FICO® Credit Score Holds Steady At 804

There are plenty of things I could complain about in my life. My credit score isn't one of them. My FICO® credit score has held steady at 804/805 since May of this year:



I was hanging out in a CNBC forum the other day and came across an interesting thread. The user has a FICO credit score of 788, but is still worried about a comment in his credit report that reads, "amount owed on revolving accounts is too high." I know this comment well. I posted about this back in the summer of 2006 when my credit score hit 719. Yeah, it looks bad, but, in my opinion, that's just the FICO system's way of telling you that if you want to have a score of 800+, pay your revolving accounts down to zero. It's nothing to panic about. This note disappeared from my report when I paid all my personal credit card balances down to zero.

The fact that I still had a balance on one of my business credit cards at the time did not matter, since healthy business credit card debt is reported to business credit rating systems like Dun & Bradstreet's Paydex or Experian's Intelliscore service.

Now, if I ever get into trouble with one of my business credit cards and default (God forbid), the issuing bank(s) will almost certainly report the negative item(s) to all consumer credit monitoring agencies (TransUnion, Equifax and Experian.) They have the right to do this since I signed a personal guarantee when I opened my business credit card accounts, which is standard practice.

Even with my current score of 804, I'm seeing the following notes in my report as reasons why my score isn't higher than 804:

• "The time since your most recent account opening is very recent
• The length of time your revolving/charge accounts have been established is too short"

The top one I can understand since I only recently stopped chasing 0% credit card offers. But I find the second note quite funny since I have accounts so old that I'd even forgotten they existed.


Avoiding Interest Charges on My Main Business Credit Card

There is a certain balance on my business credit card that I have been targeting. This target balance allows me to have enough cash to save to for retirement (Roth IRA, of course!), pay my bills and child support, and have a little left over for savings (I wouldn't have a balance at all if the credit crisis never happened, but that's life.) Now, with this particular target balance, finance charges are applied every month. However, I've managed to avoid having to pay any interest by using the rewards points I earn each month to "purchase" a statement credit of $50.

My target balance is $4,000. Since this business card has an APR of 9.99%, the daily periodic rate for purchases is:

• 9.99/365 = 0.02737%
• 0.02737% is the same as 0.0002737

So with my preferred target balance, I am charged $4,000 x 0.0002737 = $1.0948 interest per day. This makes the interest I owe each month in the $34 range, which gives me some breathing room since I can't predict the exact amount that I'll purchase on this card every month. As long as the finance charges are $50 or less, I'm good.

How do I manage to stay close to my target balance? Easy! I login to my account at least every other day and check my balance. When my balance is looking too high, I schedule and online payment. Quick and easy. Whenever I make a major purchase, i.e. over $500, I make an online payment immediately, so that I don't mess up my average daily balance.

So, if you've been paying attention, your next question is likely, "so how much do you have to spend each month to get a $50 statement credit?" Easy. A $50 statement credit requires 5,000 rewards points. I get 1 rebate point for each dollar I spend on the card. So I have to spend $5,000 per month. In other words, it's a 1% cash back rewards program.

During the good times, when I'm able to pay my balance to zero every month, my points accumulate and roll over, which gives me plenty to play with during the bad times (I had about 28,500 points stored up when the credit crunch took a serious turn for the worse a couple of months ago. Converted all those points to statement credits.) However, my points do expire if I don't use them within two years, which is quite reasonable in my opinion.

So, with this technique, it would seem as though I could have a 0% business credit card forever, just as long as I keep spending and avoid having an average daily balance above the $4,000 threshold (this card has no annual fee.) But the reality is a "fixed" rate of 9.99% can disappear without much notice. That's because credit card issuing banks invariably reserve the right to modify the terms of each credit card account whenever they wish, as long as they give you warning of an impending rate increase and the option to opt out of it. Citi and American Express have plans to raise APR's for millions of their credit card customers.

This technique requires that I do a lot of spending on this card each month, which has worked out fine since I've been buying a lot of advertising lately. Even as business improves and I'm able to pay down my balance a bit, I have another statement credit tier to work with: I can get a statement credit of $20 in exchange for 2,500 rewards points. As you can see, this tier isn't as equitable as the top tier I described above, but I can still work with it. Maintaining an average daily balance of $2,500 would produce an interest charge of about $21.21, so I'd need to keep my average daily balance at around $2,200 (interest would be $18.67) and spend at least $2,500 per month.

Of course, I'd much rather end this game and return to the good old days of paying my balance in full each and every month. Yes, I'm taking full advantage of my card's rewards program -- and I enjoyed 0% on new purchases and a transferred balance for a year -- which is great. But by having a revolving balance, I'm playing right into the hands of my bank. Bottom line: this scheme could easily blow up in my face if my business has a really bad month.

Some credit cards offer up to 5% cashback on everyday purchases like gas, travel, home improvement, dining out, etc. The Discover More card is the perfect example. For some reason, I wasn't able to get a Discover More card, despite having a good credit score when I applied. When I submitted my application for this card, my FICO score was in the upper 700 range, yet my application was rejected. I checked my credit reports after that rejection, and found nothing wrong. Go figure. If you can get this card, do it. If you already have one, cool. The rewards are peerless in generosity, it comes with 0% intro APR on purchases and balance transfers and the "goto" APR isn't that bad (as low as 10.99%, variable) when compared to competing consumer cards in the American market.

But I'm not complaining. I like my flagship business card. It's a business purpose card, which enables me to have credit card debt and a high personal credit score simultaneously. Plus, the process that my issuing bank has setup for claiming statement credits is efficient and stress free. I just login to my account and within a few clicks of my mouse I've traded my points for a statement credit. Lovely. My other business cards either have APR's that are too high for my taste and credit standing (so I keep them for building credit and emergencies only) or, as is the case with my newest business card, the credit limit is way too low.

Discover has some relatively new business credit cards on the market now, and the rewards are quite generous, though not as generous as the Discover More consumer credit card I noted above. I'd love to apply for this card, but I'm gun shy as a result of my previous rejection.

So, why I am not recommending my favorite business credit card here? Good question. The answer is simple: it's not available anymore. A victim of the current credit crisis. In fact, I just visited the issuing bank's website to see what other business credit cards they have on offer, and found none. The market for business credit card receivables dried up last month (a receivable is any debt owed to a company/corporation that is not paid in full yet.)

Before the onset of autumn this year, my bank could take my $4,000 business credit card balance, bundle it with other credit card receivables and sell the debt to Wall Street. But investors don't want to buy that kind of debt right now because credit card defaults are rising, even with accounts held by prime borrowers.

Want to know when global credit markets will improve? Stay tuned to the TED spread (the TED spread is the difference between the yield on the 3-month Treasury Bill and the 3-month LIBOR yield; it's a reliable indicator of banks' willingness to lend.) Once it falls below 1.00 percentage point, banks will start (probably with baby steps at first) lending like they did before this decade's housing boom.

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FICO® Credit Score Rebounds to 804 After Hard Pull

Here's an updated chart of my FICO® credit score, provided by the folks at TransUnion:





Here's a real life example of how applying for credit can affect your credit score. A dip of 8 points; a minor downgrade that lasted 2 months.

Earlier this year, I decided to open a new business credit card account, not because I needed the credit, and not because I needed to do a balance transfer to avoid paying interest. I opened up the new account because the credit crunch that began last summer and still persists today started to make me a bit nervous last winter. My business has suffered as a result of the economic slowdown, and no one knows for certain when a) the economy will return to substantial growth and b) when confidence will return to the banking system. So the new account is just a little insurance in case my situation gets really bad.

My understanding was that the ding associated with a hard pull on a credit report would last for about 6 months, so there's a chance that the reason my score rebounded so fast was due to some other unrelated improvement to my credit profile. Perhaps the rule is that a hard pull inquiry into my personal credit history for a business credit card application causes heartburn for only 1 or 2 months, whereas if it was for a personal card the ding would last longer. Just conjecture on my part: there's no way for me to know for sure.

Though applying for credit did cause my personal credit score to drop for a spell, the new account may bolster the credit rating of my business, because it's a new line that I most likely won't tap (debt to credit ratio is a big deal to lenders and, therefore, credit rating agencies.) I think I made the right decision, even though I read recently that having too many unused lines can have the opposite effect. My nascent business credit card account will lower the average age of my business credit lines, which can in turn hurt my business's credit rating. Hopefully, my other credit lines are old enough to provide enough weight to balance out the new account.

The credit line on my new card is generous -- much more than I was expecting -- but the interest rate associated with making new purchases is higher than I'm used to. Of course, it's a trade off, because if I need to use this card at some point, the debt I would incur would be unsecured, and that's something I really like. None of my personal or business assets are at risk, though if I hit rock bottom and defaulted for some reason, the bank would most certainly ruin both my business and personal credit ratings, in short order.

During my recent research into credit scores, I learned that:

• There are many different types of soft pull inquiries.
  
  
• Some banks perform credit-score-damaging hard pulls on credit reports when a customer applies for a checking and savings account. A commenter at CreditBloggers.com complained that his bank performed a hard pull every time his CD rolled over. Yikes!

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Can You Really Buy a Great FICO Score?

With every great industry comes subindustries; the housing industry is no different. From the traditional mortgage lending industry emerged the subprime mortgage industry. However, now that subprime lending is mainstream, companies who offer quick FICO fixes for individuals who have further damaged their credit through subprime borrowing abuses or other poor credit usage are now coming to the foreferont.

Yes, you can buy a good FICO score these days.

However, you might not be able to do it for long. These kinds of companies use legal loopholes to cosmetically establish good credit scores, and neither the Fair Isaac Corporation nor mortgage lending industry leaders are happy about it. These quick credit fixes are achieved by essentially attaching individuals with poor credit to the loans and credit accounts of others with good credit - and it's legal! This, opposers argue, will inevitably lead to more woes in mortgage lending scrutiny and foreclosures because people who really should not be approved for loans will be.

Furthermore, many think it to be unethical, as it is a false positive of sorts concerning one's creditworthiness. Fair Isaac is already changing it's formula to exclude some of these slick maneuvers from counting toward FICO score calculation. Industry whistleblowers are calling for further regulation. It seems like this 'insta-credit' subindustry might be of the "fly by night" sort with this level of opposition.

But what do I know - upon seeing the first episode or so, I predicted that the Power Rangers would flop, and I was absolutely sure that "Friends" wouldn't last.

Go figure...

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Credit Score Peaks At 826, Then Dives to 803

So here's the latest snapshot of my charted, FICO® credit score, provided by TransUnion® :



I don't have enough room to fit as much time as I would like, but you can see that my score peaked at 826, then dropped 14 points, then went sideways for several months, and is now at 803.

I like the FICO scoring system. In my humble opinion, the system works. It's not perfect (see my gripe below) but if a guy like me -- someone who has had serious problems with debt in the past -- can go from having a truly terrible score to 826, that's proof enough that the system is reasonably fair. I went from 697 to 826 in one year, and I think that's pretty cool.

Ok, now here's what I don't like about the system: you have to continue playing the game if you want your credit score to remain high.

What's the game? You borrow lots of money via credit cards and pay it all back over time -- with no late payments, of course. You let the banks make money off you, and, in exchange, you get to borrow a lot more money, and you get much better interest rates. That's the game. Play the game right, and you can live in a nice house, consume lots of junk, drive a nice car, etc. Play the game wrong and life can get really hard, really fast.

So, yes, I borrowed a lot, and paid it all back. But now I have to continue to use at least one of my credit cards on a regular basis if I want my credit score to remain in the 800+ zone. If I don't use my cards at all, my score will decline steadily over time, and that's not fair. In essence, I am being penalized for not using credit cards, even though I am still a very responsible consumer. I still have debt that is being reported to the credit bureaus, but student-loan and car-loan debt doesn't carry as much weight as credit card debt in the eyes of Fair Isaac.

Here's what Fair Isaac has to say about it:

You have no recent revolving balance information being reported

The score evaluates the types of credit currently in use, or that you have used in the past, and will consider the mix of retail cards, bankcards, and installment loans appearing on your credit bureau report. In general, moderate and responsible use of revolving credit accounts will boost the score slightly. Research shows that consumers with very moderate usage of revolving credit accounts (charging low balances and repaying them on time) have slightly better repayment risk than those who do not use revolving credit at all.

So, Fair Isaac expects me to swallow that? That I have to maintain a small balance on my credit card in order to be considered an exemplary credit consumer? I mean, how much is "very moderate usage" anyway? $5? $25? $200? Yuck! That leaves a nasty taste in my mouth. Come on, Fair Isaac, you can do better than that! Seems to me that it's just an excuse to give the banks a shot of making some interest income off me. Seems to me that this is a classic case of conflict of interest, since banks pay Fair Isaac for their services. Yes, Fair Isaac makes money from many different sources, but here is a quote from the Fair Isaac website:

"Fair Isaac clients include...99 of the top 100 US banks and half of the top 50 banks in the world..."

Hmmm...

So, what are my plans? To be fair, I'm going to see if my score drops below 800. If it does, I'll write to Fair Isaac and complain. You never know. My arguments may be cogent enough to convince the firm that tweaking the FICO scoring algorithm is the right thing to do. Or maybe not, but I won't feel right if I don't try.

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A 20 Point Jump In My FICO Credit Score!

I've been waiting for my FICO credit score to hit the 700 mark for over 2 years now. Well, it looks like it's finally happened! Yesterday, I checked my score and found that it had jumped from 686 to 706! Yippee! Pretty exciting stuff!

In October of 2004, my score was 628. I really don't know if it is a real accomplishment to go from 628 to 706 in a year, but I think it is.

How did I finally get over the 700 mark you ask? Well, I recently made a nice sale of one of my online properties which left me with a decent chunk of cash to play with. After making some investments, I was left with about $4,000. I could have put that money into the bank, but I realized that it made more sense for me to use the money to pay down some of my personal and business debts. Why? The answer is quite simple:

The money I am saving in interest charges that I would have paid to the credit card companies is greater than any interest I would earn by putting the money away or even by making some safe investments (like a Certificate of Deposit.)

And, of course, paying down my debts would cause my FICO score to rise, and an improved FICO score has many obvious benefits.

I did not realize, however, that my FICO score would jump by 20 points as a result of my actions. I was expecting a 10 point increase, or maybe even a 15 point increase at most.

I think that other factors may have contributed to this favorable jump in my score. Perhaps I had reached a 2, 3 or 4 year anniversary with one or more of my creditors this month, and that could have been a contributing factor.

Well, whatever the reasons, I am still seeing some somewhat discouraging language in my credit report, i.e:

1. The proportion of balances to credit limits on your revolving/charge accounts is too high.

Analysis of consumer credit behavior repeatedly finds that owing a substantial balance on revolving/charge accounts (Visa, MasterCard, Discover, American Express, Diners Club, department store cards, etc.) relative to the amount of revolving/charge credit available to you represents increased risk. In fact, the level of revolving debt is one of the most important factors in the FICO score. The score evaluates your total balances in relation to your total available credit on revolving/charge accounts, as well as on individual revolving/charge accounts. For a given amount of revolving credit available, a greater amount owed indicates a greater risk, and lowers the score. (For credit cards, the total outstanding balance on your last statement is generally the amount that will show in your credit bureau report. Bear in mind that even if you pay off your credit cards in full each and every month, your credit bureau report may show the last billing statement balance on those accounts.)


2. The length of time your accounts have been established is relatively short.

This factor is based on the age of the accounts on your credit bureau report (the age of the oldest account, the average age of 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 don't.

Source: FairIsaac

So it would seem that I still have a long way to go before I will reach my ultimate goal: debt free, with an 800+ FICO score. Wish me luck!

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