What's Not On Your Credit Score: Income

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

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

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

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

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

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

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

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

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

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

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

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!