From the category archives:

credit score

An Example Of Bad Credit Advice

by golbguru on April 18, 2007

I was reading this article about “How many credit cards are too many?” on the American Chronicle [noticed it earlier on Binary Dollar] and realized that it was actually dishing out advice that can hurt some people’s credit scores. It’s not a *horrible* article, but the problem is that it mixes good advice with bad. I have a feeling that such articles may be carrying a greater potential to confuse and mislead people than outright, easily identifiable, bad articles. Below, I have quoted some parts of the article and my commentary on the related issues.

The article starts like this:

Most Americans have between four and twelve credit cards in their pockets. There are also those who have even more rising up to twenty or more. Have you ever wondered how many credit cards are too many? How does the amount of credit cards you carry affect your credit report and score? Here are some thoughts about the subject.

So far it’s not that bad. However, it is clear that there are two separate issues under consideration here (I am not sure whether this was intentional mixture of two topics or just a result of a confusion).

Things get worse in the next section. Read this:

…However, more than 10 credit cards are completely unnecessary. Moreover, you should slowly replace your credit cards for credit cards with higher amount limits but you shouldn’t keep the previous ones. And you should only do this if you can afford it and your debt to income ratio doesn’t suffer that much.

Agreed, 10 credit cards are *unnecessary* (btw, I have 9! …for various reasons, including early ignorance). But the next two sentences just don’t make any sense. Apply for higher amount limits..but DO NOT cancel the other cards. You must retain your older cards or else suffer major dings to your credit score (well unless you are paying annual fees or something to maintain a junk card).

Also, it’s not the “debt to income” ratio that is influenced by opening new (higher) lines of credit; it’s the outstanding balances to credit-line ratio (often called as credit utilization) that is affected. Debt to income ratio depends on outstanding balances and your income and that’s got nothing to do with credit utilization.

This “debt to income” confusion keeps happening throughout the article. For example:

What is really important is to maintain your credit card balances within a reasonable range so income to debt ratio (and consequently your credit score) won’t suffer.

Again, credit score (at least the FICO score) does not depend on debt to income ratio (check your credit report and see if your income is reported anywhere on it…it’s never reported). It depends on credit utilization.

A hypothetical person with a million dollar income and $500 debt (very low debt to income ratio) can have trashy credit scores if he/she has defaulted on payments.

There may be other scores that take into account the debt to income ratio, but I don’t know of any and I don’t know who uses those scores if at all they exist. However, since FICO scores are the most popular ones, I prefer to talk in terms of FICO scores.

The confusion just never stops. Later in the article, this comes up:

…This is due to the fact that even if you always pay the minimum payments on your credit cards, too much debt accumulated makes lenders doubt your ability to repay further debt. That’s the main reason why a low income to debt ratio will lower your credit score even if there are no delinquencies on your credit report.

While it is true that some lenders may look at your debt to income ratio and make judgments on your repayment capabilities based on that ratio….it is not true that a low debt to income ratio lowers your credit score. Btw, did you notice how the article suddenly mentions “income to debt ratio” instead of “debt to income ratio”? :) …more scope for confusion there.

Now comes the real juicy (crappy (?)) part. Don’t just read it…enjoy it :) :

Thus, you should be very careful with the amount of credit cards you hold and always consider that having too many open lines of credit can scare away future lenders that you may need. Thus, if you don’t really use them, if you just have them because they were offered for free, you should close them.

But don’t close all your accounts at the same time because this will affect your credit too. Instead, slowly replace the credit cards you actually use with those with the lowest APR and the highest credit limit possible according to your needs, closing at the same time, those with the highest APR even if they offer exceptional credit limits.

This is incredible. Three things - two bad advices and one lack of good advice. 1. it says you should close your unused accounts, and 2. it says close the ones with highest APRs even if they offer good credit limits. 3. It does not mention anything about the importance of the “age” of your credit history or the importance of your old credit cards on your credit file.

If you close your unused accounts, it will hurt your credit score. Now, how badly it will hurt depends on which credit card to cancel. If you cancel the oldest one, you will do major damage to your credit score. It doesn’t matter if it has 350% APR. If the high APR bothers you, don’t use the card (or always pay it in full), but DON’T cancel it if it’s your oldest cards (or one of the older cards). Moreover, if you close a credit card with a high credit limit, that will just make your credit utilization even worse and further damage your credit score.

The article did give one good advice, but it was all overshadowed with the rest of the crap. Here is the good part:

The idea is that the number of credit cards is not so important. What is really important is the amount of money you owe on them. Ten credit cards with the balance on zero all the time because you don’t finance your purchases and you use them just to avoid carrying cash, won’t alter your credit in a negative way and chances are that your credit history will benefit from such procedure. But accumulating high balances on your credit cards will definitely affect your credit score negatively and scare away new creditors.

That should have been the concluding thought of the article. What matters most (after on-time payments) is your credit utilization. Now, credit utilization DOES NOT depend on the number of credit cards you have. You can have horrible credit utilization (and hence a horrible score) with just one card or excellent utilization (and hence excellent score) with 10 cards.

I think the author of the article was completely confused between two distinct issues here: 1. Number of credit cards, and 2. Credit utilization. Now, if you are confused by all this, here is a quick summary for you:

  • Don’t confuse between debt-to-income ratio and credit utilization. They are not related to each other. Only credit utilization influences your credit scores and not the debt-to-income ratio.
  • It is OK to have open and unused lines of credit (however, if you don’t use a credit card for a long time, there is a chance that your card issuing company may cancel it…so swipe the unused cards every once in a while).
  • DO NOT close old credit cards in an attempt to manipulate credit utilization. It will hurt your score. Open new accounts (just one or two in a couple of years) if you want, but never cancel your old accounts.
  • There is one chance where the “number of credit cards” can hurt you…and that’s when you apply for too many credit cards in a short span of time. Again, technically it’s the number of open credit inquiries that will hurt your score - not the number of credit cards. Once those inquiries disappear from your credit report (after two years) …your score should potentially come back to normal, even with the increased number of credit cards.
  • If you don’t digest all this after reading it once, read it again, or feel free to ask questions ..but make sure you understand it all.
  • Finally, never rely on just one source of information. Always get a second (sometimes third or fourth) opinion.

Related posts and resources:

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Deconstructing My Credit Score After 0% APR Credit Card Arbitrage

by golbguru on March 13, 2007

I mentioned in an earlier post that, about six months ago, I involved myself in some 0% APR credit card arbitrage. Here, I will document a few things about my current credit score (as compared to my score before the arbitrage), that may interest some of you. If you don’t know what I am talking about, and/or if you haven’t heard about “0% APR credit card arbitrage” or “0% APR balance transfers” before, you must read this primer: How to Make Money from 0% APR Balance Transfers @ My Money Blog.

Before you start drawing conclusions from the numbers and charts below, here are some background facts about my credit that warrant consideration:

  • Ratio of credit card balances to available credit limit (credit utilization) before arbitrage: ~ 2%
  • Credit utilization after arbitrage: 23%
  • Length of my credit history: 5 years
  • Cards used in 0% APR arbitrage: 2
  • Number of open credit cards on record: 9 (click here to read about how I manage them)
  • Credit score before 0% APR arbitrage: 771 (click here to read more about this). This score was based on 9 open credit card accounts, but the 0% APR balance was not yet reflected in the score…so essentially, it gives a good reference for comparison.

Current credit score

current credit score

transunion%20credit%20score apr

This score may not be reflecting the worst situation after the arbitrage. Right after I availed the 0% APR offers, I was using about 26% of the available credit. The credit score must have been lower at that time. Since then, I have made a few minimum payments towards both the cards, which must have improved my score a bit. Based on the situation, it is fair to say that almost the entire drop in the score can be attributed to the increase in credit utilization (from 2% to 23%). Anyways, 737 is not too bad. :)

What does this credit score mean to me?

Here is a table that myFICO drew for me.

credit score interest rates

Obviously, lower FICO scores will mean higher interest rates (in most cases). But, at present, this is OK for me because I am not looking at any big loans in the near future. However, for someone who is looking for a 30 year mortgage, this drop in the credit score may make a huge difference. For example, if you get a 30 year, $200,000 mortgage at 5.99% instead of 5.77% , you will end up paying about $10,000 more (over a period of 30 years) than what you would have paid if your interest rate was 5.77%. So be careful about the timing of your arbitrage if you are looking to borrow large amounts soon. As a rule of thumb, I would suggest a period of at least 2 years of “no credit card balances” before you go in for borrowing something big.

What may have affected my score?

The score report mentions these as negative factors towards my credit score.

The proportion of balances to credit limits (high credit) on your revolving accounts is 23%. The average proportion of balances to credit limits (high credit) on revolving/charge accounts carried by U.S. consumers is around 36%.

According to your credit profile, you have 4 accounts where your balances last reported are greater than $0. On average, U.S consumers carry balances on approximately 4 of their credit accounts at a given time.

Of the 4 accounts, 2 were carrying the 0% APR balances and the other 2 carried a purchase balance at the instant of time that my credit report was pulled up for score calculation. Eventually, as I keep paying off the borrowed *free money*, both these factors will change for good and improve my score.

What does this score mean to lenders?

For lenders, here is how the FICO score relates to the risk of lending money to me.

credit score and risk

Seems like I am not that bad after all, although I have jumped from a 2% risk level to a 5% risk level in the process of utilizing the 0% APR balance transfer offers.

The mathematically curious/observant/astute will appreciate the fact that this chart almost follows a sigmoid function (I used this function earlier in this post). For others, it will be sufficient to say that if your credit score is very high or very low, a change in your credit score will have smaller effects on how lenders perceive the risks associated with your credit. When I say “smaller”, I am comparing it with a situation in which you credit score is *medium* (say between 500 and 700). People with credit scores around this range should be extremely cautious of things (including 0% APR credit card arbitrages) that may damage their scores. For example, I might be digging a ditch for myself if I indulge in another big 0% APR arbitrage transaction at this point of time - when my score is 737 (most likely that will throw me in the 14% risk group)

So that’s about it. In conclusion, I am pretty much OK with the changes that the 0% APR arbitrage has caused to my credit (as compared to the free money that I am earning with the borrowed amounts). This sort of encourages me to do something similar this year too. Although, I would wait till my score bumps up a little bit (comes near 770 again).

Before I conclude this post, I would like to offer a word of caution here if you try to compare your situation with some of the data presented in this post. The numbers above give a fair idea of what’s happening to one’s credit situation, and yet they are just a little more than *handwaving*. Mortgage rates (or any other loan rates) depend on a lot of other factors, in addition to credit scores, so keep that in your mind before jumping to conclusions.

Feel free to drop a line or two about any interesting observations or perceptions (either from the above writeup or from anywhere else) that you may have about 0% APR arbitrage issues.

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0% APR Credit Card Arbitrage Quick Tips

by golbguru on March 7, 2007

If you are worried about what happens to your credit score when you apply for a new 0% APR card, then this tip is for you.

Here is what myFICO.com says about factors that do not affect your credit score:

Your own credit report requests, credit checks made by businesses to offer you goods or services, or inquiries made by businesses with whom you already have a credit account do not count toward your FICO score. Credit checks by prospective employers also do not count. These types of inquiries may appear on your credit report, but they are not included in your FICO score.

Read that carefully, it says “…inquiries made by businesses with whom you already have a credit account do not count toward your FICO score ”

For example, if you already have a Citi card and if you apply for another Citi card (or multiple cards) to avail a 0% APR offer, the new credit inquiries are not going to hurt your credit score. :) That’s good right? At least that is what I understand from the above information.

What about an app-o-rama (applying to a lot of credit cards at once), will that hurt your credit score?

My good friend, Sun raised this issue on my previous post about credit scores and I thought about clarifying a few things here. Apparently, many people apply for a lot of credit cards in one fell swoop, banking on the fact that there is some mechanism in the FICO score that does not account for multiple inquiries done at once. That’s not entirely true and it’s important that you understand it. Here is what may be confusing people (source):

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.

It’s important to note that this feature is only applicable to auto loans and mortgages. This is not applicable to credit cards. Here is what the website says about credit cards:

If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time.

So, yes, an app-o-rama has the potential to hurt your credit score (unless you follow the tip that I mentioned at the start of this post). While it’s true that credit inquiries have the least effect on your credit score (as noted by another blogger here), it is still important to understand these things before you go about doing an app-o-rama for 0% APR credit card arbitrage. Inquiries hurt different people in different ways. Don’t do these things just because others are doing it that way.

It will be in your interest to read all the factors that appear here: myFICO Credit Inquiries, before you start getting into this 0% APR arbitrage game.

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The Confusing World Of Credit Scores And Some Pointers For Getting FICO Scores For Cheap

by golbguru on March 6, 2007

It’s about time I checked my FICO credit score ( rather multiple credit scores ) - been 6 months since I applied for a couple of 0% APR (balance transfers) cards and transferred large balances from the cards to my HSBC Direct account. Now, I want to see if things have gone haywire (or not) after the balance transfers (this will help me plan my future credit card arbitrage moves). Trying to find the best deal for your credit score is really a pain if you don’t know where to look - this led me towards doing some research on the subject, the results of which are described below.

I have compiled all the information I could find and added some recommendations towards the end to highlight the best ways of getting your credit score for cheap (I wanted to use a ranking system…but that might mean comparing apples and oranges, because some of these products are conceptually different than the others). If you know of any other reliable sources of obtaining credit scores for cheap, please feel free to share the information.

Before I get into the details, I would like to draw your attention to the fact that Experian does not offer FICO scores through it’s website and TransUnion offers an in-house *TransUnion* score (not a FICO score) with some of it’s programs. So don’t just rush into buying any score that first comes to your attention…read and understand what it means.

I don’t know why they are making it so complicated for the common man. Between the three credit rating agencies, you can get 6 different credit scores (3 different FICO scores for 3 agencies, TransUnion score, Experian Plus score, and VantageScore). Thank god there is just one VantageScore, not three different ones for the three agencies.

To add to the confusion, each credit rating agency and myFICO.com sell different types of products with different types of scores and it really takes a while to figure out what product is using what score. The list below will make the process simpler for some of you…it includes all credit score products available through the three agencies and through myFICO.com. If there are more out there, I will update this list accordingly.

Also, just to be clear, I am talking only about credit scores…not credit reports (you can get free credit reports via AnnualCreditReport.com). My main objective is to find ways to get the score for less money …irrespective of whether it comes with a credit report or not. Another thing, there are no referral links in here…all links for your information purposes only.

Credit scores from TransUnion [Updated: March 27th, 2007]

TransUnion is the master of confusion when it comes to credit scores. It has two different websites www.transunion.com and www.transunioncs.com. On transunion.com (which takes you to truecredit.com for your scores), all scores available are ONLY TransRisk scores (not FICO scores)…which are some in-house scores generated by TransUnion. I was not aware of this before one of the readers made a comment regarding this issue.

I had to call TransUnion in order to figure out where I could get my FICO scores and then they mentioned www.transunioncs.com. I have no idea why TransUnion is doing this two-websites thing….and why there is no mention or link to the FICO scores website on their main website.

Anyways, here is what TransUnion offers on it’s www.transunion.com website (pretty much useless scores):

  • TransUnion offers a 30-day free trial of the TransUnion Credit Monitoring program. This program will give you access to your TransUnion credit report and your Trans-Risk credit score based on the credit report. The potential cost of laziness (if you don’t cancel within your trial period) is $9.95 per month. This is not a FICO score.
  • It also offers a 3-Bureau Credit Monitoring program for $14.95 per month. No free-trial offer. This thing provides all three credit reports and all three Trans-Risk scores. This is not a FICO score.
  • Watch out for this “3-in-1 Credit Report and Free Score” one-time purchase offer from TransUnion for $29.95. This is a different offer than the two above and it provides a *TransUnion* credit score….not a FICO score.

Here are the FICO score offers from TransUnion’s www.transunioncs.com (transunioncs stands for TransUnion Consumer Solutions) website:

  • TransUnionCS offers Single Credit Report + FICO score. A one time TransUnion credit report and score for $14.95. There is no trial period.
  • It also offers 3-in-1 Credit Report plus FREE FICO Score. This program offers three credit reports but only one credit score…and that is based on TransUnion credit report. The one-time cost is $34.95. No trial period.
  • There is also a credit monitoring product available through this website. This product provides you with your TransUnion credit report and FICO score 4 times a year at the cost of $19.95 per quarter($79.8 per year). No trial period.

Credit scores from Experian

  • Experian offers a 30-day free trial of the Triple Advantage program, through which you can get all 3 credit reports and Experian Plus Score. Note that the Plus score offered by Experian is not your FICO score. Plus and FICO are similar scoring systems but not the same. Personally, I only care about the FICO scores…so this doesn’t sound attractive to me. Potential cost of laziness (if you don’t cancel within your trial period) is $12.95 per month. (annual cost: $155.4)
  • A one-time, non-subscription purchase of Experian credit report and score will cost you $15.
  • Experian also offers credit scores calculated using a new credit rating called VantageScore for $5.95. Again, as in the case of the Plus score, this score has nothing to do with your FICO score and hence, doesn’t impress me.

Credit scores from Equifax

  • Equifax offers the Score Watch program through which you can get your FICO scores based on Equifax credit report. Monthly subscription cost is $8.95 and there is no free trial offer. (annual cost: $107.4)
  • Equifax also offers a non-subscription (one time purchase) program called Score Power for $15.95. With this you will get your Equifax credit report and your FICO score based on that report.

Other sources of credit scores

There are a multitude of third-party credit score providers that go through one of the above agencies to obtain your credit score. Personally, I would not punch in my all my personal information on such third party websites. Apart from the risk of having your identity stolen (or misused), there is also a risk of finding yourself signed up for a ton of trashy snail-mail and junk email if you go through some arbitrary credit score information provider. If you insist on using such websites, make sure you comb through the privacy statements and opt out of any optional services that they might stick to your application.

  • The only exception to this rule is AnnualCreditReport.com on which you can get a credit score for $7.95 with your once-a-year free credit report from each credit rating agency (I need to verify this in a better way). AnnualCreditReport.com does not offer credit score as it’s own product…ultimately it’s offered through the individual credit agency.

Credit scores directly from myFICO

Buying your scores directly from myFICO has one advantage..they are just FICO scores (duh!). myFICO offers 5 products as follows:

  • myFICO® Identity Theft Security Deluxe: this one gives TransUnion credit report and the corresponding FICO score at $4.95 per month. No free-trial offer. (available for 1 annual payment of $49.95)
  • Score Watch: provides Equifax credit report and corresponding FICO score for $8.95 per month. 30-day free trial is available with potential cost of laziness at $89.95.
  • FICO standard: just gives a one-time score and credit report for any of the three credit rating agencies for $15.95 each. This is an incredibly bad deal…just stay away from this one.
  • FICO Deluxe: All three credit reports and credit scores with a one-time purchase for $47.85.
  • Suze Orman’s FICO kit: Suze Orman’s advice and all three credit reports and credit scores with a one-time purchase for $49.95. I don’t know why myFICO has special love for Suze Orman. But, it is noted that the product above (FICO Deluxe) has everything except the Suze Orman advice and it just costs $2.1 less than this Orman-endorsing product. I wonder if Orman’s advice is not much worth than $2.1 then, is it? :) I won’t recommend this.

Some recommendations on purchasing credit scores for cheap

[Updated March 27th, 2007: according to TransUnion, it does not provide *FICO* scores on www.transunion.com. When I called them up to ask about checking my FICO scores, they directed me to www.transunioncs.com. The following information has been updated to reflect the change]

Based on the above information, it is clear that the cheapest way to get your credit scores is by signing up for free trials and cancelling them before the trial period expires (some people may have ethical issues here and I understand that). If you are just looking at scores for one-time comparison purposes, here are my top recommendations:

  • If you want a score based on Equifax credit report, the best option is available on myFICO website through the Score Watch program. Free trial for 30 days. If you forget to cancel, it’s $8.95 per month.
  • If you have exhausted the free trial offers in the past, your next best bet is myFICO® Identity Theft Security Deluxe through myFICO website for getting a TransUnion credit report and score. Cancelling within a month will cost you just $4.95.
  • If you want to look at all three credit scores and reports just once using a single product, your best choice is FICO Deluxe through myFICO website. It will cost you $47.85. Alternatively, you could buy individual credit scores from myFICO website for Equifax ( Score Watch , $0 free trial - cancel within one month), TransUnion (myFICO® Identity Theft Security Deluxe, $4.95 - cancel within one month), and Experian (FICO Standard, $15.95)…this way all three credit scores will cost you only $20.9. Just remember to cancel them during the trial period.
  • Stay away from Experian’s website unless you want the Plus score or the VantageScore.
  • Stay away from TransUnion’s www.transunion.com website. FICO scores are only available on www.transunioncs.com.

If you are looking for year-round continuous monitoring, then go for this:

  • myFICO® Identity Theft Security Deluxe ($49.95 per year, no free trial) for TransUnion credit report and score. A better option is to purchase the plan and then cancel within a month. That will cost you just $4.95 per month. Doing this every three months will cost you just $19.8 per year……and quarterly monitoring is sufficiently *continuous* for credit scores, in my opinion.

Update: Free credit score offer suggested by a reader

An avid reader of this blog, Gaming the Credit System, mentioned a credit card offer from Washington Mutual that comes with free online acces to credit score. In case you find the card attractive, the free score is an additional incentive. :) Thanks GCS.

Most credit scores will come in a combination of score+ credit report, so don’t go about buying a separate report if you are ordering a score.That’s all for now, good luck with your next credit score purchase. I think by now you fully understand why this stuff may be really confusing to some people. :) If you have something more to add, just drop a line and I will include it.

And while I still have your attention, let me mention it here that you can subscribe to this blog by clicking on the following buttons:

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Bad Credit Hurts - How And Why?

by golbguru on December 21, 2006

Lets see the “why” first, and then I will mention a few points from a Bankrate.com article about “how”.

Why does bad credit hurt?credit-report
Come to think of it, your credit history is really keeping a track of your financial responsibility more than your “credit-worthiness”. People who lend money to you are interested in knowing how “responsible” you have been in the past with instances when people lent you money. For lenders, credit-worthiness is analogous to financial responsibility, and that’s what they are looking for in your credit history. For these people your credit history answers this question: If I lend this person some money, what is the probability that he/she will return it? Better credit history means better probability of the lenders getting their money back. No rocket science in this.

People who don’t directly lend you money may also be interested in knowing how financially responsible you have been in the past. These include: your employer, your apartment landlords, your utilities company…and almost anyone else who “lends” you something (products or services) of significant value. These people are purely interested in your financial responsibility rather than the literal “credit-worthiness”. Why? because lack of financial responsibility is always associated with costs. One may argue that making late payments has nothing to do with your job. But, if employers see too many late payments on your credit report, whether you like it or not, “lack of responsibility” is the first thing they will conclude from your credit report. A couple of late payments to credit cards (or other agencies) could be explained as freak mistakes, but more late payments are a sure sign of one or more of these characteristics: you are not organized, you are careless, you spent more than you could afford, after making one late payment you did not take efforts to avoid the second one..meaning either you are a slow learner or you do not have the ability to recognize the problem. All these characteristics can be potential costs for your employer at some point in the future. Your credit history answers the following questions for the respective people:

Employers: Is this person going to mess things up at some point in time and potentially cost us (money/reputation)?

Landlords: Is this person going to pay the rent on time?

To sum up, whether they are lending you money, something else, or employing you, they are all asking the same thing:

Are you financially responsible?

Other than your credit history, what else can provide a well documented answer to that question? Bad credit history means the answer to the question is NO and everyone knows what will follow from then on. Credit scores (like myFICO, Vantage) are formulated in a way to reflect your credit history; there might be loopholes in the formulae used for calculating credit scores, but as long as we don’t have a better answer…these scores will be a measure of our financial responsibility and we need to suck it up.

How many ways can bad credit hurt you?

I stumbled across an article Bankrate.com titled “Bad credit hurts in many ways“. Listed below are some areas where bad credit rating can hurt you. To keep it brief I will just stick to the list, to read more detailed explanations click here.

  1. Car loan
  2. Car Insurance
  3. Job
  4. Housing
  5. Utilities
  6. Cell Phones
  7. Elective Medical Procedures
  8. School Loans
  9. Marriage (what !?)

Wow..that “marriage” on number 9 made me think “I didn’t know people checked credit scores to marry” :). Obviously, it’s not about that.

Btw, Bankrate missed a big one here: Mortgage !! They mention “housing” but only in context of renting apartments not buying homes. Bad credit can really cost you a lot of money in the long run due to high mortgage rates.

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So How Many Cards Does It Take To Hurt Your Credit Score?

by golbguru on November 8, 2006

After my previous post titled “18 Credit Cards And Not A Single Late Payment: A Guide To Efficient Credit Card Management #1“, I got a number of comments to the effect that it will hurt my credit score badly. Incidently, I last checked my credit score just a few days ago on November, 01 2006 [remember the post on "the smiling guy-sucker" on the myFICO website? :)]. You can see the score below in the post.

Before you interpret my score, here are a few points to consider:

  • Though I manage 18 credit cards at present, I own 9 of them. My wife has the other 9. But our agreement is that she takes care of our stomachs while I take care of our money, so I get to manage all of them.- All 9 of my credit cards were accounted for on myFICO website including two that I got around Sept 01, 2006, so I am assuming this is the lastest updated score.-Since I got two new cards in Sept, the “hard” credit inquiries should have hurt my score a bit at the time. (Update: from what I learned eventually, this is not true. Read here about why this is not true.)
  • You should understand that there is bit of a lag involved in the credit score reporting stuff. If you have a hard credit inquiry today, it doesn’t mean an instant reduction in score; it will take about a month to appear.General knowledge question:

What is a “hard” credit inquiry?

These are inquiries when someone pulls your credit report for a serious purpose like opening new credit card, bank accounts, mortgage, auto loans, etc. Such inquiries appear when you initiate a transaction. All hard inquiries adversly affect your credit score. Other companies also access your credit report to send you those trashy offers, but when they initiate an inquiry, it is termed as a “soft” inquiry and this one doesn’t ding your credit score.OK show-me-the-damn-score-already time. Here is a snapshot of my Transunion credit score on myFICO:

ficoscore2 credit-cards

So obviously, my 9 credit cards were not enough to punch a big hole in my FICO score. May be it could be higher, but 771 is more than enough. So right now I can certainly say that if you have 9 credit cards or less you should be pretty OK on the credit score scenario (assuming you are never late). If you want to extrapolate this result to more than 9 cards, do it at your own risk (however, personally, I would think that it won’t matter much to your credit score if you have more than 9 cards). If I get one more card in future, I will post an update on what happens then.I think what matters most is whether you pay your bills on time and how much balance are you carrying on your cards and how close is that balance to your credit limit. Number of cards is not really an issue towards the score. However, be discreet and have only as many cards as you can manage properly.

  • So should I go ahead and apply for 5 credit card offers today because having many cards won’t hurt my credit score?

NO !! If you apply for 5 cards, that will mean 5 hard credit inquiries and a significant ding to your score. Stack your cards if you want, but space your credit applications out over time. Something like 1 or 2 a year.

  • I think I have a lot of credit cards, should I cancel some of them?

NO !! If you cancel your credit cards you are effectively reducing the total credit limit. That adversly affects the ratio of your credit card balances to total credit limit. This will hurt your credit score.

Does anyone know about anyone who had problems with getting credit because of too many credit cards? I would like to hear about such things so that I can document some example for (or against) this article.

P.S: I will post the “A Guide to Efficient Credit Card Management #2″ in a few days…may be tomorrow? let’s see.. I know there are a lot of eyes waiting for that one to come out :)

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Tell Me Why Is This Man Smiling On myFICO Website? Does He Understand The Cost Of His Low Credit Score?

by golbguru on November 1, 2006

After you finish reading this, try and give some innovative reasons that might be making the man smile. :)
So, I was just went to myFICO.com to check my FICO score (made a huge balance transfer and now I am worried about my score…this is another story). On their main page, I see these three people smiling at me with their FICO scores halo-ing around their heads. Here is the image:

fico1.2 credit-score

They got it right with the ladies on either side of the guy. The lady on your right has a wide smile due to her excellent credit score. The lady on your left has a not-so-wide smile because she realizes she will be paying more for her loans than the other lady. But the man? why is he smiling? :) Does he realize what it means to have a low credit score?
Here is a copy of a table right below the image on the website:

fico3.0 credit-score

The man lies somewhere near the bottom of the table (marked by an arrow and a box). He probably doesn’t realize that, for $300,000 borrowed, he will be paying $457 per month more than the lady with the 790 credit score. That translates to a total of $164,520 over the term of his 30 year mortgage ! …and that is certainly noting to smile about. Small rises in APR probably mean nothing to some people unless they see how it affects their total cost. The lady with the score of 724 probably realizes that and hence the subtle smile :). She will paying $43 per month more than the other lady and it will cost her an additional $15,480 just because she doesn’t have a FICO score more than 759.
In my opinion, the image should look like this:

fico2.2 credit-score

Now, you don’t want to look like that, do you? Make sure you understand what your credit score means to you and how much it will affect the cost of your debt/loan/mortgage. Fish around the internet a bit and find out all you can about credit scores and how to improve them. Almost all the major credit reporting agencies and some credit card websites have free tutorials about improving credit scores. Read them.

Btw, here are a couple of reasons why the man might be smiling anyways:

  1. He is not going to borrow anything anytime soon and doesn’t care about his credit score.
  2. Just because he is photographed between two chicks.

Anymore reasons you can think of?

Some resources (these are not ads so feel free to click on them):
Bankrate.com : Mortgage Payment Calculator
myFICO.com : Improving Your FICO Score
Experian.com : Improve Your Credit Score

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MSN: Weird Stuff That Hurts Your Credit

by golbguru on September 19, 2006

Interesting article on MSN about how you can hurt your credit score. Here is the hot list of weird things that can do the damage (my comments are in italics):

1. Credit company not reporting your true credit limit (Capital One) (Not really weird)
2. Credit cards with no preset spending limits (Amex) (Not really weird)
3. Disappearing deliquencies or brankcruptcy (Weird)
4. Balance transfers (Not really weird)
5. Opening new credit card accounts (not a big deal), closing old ones (can be a big deal), but everyone knows this by now.
6. Settling old debts (Weird)
7. Tickets and fines (Expected, Not really weird)

The article does not mention this, but paying some bills late can also hurt credit scores. One example is T-mobile. I know for sure that paying your T-mobile bill late goes as a negative entry in your credit report. I don’t know how they do it, but they confirmed that they report late bill payments.

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