A Plan For Young People

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:

1. Get your first credit card ASAP, using your parents' income on your app if you have little or no income of your own.
2. Get subsequent cards every 6 to 12 months, and ask for credit line increases on your cards yearly.
3. 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.
4. 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.
5. 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

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

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

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

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!