at my credit report in late January, the status of most of my accounts was current through December. But a couple of my lenders (a couple of credit cards and both of my student loans) were current only through November. These accounts showed the balances from November. So if you want to show 0 balances on your credit report (and thus your credit/limit ratio would be 0, bumping up your score) you would be best advised not to use your credit cards at all for 2 months leading up to your loan application.

Here is a listing of my credit scores for the past year (this tracking of scores up to a year is one of the benefits of my Wamu Card):

Feb 06 731
Mar 06 746
Apr 06 766
May 06 765
Jun 06 772
Jul 06 748
Aug 06 720
Sep 06 760
Oct 06 743
Nov 06 772
Dec 06 766
Jan 07 764

You can see that there's considerable variation. I can't remember what was going on in February, and in August I put an extra $4000 on one of my cards. (It was paid off within 2 months.) But for all other months, the combined balance on my credit cards was always around $3000 (always paid off monthly). I really don't know the reason for most of this variation, so I attribute it to the vagaries of timing. Eliminating all of my credit card usage would probably lead to a much more stable (and slightly higher) credit score. I may start such an experiment soon. If I do, I will be sure to report the results here.

How I Keep Track of my Credit Score

2007-02-03T13:24:00.000-06:00

I have a credit card with Washington Mutual (aka WaMu, formerly Providian) which provides a free monthly credit score. I have not charged anything to the card in about a year now. I use it solely for the free credit score, which I find very handy. The card itself sits at home... somewhere (not sure where.... just went through a move).

It seems as though the credit score is updated at the first of the month, but it is not available on the website until the 20th or so. I am not sure how accurate that first date is. The site says "Updated on: 12/01/2006", but it seems strange to me that the score is pulled on the 1st but I can't access it until the 20th.

In any case, despite the question about the timing of the updates, the service is extremely handy. It shows everything from one reporting agency (in my experience, it has always been TransUnion, although evidently it can be Experian as well). I know that all 3 FICO scores track together, from the couple of times I have checked all 3. As long as I check my credit reports (not credit scores) regularly to make sure that there's no bad info on any of them, I am content just using the Washington Mutual service to check my credit score rather than something else.

I've had my Providian/WaMu card since 2003, which has allowed me to track my FICO through quite a few changes. The biggest monthly rise was when I got a new credit card with a $10k limit (at the time, more than all my other card limits combined) and transferring my balances (which were all skating close to the limits) to that card. Since then, I have paid off that card and never run up a balance on any of my cards.

If you want to sign up for a Washington Mutual card to get this benefit, the website is WaMuCards.com. If not, the best place to get your FICO scores is through MyFICO.com . If you decide to use MyFICO, please use that link, as I just signed up to be part of their referrer network and will get a commission based on whatever you buy. The Google ads aren't getting many clicks (not so surprising) so hopefully this will work better.

What's Not On Your Credit Score: Income

2007-01-30T21:47:00.000-06:00

When applying for any type of loan or credit, you will have to include your income. Something to keep in mind is that your income will never go "on your credit report" or affect your credit score. You can have a very high credit score and low income, or high income and a very low credit score. The two are mostly independent (although it's probably easier to take the actions necessary to get a high credit score, i.e. minimizing your debts, if you have a high income).

But your income can feel like it's part of your credit score when you're applying for a loan. Sometimes it can be a bigger determinant of the outcome than your credit score! Even if you have a really poor credit score, if you've got a sky-high income and you can document that income, you will be able to get some kind of loan (although it will be at a high interest rate). Conversely, if you have a great credit score and a low income, most lenders will find it quite easy to turn you down.

This gets more important when applying for mortgages. Most mortgage lenders will require you to document your income. They might require anything from check stubs to your tax returns for the past 2 years. However, if your credit score is high enough, you can get a no-documentation loan, aka a "stated income" loan.

I was fairly amazed (and grew to appreciate the value of a good credit score) when I was thinking about buying a rental property last year. I walked in to the bank (a very large, national bank... you've definitely heard of it) and the mortgage guy checked my credit score. This bank used the median score out of the three; since my median score was above 750, I was pre-approved for more than twice what I was thinking of spending with a 5% down payment and no income documentation. In the words of the banker, "If your credit score's that high, we'll believe you when you tell us what your income is." That statement made my jaw drop.

Of course I told him my correct income, but since I'm an independent contractor who's reimbursed for lots of stuff, my "income" is unusually flexible. If you looked at the checks I get every 2 weeks, you'd say my income is X; if you looked at my final net income on my tax returns, you'd say my income is more like 0.6*X or maybe even X/2. A more realistic view would say that my "income" (as most people would figure it) is about 0.8*X. On a stated-income loan, I'm able to use this more realistic figure rather than the understated income on my tax return.

I am not suggesting that you lie on a loan application, and I'm not saying that I've done so or are even thinking of doing so. I think that would be very dangerous. But, at the same time, I appreciate the flexibility that I now have when it comes to mortgages. The whole process becomes much easier. I get to skip a bunch of forms and paperwork that I would normally have to fill out. I get to give the bank a more realistic (yes, higher) view of my income. And I wouldn't be able to have this flexibility without an awesome credit score. And I'm happy to tell you how to achieve that.

AnnualCreditReport.com Timing Issues

2007-01-28T21:31:00.000-06:00

As you probably know, you can get a free credit report yearly at AnnualCreditReport.com. This is mandated by the federal government. You can get one per year per each of the 3 credit agencies.

Note the ambiguity in that last statement: one per year. A reasonable interpretation of this is one per calendar year; i.e., one in 2005, one in 2006, one in 2007. I thought that this would be the case because of the way they rolled out the free reports across the country in 4 phases; the first 6 months, only the Eastern part of the country could receive their reports, then it expanded from there. I can't remember the exact rollout plan, but it doesn't matter. The point is that there were set dates when you could get your reports, according to where you lived in the US. Somehow this led me to believe that the "annual" thing was based on the calendar year.

But noooo. They apparently mean that there must be a year between each credit report. Since I didn't really need it in 2006, I purposely waited till the end of the year to obtain my free reports, thinking that I could get them in 2007 whenever I wanted. But I recently tried to pull my TransUnion report through AnnualCreditReport.com; due to a minor issue, I wanted to see if something had come up as a new inquiry. However, it wouldn't let me. It said that I already had obtained my report. I last pulled my TransUnion report in November of last year.

So clearly they aren't basing it on calendar year. I assume (will have to wait until November to find out for sure) that they are basing it on the amount of time from one report to the next. So, the take-home lesson here is that your free "Annual" credit reports are only "annual" if you get them at the same time every year. By waiting longer between free credit reports, you are putting off the earliest time when you can get your next free credit report. Your "year" resets each time you get the free reports.

Hope that helps somebody.

Intro to Credit Gaming - Part V

2007-01-25T23:46:00.000-06:00

See previous parts I, II, III, IV.

We finally get to the last component of your credit score, "recent credit requests and recently obtained credit", which comprises 10% of your credit score. This is the one that many people seem to freak out about. "I don't want to apply for X, because I don't want the inquiry on my credit report!" is the common refrain heard on forums and weblogs everywhere. The thing to realize is that 1) you have to have quite a few inquiries in a short amount of time for this to have any impact; and 2) even so, the impact will be quite minor, as well as short-lived.

First off, let's examine the reasoning behind this component of your credit score. The first part is "recent credit requests." Say that you have applied for 7 credit cards in the past 3 days. That will be enough to cause any lender to worry. First off is, even if your credit is otherwise good, why would you be applying for so much credit in such a short time period? Maybe your finances are in disarray, or maybe you've gone crazy. In any case, it's a red flag. If you're denied this new credit, that's a knock against you. Moving along to the "recently obtained credit" part, if you're approved, that's also a problem because now you have a new line of credit which you have not proven yourself able to use responsibly.

So that's the negative part. The positive part is that any normal behavior will hardly ever be punished, and any punishment will be very limited. The max that your score can be decreased for this purpose is 50 points. That can be enough to make a difference in interest rates for a mortgage, but it's not enough to make "good" credit look "bad." According to the MyFICO site, inquiries can affect your score for up to 12 months, but they seem to stay on your report for longer (I've got some that are 23 months old on my credit report).

Another positive thing is that, assuming your application is approved, chances are that your credit score will go up overall instead of down. This is especially true with credit cards or other revolving lines of credit. Adding a new line of credit will increase your overall credit limit, which will decrease your debt to limit ratio, the second most important part of your score. I guess that obtaining a new installment loan (such as a mortgage or auto loan) will probably decrease your score overall; you'll have first the inquiry, and then a bunch of new debt added to your report. However, I'm not sure how much of an impact this would actually have on your FICO score. I'm lacking data here.

Basically, my point here is that you really shouldn't worry about this aspect of your credit score too much. If you know that you are going to be applying for a mortgage very soon, you should probably not apply for any other credit if you can help it. Checking your credit score and talking to your lender will help you find out if you might be close to the line between two interest rates or loan package programs. If so, a couple of points could make the difference, and these particular couple of points are easily managed. Otherwise, though, don't worry about it. The natural variation in your credit score (due to timing issues when lenders report to the credit agency, etc.) will probably be quite a bit larger than the tiny amounts you might get docked for recent inquiries.

The Penny Problem

2007-01-24T20:52:00.000-06:00

Rising metal prices have caused pennies and nickels to be worth more as scrap metal than their face value. Therefore, the US Mint has banned melting of pennies and nickels. And now, Fed Economist François Velde is recommending that the penny be "re-based" to become a 5-cent piece. You can read the original 4-page document here (PDF, and worth the read). While this sounds crazy, it's actually pretty much the only choice that the government has. History has proved this time and time again.

I happened to have Mr. Velde as a professor in college. He taught a course on monetary history (I got a B+). It was my favorite Econ class. His book The Big Problem of Small Change is both well-written and informative. It goes in some depth through the history of money, mostly focusing on the problems of medieval currency and into the modern day notion of fiat money (money with no inherent value... which is the source of the penny problem, since coins always have some inherent value). If it sounds crazy to you to simply decree that pennies are now worth 5 cents, you need to read this book. The same thing happened numerous times in various European countries from the 1500's forward.

Spain (actually, Castile) was especially good at this. The problem with using gold and silver coins is that both gold and silver are commodities with their own values that fluctuate according to market forces. This was a problem in 17th Century Europe, and especially Spain, due to the huge fluctuations in value as a result of precious metal discoveries in the New World. If I recall correctly (I wish I had the book in front of me), gold and silver were originally relatively similar in value (compared to today). With the huge amounts of silver found in Central and South America (note: Argentina gets its name from "argentum," the Latin word for silver), silver began to fall in value relative to gold.

The Spanish government was forced to revalue its coins. It basically ran a campaign to turn 10-unit coins into 20-unit coins. Citizens would bring in two 10-unit coins, the government gave them a "new" 20-unit coin (really just a restamped 10-unit coin) and kept the 2 old 10-unit coins. So the government would get 1 coin for free, while the citizens would keep the same amount of "money."

It sounds kind of stupid, but the amazing thing is that it worked. The Spanish government did this many times in the early 1600's. Most other European governments had to do the same thing during this general time period. I wish that I could give more detail (and hopefully I'm right on the detail that I did provide) -- the book is packed away somewhere, and there's no way I could find it right now. It has been years since I've read the book, and more years since I was in his class. So my memory is fuzzy, but I'm pretty sure I'm right. The book also goes into the theory of the whole topic, putting everything into equations, so we could figure out in our scenario above exactly how low silver could sink relative to gold before people started melting their gold coins. If you want to get into the nitty-gritty, have a look at Mr. Velde's working paper selections. The most historically-minded (and least mathematically dense) paper is The Evolution of Small Change, where you can find a discussion of the Spanish "experiments" (in which the government of Castile came very close to implementing a virtual fiat money policy) on pages 40-45.

If you still think this whole thing is stupid and would never work in real life, just think about the current situation. What if the US Government announced tomorrow that it was doing away with the penny? The program would be very similar to what the Spaniards did. You would bring 5 pennies in to a bank, and the bank would give you a 5-cent piece back. This new 5-cent piece would be about the same size and metal content of a current penny; current nickels would also be traded in for the new 5-cent pieces. Given the high transaction rates of our currency, it would not take long for pennies to disappear completely; some would be hoarded, but most would be traded in. Banks would collect them just like they collect worn-out dollar bills to send to the government to be destroyed. The old nickels and pennies would be collected, melted down, and minted into the new 5-cent pieces.

My bet is that most of the American public would welcome the change (no pun intended!). I have friends who have groused about pennies for years now. Yes, there are a few who would hoard the old coinage, but most people would be happy about the convenience of one less coin to deal with. Mr. Velde's suggestion is similar to this, but it saves the cost of having to re-mint everything and take the old pennies and nickels out of circulation. While this would be basically the equivalent of what I outlined above, I think there would be quite a bit more resistance. After all, a penny says "One Cent" on its reverse. Decreeing all pennies to be worth 5 cents would be a bit too much cognitive dissonance, I think.

Car Buying: GM Card, "Good Deals" and Financing

2007-01-23T11:10:00.000-06:00

As I've mentioned before, I've got a GM Card. This card gives a 5% rebate on all purchases, with the caveat that this 5% must go towards the purchase of a new GM vehicle. There are varying amounts that you can apply towards different vehicles, based upon the vehicles' popularity, newness, and price. For example, you can apply $1000 in earnings towards a low-end Chevy Aveo, but the amount bumps up to $2500 on a Chevy TrailBlazer. Last year, I think the highest amount was $3500 on a Suburban. Right now, the Suburban amount is $1500 because the Suburban is new for 2007; I expect the earnings allowance will bump back up within a year. There are some caveats: earnings don't apply towards Saturn or Saab, for example.

One trick about this card is that you can count on "Bonus Earnings" about once a year. A couple of years ago, I got "Bonus Earnings" that bumped my earnings up to $2500, basically for free. These "Bonus Earnings" had to be spent within a month or two. More recently (I think it was in December), I got an extra $2000 in "Bonus Earnings" that could be spent only on Chevy Trucks and SUV's, and only for a limited time. So if you like to buy new cars and don't mind buying GM, you might want to get this card just to wait for the "Bonus Earnings" to come around; you won't have to pay a cent for them. In fact, these offers kind of negate the purpose of the GM Card in the first place, which kind of makes me mad. Why use the card to get Earnings when I can just wait for Bonus Earnings during the slow car-sales months?

I've got about $1200 in Earnings saved up right now. A few years ago, I applied about $370 in Earnings on the car that I'm currently driving. The process was pretty painless. You negotiate the sale price of the vehicle like normal, then tell the salesman about your GM Card earnings. You will fill out a little form, and the salesman will call in to verify some things. The amount will be considered as an extra down payment.

But, of course, there is a downside to all of this, especially if you would need to finance your new car (like most of us). Every time that I've gotten one of the "Bonus Earnings" offers, I've been tempted. Despite the fact that my current car only has about 55k miles on it, is still in good shape (except for the accident last week, damage from which is being repaired as I type), and still meets my needs completely, I have been tempted. I think to myself, "Wow! $3000 off the price! That's such a good deal!". My inner deal-hound starts to get the best of me.

But, last time I got one of those offers, I realized something. So what if I could get a new truck for $18k instead of $21k? After financing, I would still end up paying more like $22k. Financing a car (or most things, for that matter) basically negates any "good deal" status. Sometimes you can get a very good interest rate; if you can get 4% or below on a car, then it might be worth it to finance. But otherwise you should pay cash -- and probably buy used.

I am still kind of torn on the new vs. used thing. A new car with a warranty has benefits of its own. You're not inheriting somebody else's problems. But at the same time, you're paying dearly for it. So I am not sure. For the time being, I have curtailed my spending on the GM Card substantially, and if I do use my accrued earnings, it will probably be on an econobox like the Aveo. Either that or a big family minivan or SUV with lots of airbags and a built-in DVD player. I guess it will depend on my family status at the time.

As for the GM Card, it is one of the best deals around (I don't think any other card out there offers 5% on all transactions)... if you like to buy new GM vehicles. If you own a business that uses work trucks or delivery vans, this card is practically a no-brainer. For the average consumer, though, it becomes a more difficult calculation.

Managing Your Finances Part III

2007-01-22T00:37:00.000-06:00

Management Tip #3: Buy Stuff When It's A Good Deal; or, Buy Below Ebay

I admit it: I am a consumer at heart. I like to buy stuff. My acquisition gene is dominant (if that makes sense, to you geneticists out there). Fortunately, my areas of acquisition are generally limited. I buy what I like. These interests are currently:

Computer stuff
Video games
Audio stuff (including musical instruments)
Books

Because I have a high degree of interest in these areas, I know very well what a "good price" is for most of these things. I keep up with the latest news, check out stuff on eBay, and generally know the price of most things that I want to buy. I also plan things ahead and keep an eye out for good deals. One of the best ways to save money as a consumer is not to be in a hurry to buy. This will net you savings on many, many things.

I have many goals in my life (probably too many) and just within the past year have achieved the financial wherewithal to get started on some of them. The nice thing about this kind of goal is that you can take your time. For example, I want to play the guitar, piano, and violin. (I took piano and guitar when I was young, but abandoned them.) So I scoured Craigslist for listings and visited music stores that sold used items on consignment. I ended up buying a used guitar and amp for $100; fair value was probably $150. I bought a Yamaha P90 digital piano for $600, while the same model in worse condition goes for $700+ on eBay. I picked up the violin for $115 -- a violin that retailed for over $600! The nice thing about all of these instruments is that (unless I damage them) I could still turn around and sell them for at least what I paid for them.

One of the common threads here is that these were all used items. The "huge depreciation as you drive it off the lot" phenomenon is not just limited to cars! Especially on big purchases, you can save substantially by buying used or refurbished items. Looking for a pool table? An engagement ring? A leather sofa? Just find some poor sap who's got a practically new one and is selling it for half what he paid for it. It's not hard.

I do the same thing with books. I am a regular visitor to my local used bookstores. I never feel bad spending $100 on books there because I know I would spend $200 or more at Barnes & Noble for the same books. Even at Barnes & Noble, most of my purchases come from the bargain racks (and I also have the membership card to get an additional 10% off!). Maybe 1 out of every 20 books that I buy is a new, full-priced book.

I shop for clothes in the same way. I get gift certificates to the Gap from my AmEx card. Even with a $100 gift certificate I will head straight to the clearance racks, where most things are 50% off or more. For that $100, I can 2 or 3 pairs of jeans, a number of shirts, maybe a sweater or a jacket... and still have money left over! I also visit my favorite upscale department store, which has clearance sales 4 times a year. There I buy very nice Polo and Tommy Hilfiger dress shirts for under $25. Yes, many times I don't find "exactly" what I want in the clearance section. Bad colors, wrong sizes. But you know what? I don't mind, because I don't really need this stuff right now -- which is the key to getting a good deal. This is my "stocking up."

As a general rule in my mind, I compare things to eBay prices. eBay is the biggest marketplace in the world, and most kinds of goods are sold there. For many things it's not a good market (IMO buying RAM or a CPU on eBay is stupid) but it's the best we've got for most market segments. If you decide on something that you want (or even just *might* want), check the prices on eBay. Next time you're in the store, you can compare the price to the eBay going price. If it's *much* less (say 40% or more) you can know to buy it, if only to sell it on eBay. If it's less, you can know that it's a good deal. Buying locally also usually has the benefit of some sort of a return period. Target, Sam's Club, and Costco have very liberal return policies.

Of course, it's hard to always be prepared for every situation. Sometimes I'll be in a store and see something that I've never really thought about, but it's on sale for what seems to be a good price. So I'll go ahead and buy it, and then check eBay prices right when I get home. If it would be a break-even deal on eBay, I'll usually return it right away. Seriously. I've done this probably 5 times within the past 6 months on items varying from $45 to $200 in price.

This is already getting pretty long, but I have one final point to mention: By knowing this price information, I can control my spending easier. In my areas where I'm most likely to splurge, I have a very good idea of what I should be paying for any given item. Simply knowing and telling myself "This is not a good deal" is enough to generate the self-restraint needed to keep from overspending.

Managing Your Finances Part II

2007-01-20T10:02:00.000-06:00

Management Tip #2: Use Your Credit Cards (Specifically!) For Almost Everything

As I mentioned a couple of times in the previous post on the topic, I use my credit cards for most purchases. Only on rare "brain-fart" moments will I use my debit card for anything other than getting money from an ATM (note to self: call bank and cancel debit-card functionality of my ATM card). I think the principle here will be best conveyed by just giving you my own example.

I have 4 main credit cards: American Express (charge card), Discover Card, GM Mastercard, and Shell Mastercard.

Shell Mastercard: All gas purchases. I get 5% back on Shell gas purchases, 1% on everything else. It is not hard for me to buy my gas at a Shell station, as there are 4 within 1 mile of my home and others scattered throughout town, including one in particular that always seems to have the lowest prices, period. They are also prevalent almost everywhere that I travel. With the 5% discount, I save about 10 cents a gallon at the current roughly $2/gal prices. This is always enough to make Shell gas the cheapest. This is my only use for the Shell card most of the time, although on occasion I will use it for a big purchase (e.g. computer parts) since its billing cycle is staggered from the rest of my cards, so I can pay it with a different paycheck. My Shell Card charges usually total $200 or so a month, although if I take several trips it can get up to $400.
GM Mastercard: General large purchases. Big trips for office supplies, computer parts, and most things that I order online. I used to use it for my hotel stays (which were quite frequent until recently). Previously I would rack up $1500 a month on this card, although now it's in the $100-$200 a month range.
Discover Card: Purchases at Sam's Club, exclusively (until very recently, Discover was the only card that Sam's Club took). This usually comes to about $200 a month, although occasionally I will make a big purchase (bed, TV, computer, etc.) there. Some months, the Discover Card will go completely unused.
American Express: This is the standard American Express Gold Card with Rewards. I.e., it is not a "credit card", it is a charge card, meaning that it must be paid in full every month (although AmEx keeps trying to get me to sign up for its "pay over time" feature). This is where most day-to-day purchases go. Restaurants, grocery stores, movie tickets, video games, small amounts of office or computer stuff, etc. This has been coming to over $1000 a month for quite a while now, although I should see that dwindle now that the holiday season is over and I'm not travelling as much. (About half of what I charge here is a reimbursible and/or deductible business expense.) This card gives rewards in the form of points, which can be redeemed for luxury goods or gift certificates (preview of a tip that I will write later: the gift certificates are a MUCH better deal on ANY rewards program that I've seen; you have to be a sucker to save up to buy a camera or watch directly with rewards points). Yes, the AmEx Gold has an annual fee of $100 or so (not sure exactly what it is), but I always get several hundred dollars worth of gift certificates yearly from the rewards. Plus, there are some other perks that I will cover in another post (I plan to go in detail into each of my credit cards later).

So you can see how this nicely segregates certain types of purchases (notably, gas and day-to-day items) and makes it easy to keep track of spending. I can look back through my checkbook ledger and see at a glance how much I paid for gas each month, because gas is always on the same credit card. I can login to my AmEx account to keep track of how much I'm spending and whether I need to cut back during the month. Putting the bulk of my more-or-less discretionary spending on my AmEx card keeps me from ever running up a big pile of debt, since it must be paid off in full each month. Also, by limiting certain types of spending to certain cards, I have to think twice about many purchases. Often I will sit there and agonize over purchases. I rarely buy anything that's not an immediate need or a very good deal (this item might be Tip #3).

Also (to relate this to the main topic of this blog) charging and paying off my credit cards every month can help my credit score, since the lenders are more likely to initiate credit reviews and raise my credit limit when I consistently use that credit.

New URL

2007-01-18T23:29:00.000-06:00

Sorry for the confusion. I accidentally wrote the wrong thing a couple of times in some other blogs' comments, and I decided to just go ahead and move the URL. Blogger made it really easy. When I first created "gamingyourcredit.blogspot.com", my desire was for a shorter URL. But I kept using "Gaming the Credit System" in so many contexts that it just makes more sense this way. Anyway, my apologies. I will go back through and change all my cross-links (why couldn't I have used relative links?!) in my old posts.

Managing Your Finances Part I

2007-01-18T16:49:00.000-06:00

J. D. of Get Rich Slowly posted recently about his aversion to credit cards in general. As I mentioned in his comments, I really do not understand this. While I'm no stranger to money worries, I don't weight my finances particularly heavily when it comes to things that have a psychological impact upon me.

Money is easy to understand. It's just a bunch of numbers. Numbers add and subtract nicely, and it's easy to keep on top of your money since it can all be summed up in a couple of nice numbers. There is no reason to be afraid of numbers. A good part of people's fears over credit cards, and their use of irrational debt-reduction strategies, seems to stem from a lack of a feeling of control. Once again, my belief is that since money can always be expressed in terms of simple numbers, it is easy to control your money. I will start a small series with my tips on how I manage my money; I rarely ever worry about anything financial any more because of how I use my system.

Management Tip #1: It's Not That Hard to Balance Your Checkbook

Ok, I admit it: when I was in college, I never balanced my checkbook. I always just looked at the online account management system. Since I wrote very few checks, had just one job, and paid for almost everything with cash withdrawn from the ATM, I knew that the online account balance was almost always up-to-date.

However, once I got out of college and had things like a variable income, car payments, utilities, multiple credit card payments every month, automatic withdrawals, and the like, I decided to get tough with my checkbook ledger.

First off, because I pay for most things with my credit cards (which will comprise Tip #2), I really don't have that many things to write down. Looking back over the past couple of months, I have been using about a page per month in my ledger. That's about 15 things per month, which is not much at all. In some months it's been as few as 10 items per month. I can give a rundown of an average month:

2 deposits (paychecks every 2 weeks)
1 auto-withdrawal for car insurance
4 credit card online payments
1 car payment (check)
2 rent/utilities checks (most utilities go on a credit card automatically)
2 ATM withdrawals
Total: 12 items

As you can see, by not using my debit card for any transactions, I keep my number of checkbook ledger entries very low. This turns my checkbook ledger into a "birds-eye" view of my day-to-day expenses. I never see the specific amounts that I pay for things at the store, but I see my overall purchase level and a bit of a breakdown into general categories: rent, gas, food, etc. (I use certain credit cards for certain things, which I will detail in Tip #2).

By keeping my level of ledger entries managably low, I am never intimidated by the thought of balancing my checkbook. Every week or so, I log into my bank account and check for things that I might have forgotten to enter. I always have a surplus of a few thousand dollars in my checking account, so I never have to worry about bouncing a check or or having insufficient funds for an online payment. I know that this is somewhat inefficient (since that same money could be in a savings account with a decent yield), but for the time being it is good enough. I am working on plans to keep lower amounts in my checking account, but it will require more sophistication with my payments and transactions back and forth between savings and checking, which I don't have the time for right now. As it is, when I have too much extra, I will transfer some to savings or make an extra-large payment on my car. Once my car is paid off, I will get serious about the "float" and keeping more money in the savings account rather than checking.

Intro to Credit Gaming - Part IV

2007-01-17T22:05:00.000-06:00

First off, my apologies for the lack of recent posts. A short vacation where Internet access was surprisingly un-handy, coupled with a car accident and all the hassles that went along with it, have kept me from posting. In any case, I'm back, the car is getting fixed, and hopefully I can keep up a more rigorous posting schedule.

The fourth component of your credit score is 10%, "Types of credit used." Basically this simply means to have balance in your credit portfolio. Fair Isaac likes a blend of installment loans and revolving loans. Other credit scores (such as the Vantage Score) break it down even further, preferring to see a mortgage and possibly other specific kinds of loans such as auto loans and student loans.

This is one area where it's pretty easy to max out your score. Just have at least 3-4 credit cards and 2-3 installment loans. Try to balance out your amounts financed and/or credit limits on each kind of loan.

The credit cards are easy to get. Installment loans are a bit harder to come by, but they often come up in the course of your life. If you've got student loans, those count (and, depending on how your lender structures the loans, they may show up as multiple accounts, one for each year of school for each type of loan). Auto loans also count, as do mortgages. In a pinch, it usually isn't hard to get a small installment loan for a few thousand dollars from your bank.

Basically the red flags to avoid here are 1) not having any of one type of credit, and 2) having an extreme disparity in favor of revolving credit. For instance, if you've got $100k in revolving credit lines but your installment loans total up to $20k, you might see a problem here. Fortunately, installment loans tend to be for big, expensive things such as houses and cars. If you have a mortgage, chances are that the amount financed will be substantially more than your revolving credit lines, so no worries there.

You may be wondering why this component is included at all. Well, the credit score is all about trust. If a bank gives you a loan or a line of credit, can they trust you to pay it back? The credit score is just a number encapsulating how much they can trust you. Having revolving credit shows that you can handle having quick access to money, and that you use it wisely. Having installment loans shows that you can accept a big, long-term debt and make the same monthly payment, month after month, year after year. These two aspects of financial responsibility contribute to your overall trustworthiness, and thus they are part of your credit score.

Comment Policy

2007-01-10T15:53:00.000-06:00

I wondered how long it would take before I started to get spam comments. The problem is that, as a credit-related blog, there is a big opportunity for "on-topic" spam. I got two comments today that were (obviously) credit-card related but just had that "spammy" feel to them. So, I deleted them. Sorry if your comments were real.

So, the policy from here on out is:

1) No links in your comment: no problem. Comment away. Even somewhat off-topic or simple "nice blog" comments are fine if you're not trying to bump up some site's PageRank.
2) Links in your comment: Please be very specific in your post and reply directly to something that I've written so that I know that your comment isn't generic. Links to blogs are mostly ok, unless they're spam blogs (left to my discretion). Links to "Bad Credit" sites that appear to be scams or domain parking pages are highly indicative of spam. Linking the same site over and over again with different keywords in the link is also highly suspicious.
3) Please try to give yourself an identifier somehow. I've had several "Anonymous" commenters so far, which is fine, but I'd kind of like to know if you're all the same "Anonymous" or if there are multiple people out there. I want to get to know my readers. So please just sign it with a name; it can be made up if you want. Just try to keep it consistent and don't use a name that somebody else is using.

I really appreciate comments and would like to have this site become a place where people can help each other by telling their own credit stories and swapping hints. As I said before, I'm only one person, so my own experience is limited. We can make this info a lot better if more people contribute.

A Plan For Young People

2007-01-08T16:00:00.000-06:00

This post is a continuation of a topic I started in Intro to Credit Gaming - Part III, which is that of a young person just starting out in the world with little or no credit history. As a somewhat young person myself, I have been there recently and can offer direct advice on the matter, as it's all stuff that I've done personally. If you're a typical college student, 1) You don't make very much money and 2) You're still counted as a dependent on your parents' taxes. #1 makes it hard to get credit (ever try to get a real (i.e., unsecured) credit card with $10,000 in claimed yearly income? Hahaha!). But #2 makes it easy to use a little trick to get credit. On credit apps, they never ask for your personal income; they ask for the household income! As long as you are claimed as a dependent on your parents' taxes, you are still technically a part of their household, even though you may live in different states.

So, simply write in an approximate amount for the total household income, including both parents' incomes and any other dependents'. Assuming that your family isn't barely scraping by, it should be no problem for you to get lines of credit in the $1k range, even with no credit history.

Of course, I am in NO way saying that you should USE all of that credit that you can get from inflating your income. Credit card debt is definitely a life-sucker. I ended up about $8k in CC debt a couple of years out of college, and it is no fun place to be. (And I know that $8k is pretty minor compared to many others' experiences!) Use the credit card as if it were cash; if you can't afford something, don't put it on your credit card! (There can be exceptions to this rule which I will discuss in a later posting, but only if you know yourself to be responsible with your credit.) If you cannot trust yourself, lock up your credit card somewhere and set it up for automatic payments of your cell phone or other bills to the tune of $50-$100 a month. Pay off your credit card every month.

All of the advice presented here is intended for responsible individuals who have enough self-control to keep from over-spending. It is intended for the person who wants to maximize his credit score as if it were a game. Falling deep into debt is an easy way to lower your credit score very easily. In this post, I am trying to tell you how you can establish a credit history when you are young and have very little income. Above all else, you do not want to establish a BAD credit history. (Note: Just carrying a lot of debt will not give you a "bad credit history," but it will depress your credit score until you pay off the debt. Missing a payment will definitely be a 7-year negative mark on your credit history, though.) If you cannot trust yourself with a credit card (if the thought of doing this scares you at all), you may want to hold off on this whole thing until you are a little more mature. For example, if you have never held a job or a bank account at all, you probably do not have the basic financial skills necessary to do this.

So, my "plan for young people" would be the following:

Get your first credit card ASAP, using your parents' income on your app if you have little or no income of your own.
Get subsequent cards every 6 to 12 months, and ask for credit line increases on your cards yearly.
Spread your cards out. I recommend one from every major company: Visa, MasterCard, Discover, and American Express. If you always buy gas from the same gas station, get their branded card if it will give you a discount. If you have frequent flyer miles with a particular airline, get a card that will earn more miles. There are many credit card benefit programs out there, so shop around. Always avoid annual fees. I will write later about choosing a credit card, but this short piece of advice is good for now.
After you get 4 cards (one from each of the major companies) you should stop unless there is some particular reason to get another one. Pay off all of the cards every month, online. It is very easy to set up a certain day of the week (usually I take Sundays) and log into ALL of my credit card websites, as well as my bank account, to see what is due. At the moment, I am paying off all of my cards as soon as a statement is generated. It takes about 45 seconds to set up the payment online, and in most cases it can be processed the same day. (It will take longer the first time you pay online, because your bank account has to be linked. This delay, which may be several days, could cause you to be late if you wait until the due date to make your payment.) This is probably the way you should do it too, until you reach a place where you can use more sophisticated methods. It saves you from having to worry that something is overdue. Check your online account weekly and pay as soon as you get a statement.
By the time you graduate from college and start working, you will have a solid foundation for your credit report. You will have a solid history of payments (35% of your FICO score), and your credit limits will be bumped up so that you can have a good debt to limit ratio (30% of your FICO). You will also have a good start on the 15% length of credit history component (and the sooner you start, the better off you will be).

Note: I had to change the timestamp on this post, as I had originally started it last week and saved it as a draft. I had no idea that Blogger would keep the original time that I started it! When I first posted it, it was 3 posts down the page. I will try to keep that from happening again, and in general, I am going to try to keep from editing posts that have already hit the page.

FICO vs. FAKO

2007-01-06T11:07:00.000-06:00

Today I came across a post a Make Love, Not Debt entitled FICO and the Mortgage Catch-22.

I just got my credit score, which is based on the new Vantage Score model. My current score is 725 on a scale of 501-990. According to the credit score analysis, one of the primary reasons my score is so low is that I "have no real estate accounts."

More info on the Vantage Score

A few months ago, Casey Serin of I Am Facing Foreclosure committed the same mistake, pulling his TrueCredit score instead of his actual FICO. (See comments on the first link for people criticizing his choice of credit score and telling him to get his real FICO.)

What's the problem? A credit score is a credit score, right? Well, yeah, but not the REAL credit score. There is The One True Credit Score -- FICO -- and then there's a bunch of pretenders (at least in the US). According to Wikipedia, the Vantage score is up-and-coming and may start to replace FICO. This looks like a bunch of politicking to me. The Vantage score is backed by all 3 credit reporting agencies, which is a plus for it, but it looks like they basically came up with it in order to avoid paying royalties to Fair Isaac. When I see a bank pull my Vantage score, I'll start believing in it, but for now it just looks like a power play by the credit agencies. Even if it receives a lot of promotion by the credit agencies, it will take years for it to achieve any real market penetration -- lenders are already comfortable with the FICO, and switching to another system will require a long period of recalibration.

So while Vantage and TrueCredit are "actual credit scores" that obviously take into account much of the same information that FICO takes into account, the scoring process is different and the final score will be very different. Vantage goes from 500 to 990 -- almost the same range as FICO (covering about 500 points) but bumped up about 150 points on both ends. This is probably a psychological boost to people who have a poor credit score, but it makes for confusion because you can't compare it apples-to-apples with the FICO, which is what everybody means when they talk about their credit score. It is easy to see the psychology at work; nobody wants a credit score (or SAT score, for that matter!) of 0, so all of them start at a few hundred points and go up from there. But these are all just numbers games. You could have a "TrueVantage Extreme Plus Credit Score" of 90 gazillion, but it wouldn't mean anything.

As a side note: based on MLND's post about her Vantage score, it appears that there is at least one significant difference between the FICO and the Vantage: the inclusion of mortgage debt, specifically, as a positive predictor of credit-worthiness. FICO does look at the types of loans you have (which I will look at very soon as Part IV of the Intro to Credit Gaming series), but that is mainly a revolving vs. installment debt calculation. It is kind of hard for me to believe that this mortgage component will play a big role in the Vantage score. Of course, a credit score is just a "best guess" prediction at how credit-worthy a person is; it considers a limited-yet-potentially-large set of information and distills it to a single number. Such a process is always fraught with peril, and always needs tweaking from time to time to match trends. Insurance companies have years and years worth of data that they sift through in order to determine how much to charge you for insurance. This is the same thing that lenders do, based upon your credit score (at the moment, almost exclusively the FICO score). Having a mortgage loan really doesn't seem like it could be that great of a predictor. I understand the knee-jerk "but if you own a home, you must be stable!" argument, but on the other hand, if you lose your job and run low on cash, you are going to keep paying your secured debt (i.e. your mortgage) and let your unsecured debt (credit cards, etc.) fall to the side. Credit card companies can't repossess your credit-purchased belongings! Therefore, in an app for a credit card or other unsecured line of credit, having a mortgage should logically LOWER your credit score. Not by much, mind you, but a bit. Anyway, enough of this speculation.

For the moment, the one and only credit score that matters is the FICO, unless your lender tells you otherwise. If you pull your credit score, you need to get the FICO. I have read good things about MyFICO.com but have not used it. I think they may be somewhat overpriced, but at least they are not pulling the wool over your eyes with a "FAKO" score. I get my credit score (FICO based on TransUnion) for free through my Washington Mutual credit card. I'm working on that post right now, and I will post it this week.

Resolutions / Goals for 2007

2007-01-04T22:03:00.000-06:00

I guess I will write down some goals, as it seems to be the "in" thing to do. Keep in mind that this is a "personal finance blog with an emphasis on credit scoring," so I will sometimes cover topics that are not related to credit scoring.

Unfortunately, I do not know how long I can keep up the information-dense credit gaming posts. I am trying to pump them out now, and I have had a number of ideas for posts related to things that I have already posted, but it looks like I've covered a lot of the major ideas already. I don't want to get too repetitive either. There are still many topics left to be covered, but they are limited. Anyway, I don't want to be too negative so early, but fair warning: I'm going to try to pace myself on the credit gaming posts.

Finance-related Goals:

1) Attain a positive net worth. I am currently down about $30k due to student loans and my car ($8k). At the very least, I will pay off my car this year and hopefully save up about $15k in various investments. I will not pay off my student loans early, as the interest rate is very favorable.

2) Start investing in rental properties. I believe this year will be a good time to do this. You can count me among the "housing bust" believers; with the rising interest rates, the foreclosure rate is going to skyrocket over the next 12-24 months, and that means the market will be flooded with houses, most people won't be able to buy them, and many people will move back to the rental market. I am aiming for duplexes, triplexes, and quads. Fortunately, the housing boom never quite exploded here like it did in most of the country. Appreciation rates have been mostly reasonable, so I am already comfortable with buying many of the local properties at their current prices. But the glut due to foreclosures will mean that I can pick and choose and wait for good deals. I won't go for any deal where the cash flow is negative. With that kind of plan, it seems hard to go wrong. This goal kind of interferes with goal #1, as mortgages are a big hard negative on the net worth, while property equity is kind of a fuzzy positive.

3) Maintain this blog with at least 3 posts per week, and grow readership and revenue. This blog is mostly for my own gratification and to satiate my verbal diarrhea, but I've never seen the point in writing without an audience, and the money can't hurt. Already I've made nearly $4! Woo hoo!

4) Raise my current "day job" pay by 33%. This is entirely do-able, and I did at least as well in the first year of my job. I'm now well into the 2nd year, and I've found myself slacking (and the raises haven't been coming as fast). If I get back in gear and impress my boss some more, the 33% goal will be no problem.

5) Finish up the web site that I've been working on (in my last job, I was a web programmer) and get it to generate money. I've just started marketing the free "beta" version with AdWords. The final version should easily take in $20 to $50 a month per user, for a very niche user market (but still in the tens of thousands in the US, and easily marketed to). I think a reasonable long-term goal (3-5 years) would be $100k a year from the site. In 2007, I simply hope to have "some" subscribers (meaning I have to get the bulk of the programming done before I can start charging people). Breaking even (revenue >= advertising costs) would be even better. Sorry, not gonna mention the site here, as it's pretty much a lock that nobody in this audience would have a use for it, and it would reveal my identity.

6) Incorporate my business and take advantage of the tax benefits of doing so. Set up a Flexible Spending Account, a "profit sharing plan," and other (legal) tax shelters.

7) Speaking of taxes, I need to get on the ball this year. The past two years, I have taken extensions and ended up owing penalties and interest on unpaid taxes. The penalties and interest have been almost laughably small and certainly not enough punishment to make me very scared to let it happen again (I will owe some back taxes + penalty + interest this year too), but I do want to get my financial house in order, taxes included.

Ok, I think that covered everything. It has been interesting reading various goals and resolutions on other blogs, PF and otherwise. And it felt good to actually write these out. So, pardon the interruption... the next post will be credit-related!

Intro to Credit Gaming - Part III

2007-01-04T15:00:00.000-06:00

Or, Establish Credit - NOW!

After the juggernauts of payment history and debt/limit ratio, the next-largest factor in your credit score is length of credit history. The maximum length of credit history that appears on your credit report is 7 years or 84 months (looking at my most recent credit report from Equifax, it appears that their history only goes back to a maximum of 81 months -- close enough).

My own credit history is creeping up into the 7-year range (earliest account opening was in March of 2000), so it has not yet hit the maximum. Therefore, this is something that still holds down my credit score a bit. When I look at my credit score (which I will cover soon), I can see the "primary reasons" for my score (i.e. "why is my score lower than the maximum?"), and one of the two reasons is this:

The length of time your revolving/charge accounts have been established is too short.

This factor is based on the age of the revolving/charge accounts on your credit bureau report (the age of your oldest revolving/charge account, the average age of your revolving/charge accounts, or both). Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.

So this is one of the reasons that my credit score is currently in the 770 range (the December update had it at 766 instead of 772) instead of the 830-850 range.

The only cure for this is time. There is no way to jack up this component of your credit score, other than to wait it out. In March, my first-opened account (opened when I was 19) will hit the 7-year mark. In September, the next oldest one will hit 7 years. After that, it will be another few years before my next oldest accounts will hit 7 years. There is nothing I can do about this except wait and keep those accounts open.

I read a lot of articles and blog postings by twenty-somethings who state proudly that they have graduated from college and have no credit cards. While this is good in many ways, it is bad for your credit score to have no credit history. If you take the effective range of credit scores to be 500 (from 350 to 850), and accept the claimed 15% weighting for this component, that means that this can affect your credit score by up to 75 points. That is more than enough to make the difference for many people to be approved for a loan or not; to get a lower rate mortgage or not; to move into a new apartment or not.

The "take-home message" from this is: if you don't have credit, get some NOW. You can't retroactively build a credit history when you need it. If you are young and currently have no credit, you are doing yourself a disservice. If you are older and have never had a credit card or other revolving credit account, you are doing yourself a disservice.

Of course, I am NOT suggesting that you throw yourself willy-nilly into a bunch of debt! I did not carry a balance on any of my credit cards for several years. I would charge maybe $50 a month to them each month and pay off that amount each month. Maxing out a credit card can be useful for other reasons (e.g. if you want a credit line increase to help out your debt/limit ratio), but it is not recommended that you do so without a plan and the financial wherewithal to pull it off without piling up a lot of interest. In my next post I will discuss a technique for young people to use to help them establish their credit history.

Why I Created This Blog

2007-01-01T20:59:00.000-06:00

Quite simply, it's because there's so much cluelessness out there about credit scoring. I started reading Personal Finance blogs a couple of months ago, and many commenters seem to have quite a few misconceptions or wrong ideas about one's credit report and/or credit score, and even credit in general. I found myself making long-winded comments on blogs, which got kind of old. So I decided to try to educate people more generally and create the best online credit score resource available.

I just set up the new e-mail address for this blog. It is

gamingthecreditsystem@yhoo.com (fix the obvious misspelling)

Please feel free to e-mail me with any questions or comments that you don't want to post to the blog comments.

Sorry for the couple of days of "housekeeping" posts. I figured I would get certain things out of the way early on (and so I could add links to the sidebar). The next post will have "real" content again!

About Me and Disclaimer

2006-12-31T16:08:00.000-06:00

I am 26 years old with above-average intelligence and a better-than-average job, but a fairly average life. I do not work in the banking or finance industries. I have never managed anybody else's money nor even seen anybody else's credit score. All of my experience in this area comes solely through things that I have read, following my own credit score monthly for the past 3 years, and common sense.

I am going to blog anonymously, although I may have left a few tidbits elsewhere. I will go into detail about my credit situation, including my score, components of my score, credit cards that I have, etc. For obvious reasons, I will not identify myself by name, and other information about myself will necessarily be vague.

I make no guarantees that anything I write about will apply to your own life or credit score. I am not a credit, banking, or personal finance professional, and this blog in no way constitutes an advisor-advisee relationship between me and you. Nothing that I write here should be construed as financial or legal advice. I am not a lawyer (no, really, I'm not). What you do with your own money is your own business and your own responsibility. While I endeavor to make this blog as factual and correct as possible, I have limited experience and will definitely make mistakes. The author of this blog bears no responsibility for any actions you may take based on information presented on this blog.

I am more than happy to hear from readers about their own experiences. The more data points that we have, the better we will be able to understand the credit scoring system. I will have an e-mail address specifically for blog use soon. Until then, please leave comments on the blog.

I will run Google AdWords and possibly various other advertising systems on this blog. I in no way endorse any of the ads presented. In fact, most of them are bound to be snake oil salesmen promoting all kinds of junk related to credit. I usually don't even see the ads myself, as I use Firefox with Adblock, which blocks almost all ads. If I link to a book on Amazon, usually it will be something that I have read or heard good things about.

Intro to Credit Gaming - Part II

2006-12-22T03:52:00.001-06:00

Continued from Intro to Credit Gaming - Part I

Keep your balance to limit ratio low. (In saying this, I am talking about aggregate balances and aggregate limits across all of your credit cards, lines of credit, etc.) This can happen in two ways: A) Keep your balance low in absolute terms (always recommended but not always possible); and B) Raise your credit limit. If you already have a credit card, you can call customer service and request a credit line increase. They may or may not do it, but even a small increase can drastically change things.

This ratio is not linearly applied to your credit score. In other words, there are "tipping points" when things start getting worse and worse. For example, the difference between 0% and 25% is pretty small, but the difference between 25% and 50% is large, and the difference between 50% and 90% is massive. If you are carrying a balance that is over 90% of your credit limit, your credit score will be severely depressed. For example, if you have $20k of credit limit and you've taken up $19k in debt, you are at 95%. This kind of ratio looks like the "kiss of death" to lenders, and you look like you are headed for bankruptcy. If you can open up ANY sort of new credit line (even something with a bad interest rate -- don't use it, just open it) or extend your limit by even a small amount (and of course don't utilize that extended credit), it can improve your score.

On the other end of the scale, you can preemptively increase your limits when you are not facing credit problems. Sometimes the CC companies will do it with just a simple call and request. If they are a bit more reluctant, they might require justification. You can do this pretty easily if you can give a reasonable excuse for it when you call. Tell them that you are buying a new $2000 computer and want to put it on your card. They will have no way of tying the credit increase to your $2000 purchase, so they will increase your limit and you won't actually have to spend the money. You can even do this online with some credit cards. Just enter a reasonable-sounding justification, and you will likely get the increase almost automatically.

Often the company will increase your limit as part of their regular (annual, semi-annual, quarterly, etc.) account review. Discover Card raised my limit almost yearly for the first 3 years with no prompting on my end. But if you do not use your card at all, you will not get these limit increases. Charging it up close to the credit limit and then paying it down every month will often do the trick. For example, if you have a card with a $2500 limit, charge it up to $2000 a couple of months in a row and pay it off. The company will smell blood and raise your limit, trying to get you to charge more.

This method is very effective. If you ask for a credit increase, it might add an inquiry to your credit report, depending on the policies of the company. But the decrease due to the inquiry is quite minor compared to the improvement to your ratio. (More on the effect of credit inquiries later.)

Opening up a new credit account is just as effective as increasing the limits on an existing account. I have a real-life example of this. During the same period of unemployment I mentioned above, I was nearly at the end of my credit rope. I had 3 CC's with about $8k in total debt (within $500 of the credit limits). I finally got a job that was quite well-paying, but I was going to have a bit of trouble making the payments until my first paycheck (which would be delayed nearly a month from my start date). I called American Express, who had been pestering me to apply for a Blue card (I already had a Gold charge card), and they offered me a Blue with a $10k limit. I was dumbfounded (the limit on this one card was equal to more than the limits on all my other cards combined), but I did it and transferred all of my old balances to the new card with room to spare and a 0% APR on the transfers for 12 months. (I got the entire thing paid off easily within the 12 months.) My credit score (which I monitor monthly... will discuss in a later post) shot up from the 550 range to the 660 range by the next month. That's a 110-point change by changing my ratio from over 90% to under 50%.

Intro to Credit Gaming - Part I

2006-12-22T02:44:00.000-06:00

The first thing to know is what goes into your credit score. According to Wikipedia, FICO components are:

35% payment history (on-time vs. past due) -- goes back 7 years
30% ratio of current debt to credit limit
15% length of credit history
10% types of credit used
10% recent credit requests and recently obtained credit

These percentages are given as a rough starting point and should not be taken as gospel, but I doubt they are ever too far off from the actual calculation. The first thing you should notice is that there are two "big boys" which each are roughly equal to the other components combined. These major players are Payment History and Debt/Limit Ratio. As these are the largest components of your credit score by far, they are where you should focus your efforts. I will cover the first point now and save the others for later.
Always, always, always pay on time. If an account is no more than 30 days past due, it is not considered late. My current credit report shows no missed/late payments on any of my accounts, ever. I came close a couple of times. Once, I was basically unemployed, so my mom bailed me out on a car payment that I couldn't make for the month. It was nearly 30 days past due, and she didn't want me to ruin my credit score. Thank goodness! However, there is some question as to how badly a single late payment can hurt your score. I have read that one or two scattered missed payments won't really hurt you substantially (at least once enough time has passed, say 6 months or a year), but a recurring pattern will really do you in.
If you cannot pay on time, minimize the number of missed payments. This was my strategy before my mom bailed me out: I was able to pay all of my 4 credit cards' minimum payments that month, but I was going to miss the car payment. If I had skipped all of the credit card payments, I would have been able to afford the car payment. So rather than have 4 missed payments on my credit report, I aimed for just 1. Obviously I never saw how this played out, and I can't really do a test to verify this advice, but it seems fairly obvious.
Next time: Credit Limit to Debt Ratio!

Future Topics

2006-12-19T16:20:00.000-06:00

I have a number of Personal Finance related topics that have been floating in my mind for months. I have been reading a few PF blogs for the past couple of months and have read probably 5 books related to the topic in the past few months as well. This entry will serve as a repository where I can dump quick ideas for future entries. If you have a suggestion or want to see an article on a particular idea, let me know! Whenever I write an article on the topic, I will turn it into a link here.

The Diamond Scam
Gaming Your Credit Score:
- Paying on Time
- Maintaining Low Balance to Limit Ratio
- Monthly Timing
- Establishing Credit NOW
- Taking Advantage of Parents' Income
- Using Bank Lines of Credit
Using credit cards to your advantage
- Rewards
- Perks
- Rebates
- Avoiding Yearly Fees
Changing your Eating Out Habit
- Fast Food
- Sit-down Restaurants
Buying a Car
- Financing a "Good Deal"
- Never Ever Lease... Except
Self-Employment and its Benefits
- As it pertains to loans
- As it pertains to taxes
Getting Good Deals
- Websites
- Return Policies
- "Pay less than eBay"
Maintaining Your Finances
- Obsession vs. Control
- It's Not That Hard To Balance Your Checkbook
Insurance
- Never a Particularly Good Deal
- Car Insurance
- Health Insurance
- Renter's Insurance
Exercise
College Life
- Student Loans

Welcome to Gaming the Credit System!

2006-12-19T13:46:00.000-06:00

This is a personal finance blog with an emphasis on your credit score and how to improve it. Any time that something is scored and the scoring method is known to the participant in the system, the system can be gamed.

By that, I mean that you can utilize your limited resources effectively to maximize your score. If you're playing a "Space Invaders" type video game and you know that shooting the red guys will get you twice the points of shooting the blue guys, you know to shoot the red guys first (assuming your only goal is to maximize your score).

The rules for credit scoring are well known. Therefore, the ways to maximize your credit score are also well known. There are simple and easy things that you can do to bump up your credit score almost immediately.

A little background about me: I am 26 years old and have a FICO score of 772. I will give more details into my life and finances later, as they come up in my posts.