Posts tagged ‘credit scores’
As I mentioned in part one, for the last two years Jak and I have been using a single credit-card account, a Costco Amex card with cash-back rewards, for all our credit-card needs. (When a merchant doesn’t take American Express, we use the debit MasterCard for our joint checking account.)
This makes record-keeping easy. At the nadir of our debt we had nine or ten cards between us, which makes for a lot of due dates to track every month. As you might expect, we missed several deadlines over the years.
Now I only have to monitor the balances of two accounts, and worry about one monthly due date. We pay the full balance on the Amex card every month, so never incur fees or interest charges.
I’m very happy with this system. Except for one thing: it’s trashed my credit score.
I confess that once I’d paid everything off I stopped even tracking how many lines of credit I had open. I used to know them by bank, so there would be the Providian card, the First USA card, the Citibank card, etc. But those darned banks keep eating other banks, and the names wouldn’t stay the same. We started out with one Chase account each; four years later we had six (or maybe seven?) different Chase cards, which I could no longer tell apart. J.P. Borgan Chase!
To make matters worse, I’ve never been very happy with Chase, after a couple of predatory ‘gotcha!’ stunts like moving our due date up by a week without warning. I had no intention of using any of those cards ever again, but I left them alone because I knew that closing lines of credit can drop your credit score.
Then in the spring of this year Jak and I began to receive notices that one card or another had been closed due to inactivity. At first it was a surprise; in nearly twenty years I’ve never before had a bank close an account because I wasn’t using it. Previously they’ve just tried to woo me back by sending more ‘convenience checks’ and offering temporary low interest rates. The Wall Street Journal explains this shift in strategy: “As credit-card delinquencies rise, closing inactive accounts helps companies reduce their exposure to risky credit holders. Issuers close credit lines … if the card holder is deemed unprofitable, which is essentially the case when the card goes unused.”
I hated the idea of juggling purchases across multiple cards again, and decided not to change my behavior in hopes of stopping any other closures. It was a partially emotional decision rather than a strictly logical one, but for me the potential score drop wasn’t worth the effort and increased risk of screwing up.
When I got the termination letter from Discover, however, I had a sharp pang of regret. That was the first credit card I got in college; when it closed my ‘credit history length’ dropped from 19 years to just 2. I don’t have clear before-and-after credit scores, but since history length accounts for roughly 15% of your score, I figure that had to hurt.
I called Discover to find out if the account could be reopened. No dice; I was offered a new account, but of course that would do nothing for my ‘length of credit history’ number. They wouldn’t budge on reopening the one I’d had for nearly two decades.
This week I pulled credit reports and took stock. Jak still has three Borgified Chase accounts active (my guess is that Chase realizes that he’s still employed full-time and I’m not); I have just the one Amex card open.
Honestly, I prefer it this way. Despite my brief worry that I’d done the wrong thing by not saving the Discover account, I feel relieved to be done with all the extra cards. I have a sense of freedom and control that was missing before.
Still, it was not without cost. If we ever apply for another mortgage, the credit score will matter. It might even be making a difference right now in our car insurance rates, or in job applications.
If you’re concerned about having the highest possible credit score, you should pick the one or two cards that you’ve had the longest and make sure to put a purchase on them every few months. There’s no guarantee that they won’t be closed anyway — issuers can close an account at any time for any reason — but it improves your odds.
The bad news is that making purchases on your credit cards carries a whole other set of risks — sort of a ‘damned if you do, damned if you don’t’ scenario. I’ll cover those in part three.
(Photos by Andres Rueda and jessemoya.)
I’ve just about had it with credit cards.
Like most people of my generation, I got my first card in college. Then, and for the next twenty years, getting credit was deceptively easy. I used it in all the typical foolish ways: to pay bills during periods of unemployment, to finance an unsustainable small business, to live beyond my means.
In early 2007, after more than a year of concerted effort and lifestyle changes both major and minor, my partner and I paid off the last of our credit cards. (We still have the original mortgages on our house, but have never rolled outside debt into that loan.) I swore then that I would never carry a balance on a credit card ever again. And I haven’t.
But I do still find it useful to charge purchases to a single card, paid in full each month. Here’s why:
- Purchase tracking — This is the big one, as any attempt to budget or control spending relies on it. No matter how diligent I try to be with recording my cash transactions, I still miss one from time to time — and never mind tracking my spouse’s cash, that’s like trying to catch raindrops with my tongue.
- Overdraft protection — I try to keep a minimum cushion in the checking account and everything else in savings, where it earns interest. Putting purchases on the credit card instead of debit frees me from constantly monitoring our available checking account balance to prevent stiff overdraft fees.
- Cash-back rewards — Our Costco AmEx card gives us a tiny percentage back (1-3%) on purchases. Last year it was just over $500 — not exactly chump change. This year we’re spending less, so the total amount will drop, but even so: 1% > 0.
- Vehicle insurance — On the rare, rare occasion when I need to rent a vehicle (which hasn’t happened in the last two years, but no doubt will at some point), the extra insurance provided by a credit card saves me money.
The problem? Now that I’ve mended my profligate ways, the credit card companies no longer consider me useful.
Credit cards (and indeed the entire banking industry) work via cross-subsidies. Some of the people (a recent article quoting ‘industry lobbyists’ put it at roughly 40%) are the sort of credit user I am now, taking advantage of the benefits above without actually generating income for the issuing bank. The rest are the sort of user I used to be — carrying large balances at high interest rates, occasionally missing a payment and generating large fees and even higher interest rates. The income from that 60% has been enough to not just cover the other 40% but generate enormous profits for the banks as well.
Then along comes the worldwide credit crisis and — salt in the wound! — an act of Congress that finally puts limits on the bank’s ability to gouge their customers.
If you’re one of the 40% of responsible (aka ‘non-profitable’, from the bank’s perspective) credit users, be warned; they’re coming for you. They may have already begun. I’ll explain the first big change in part two.
(Photos by zingersb and jc.westbrook.)
In the 1990s credit reporting company TransUnion thought it had a great way to make more money. By filtering its already enormous database of credit information on U.S. consumers, it could sell highly targeted mailing lists to marketers.
Just one little problem, though: the Fair Credit Reporting Act, which allows the use of such data for credit, employment, licensing, and insurance transactions, but not for ordinary old unsolicited advertising. Thousands of junk-mail deluged consumers hired lawyers and began legal protest.
TransUnion shut down the marketing-list practice in 2001, but it’s taken an additional seven years to settle the consolidated class-action suit over the practice. The result: a $75 million payback, and free credit report/score access for anyone who’s had an open line of credit since 1987. That includes not just credit cards, but mortgages, car loans, and student loans as well.
That’s an estimated 160 million living Americans.
To partake of this punitive largesse, you may register at listclassaction.com. You will be provided with four settlement options, though unless you care to file an individual lawsuit the first two can be quickly discounted. The remaining choices are: six months of credit monitoring and a ‘potential cash payment (if available)’, or nine months of ‘enhanced’ credit monitoring. ‘Enhanced’ refers to ‘a suite of insurance scores and a mortgage simulator service’. Both options include access to your TransUnion credit score
In a nutshell: everyone gets six months of credit report and score access; the choice is between an extra three months of access, or a chance at a bite of the dollar pie. I’m not a big gambler, and I note that the $75 million pot has to cover more than a decade of lawyers’ fees before being divided between up to 160 million possible claimants, so I’m going to opt for the 9-month option.
Nothing happens right away; registering just means you will be notified by email when the settlement is final (probably late September). You then have until March 2009 to activate your six or nine months of service. Cash distributions, if any, will take ‘at least two years,’ no specified maximum.
Unlike the normal monitoring service sold by TransUnion, you do not need to give a credit card number to activate it, and you will not be automatically billed for renewal at the end of the 6- or 9-month period.
Also note that you only get TransUnion report and score access, not Experian or Equifax, which will almost certainly differ. Still, that’s 1/3 of your credit history. One benefit to having score access over a period of months is that you have time to make changes and see exactly what effect different actions have on your score, all for free. If I learn anything, I’ll certainly report it here!
Other sources: CNN, LA Times
