Credit Score Games

I’m supposed to be the “Finance Guy”, but I’ll share a dirty little secret:  My wife’s credit score is higher than mine!

OK, hers is quite high: 783 averaged over the three credit bureaus: Experian, Equifax, and TransUninon.   According to her score reporter her score of 783 is higher than 93.77% of U.S. consumers.  783 is “Excellent” credit.

Mine, I trust a bit more.  I paid $19.95  for two scores from myFICO.com and a free one from creditkarma.com (which seems to be the least offensive “free” service I could find… decent privacy policy, decent reviews, etc).  Bottom line:  747 is my current average score.  It turns out that this 36 point difference is fairly big — the difference between “very good” and “excellent”.  If 783 is in the top 93.3%, 747 is merely in the top 60-65%.

I find this all very strange since I recently cancelled a credit card that I had for 10+ years which had a $48,000 credit limit because they started charging an annual fee.  This, I think, hurt my score.  The other thing that hurt my score big time is a missed payment of about $95 dollars.  This happened because my credit union was merged and the auto-pay for the annual fee didn’t go through. Ouch!  And that was about 30 months ago.

It appears that the gold standard (true FICO) score average is 770.  Moreover the best practical score is 785+.  Notice that is very close to my wife’s average score. I’ll call 785 the platinum standard.  Any improvement above 785 is essentially meaningless, except as a “game.”  A 770 score will qualify you for just about the best rate on anything, a 785+ score will practically guarantee it.  (NOTE: Lenders use more than your credit score for making lending decisions, such as your years in profession, years at current employer, current salary, and several debt ratios based on your salary, etc).

Since my current average FICO (2/3 FICO, 1/3 “other”) score of 747 is 23 points below the “gold” standard of 770, I wish to increase it by at least 23 points.

Here’s my plan:

  • Pay everything on time with autopay. Double-check that there are no hiccups. If there are, promptly call the credit card company and ask how it can be fixed.
  • Get 2 new credit cards.  This will initially hurt my score, but I believe it will ultimately help.  Whether it does or doesn’t is part of my credit-score experiment.
  • Request credit-limit increases on all my cards… so long as they don’t require a “hard pull” of my credit score.
  • Keep paying all but one of my cards balances in full every month. This means no “finance charges” (aka interest charges).
  • Pay just over the minimum payment on my new 0% transfer-fee, 0% interest for 15-months “Slate” card.  [Ironically the balance comes from my wife's card!]

So far some things have happened…

  1. I received two new cards.  I requested a limit increase on one and they doubled my limit.
  2. I requested a limit increase on a card I have had for 7 years, and they doubled my limit.
  3. I asked about increasing the limit on a card I have had for 3 years, but learned that it would require a “hard pull” of my credit data.  Thus I said, nevermind, keep the old limit.
  4. I requested a limit increase online for a 4th card.  It was not clear if it would require a “hard pull”, but I will eventually find out if a) If and how much of a limit increase I receive, and b) if a “hard pull” was done.

Based on the credit score simulators at myFICO.com, and creditkarma.com, I anticipate that initially my score will drop between 3 and 10 points.  That’s, OK.  My goal is to improve my average FICO score over the next 6-12 months.

Depending on how #4 above turns out, I will easily have more than doubled my total credit limit from about $26,000 to at least $63,000.  Since I am holding a balance on the zero-interest intro-rate card of $12,500, my credit utilization will be about 19.8%.  This is higher that optimal (about 2-7%), but still far better than the 48% level I would have had, had I done nothing!  It looks like the minimum payment will be $125/month at first, so I will pay about $135/month.  Unfortunately auto-pay does not have a setting of pay the minimum balance plus X dollars. So I will simply set auto-pay to pay the minimum balance, and I will augment with monthly extra payments.

The thing to remember is that I won’t be paying a single penny in credit-card interest.  In order to ensure this, I don’t dare charge anything on the “balance transfer” card, as the credit card company is likely to apply any payments in a way that is least favorable to me (e.g. most favorable to them).

Currently this experiment is just a game to me.  My wife and I have a 3.00%, 15-year, fixed home loan that we got with a 50% down payment.  I don’t see any reason to pay extra on that.  Further my only other debt is the 0% on the teaser-rate balance transfer card.  I have heard that paying even a single dollar over the minimum payment on such a card is a favorable sign for the mysterious credit score.  I’m willing to throw a few extra bucks every now and then on the off chance that this is true.  (However, just before the intro rate of 0% expires, I will certainly pay the full balance!!)

I will keep score on my little credit-score game using two free sources that are staggered by 2 weeks, and which both pull from TransUnion.  I will also monitor my credit history on a revolving basis every 4 months, by pulling from each agency in a staggered basis (from www.annualcreditreport.com) for any evidence of unusual activity.  The two-week (bi-monthly) staggered scores will be my benchmark for now.  When I feel that my scores appear sufficiently awesome, I will probably pay a one-time fee to myFICO.com to get the “real deal” scores again.

So, here are my goals/plans for the next 6-12 months:

  1. Get a 770+ score based on TransUnion data (using free scores)
  2. Get a 785+ score based on TransUnion data (using free scores)
  3. Pass my wife’s score, if possible :) [again based solely on the two TransUnion-based scores]
  4. When I feel the TU-based scores are high enough, pull one-time myFICO.com scores to see if I really satisfied goals 1,2, and 3 on scores that actually count.

Since I don’t use credit for anything but a mortgage, my score doesn’t really mater too much.  However, because credit scores can affect insurance rates for cars and home(s), I do care a little bit.  However, mostly I care about testing my theories about credit-score improvement. And I care about good-natured competition with my wife, too :)

Please don’t take offence if I sound like I have a cavalier attitude about credit scores.  I know that they can be incredibly important to people at various stages of life (such as when buying a first home).  I have learned that mental “game play” can be a powerful “idea formulation” tool for ultimately making smart financial decisions.  Temporarily framing the problem in terms of a “game” can help in separating emotion from cool-headed rationality.  I take investing very, very seriously — however I have also learned a lot by playing games on the side with relatively-small “fun money” financial accounts.  Credit and finance are serious and important topics.  Perhaps ironically, introducing a little levity in the process every now and then can be a useful method of making serious progress and (sometime) serious money.  At the end of the day I am serious…. however, before I take irrevocable actions, I often engage in fun as part of the decision-making process. When I commit to final decisions, I  strive to be extremely focused and grounded.

I hope to keep updating this blog about my “credit experiment.”  Hopefully my findings and observations may be of some use to you.  Until then, all the best to you and yours!

 

 

 

Fallout from the S&P US National Debt Downgrade

Kudos the S&P for being the first major debt rating firm to downgrade US debt to AA+.  Essentially they warned Congress that $4 trillions in cuts was required in a debt ceiling deal, Congress only ponied up about $2 trillion.  Bill Gross of PIMCO saw this coming as did many, many others including this finance blog.

The importance of the credit downgrade is the message it sends to voters and to Washington:  The US Treasury  is not immune the market realities of global economics.  The giant US credit card has terms and conditions ultimately dictated by global bond markets.  As debt-to-GDP ratios increase so will borrowing costs.  The long-term trajectory of US debt growth, under current law, is staggering.  Further the cocktail of massive debt, out-of-control debt growth, and a weak US economy do not bode well for future US debt ratings.

Unfortunately I don’t think this message is being heard or understood by a sufficient number of Americans.  Gross and El-Erian get it.  The US House of Representatives is starting to understand. The Senate and the White House do not.  Neithe does the US Treasury saying “There is no justifiable rationale for the downgrade?”  Seriously, what meds do they have to be on to say that with a straight face?  The American public has a degree of understanding, but not sufficient concern or attention.

The fallout of the downgrade will be modest but wide-ranging.  It will be good news for AAA rated companies and countries like Exxon Mobile, Britain and German.  The debt rating will be bad news for adjustable-rate mortgage holders, US bond holders, and entities that are required to hold US Treasuries.

Financial Diversification Beyond Wall Street

There are many ways to diversify beyond Wall Street’s offerings:

  • CDs (Certificates of Deposit)
  • Bank at a Credit Union
  • iBonds and/or Savings Bonds
  • Residential Real Estate
  • Commercial Real Estate
  • Starting a Small Business
  • Collectibles (gold, silver, platinum, art, vintage cars)
  • DIY home improvement

Paying down debt is also an investment:

  • Paying off (or paying down) credit cards
  • Paying off auto loans
  • Paying off student loans
  • Paying down mortgage(s)

These debt-lowering options have the side benefit of improving your credit score and lead to a healthier credit report.

Additionally, there are “investments” that benefit your finances and offer other non-financial advantages.

  • Education and training.  Either self-taught or formal. (including reading this blog!)  Increase your earning potential.
  • Exercise, and healthy diet.  The longer and healthier you live, the greater your potential to earn and prosper.
  • Strengthen your social network.  You will feel happier, more motivated, have more job networking opportunities.

Finally, there are methods to reduce and diversify your cost of living expenses:

  • Learn to cook, grill, or otherwise eat at home more often.  If you are persistent you may find you are eating better, healthier, and more economically.
  • If you like coffee… brew your own.  It may take time to learn what you like, but when you do you’ll love it.  Whether it is is store-ground hazelnut drip, Vietnamese coffee with Chicory and sweetened, condensed milk, French Roast, or a plethora of other choices you will benefit.
  • If you love high-quality craft beer, consider brewing your own.  After the initial investment (~$200) you can brew your own for less than $4 per six-pack.  Share it with friends, and grow your social network.
  • Use those DIY skills to make your house more energy-efficient by installing low-E windows, LED light bulbs, and even update weather stripping and doors.
  • Grow a garden.

I have employed all of these financial ideas except commercial real estate (not counting REITs), certificates of deposit, and gardening.  My point is that it is possible to invest beyond Wall Street’s offerings.  Wall Street now offers some great investments including ETFs, and excellent brokerage companies like Vanguard, Fidelity, and Interactive Brokers (for sophisticated investors).  Finance and investing extends beyond stocks, bonds, ETFs, and Wall Street.

Improving your Credit Score

Credit scores are important because they effect the interest rates you pay on everything:credit cards, car loans, mortgages, lines of credit, etc.  Credit scores and credit reports can also effect your success or failure in landing jobs or obtaining leases on an house, townhouse, or apartment.

If you know your credit score (FICO score), and it’s 770 or higher, you have an excellent score and are in great financial shape.  If your credit score is 720 to 769, you are in good shape, but could benefit from an upgraded score.  Finally if your credit score is below 720, you should strongly consider fixing your credit score.

I have some personal experience with credit score improvement and repair.  When I met my girlfriend and eventually found out her personal finance situation I had to take a deep breath.  She had $13,000 in credit card debt and credit score of 630.  One year later she had a credit score of 750 and almost zero debt. I provided no money to her… just advice and emotional support.  Today she is kicking butt and her credit score is well north of 770.

How’d we do it?  Pretty simple.  By making minimum payments to the low-interest accounts and throwing any left over money towards the highest interest account.  After a couple months, and an improved credit score, she took out a line of credit that was lower than her other rates.  She used it to pay off her highest rate card which was charging an outlandish rate of near 27%.  She kept making timely minimum payments to her lower-rate balances, while throwing almost all leftover money at the cards with the current highest rate.  As her credit score improved she was even able to call up and negotiate lower rates with some of her credit card companies.

I am Mr. Finance.  When I initially learned of her credit and debt situation I was taken for a loop.  I called my dad, Mr. Finance Senior, and confessed my discomfort.  Wise man that he is, he counseled me on observing how she adapts to my financial advise.   Since all else with her was wonderful, I held my breath and watched and waited.  Long story short, she did great.  I am so proud of her.

Not only is she now past her debts; she is thriving.  And because she did it herself, she has learned to “grok” a healthy financial lifestyle.  We are still happily (even blissfully) together.

Buying US Debt?

Why not evaluate US government bonds like corporate bonds?  Take a look at the balance sheet, cash flow, and anticipated future cash flow.  Look at current management… where are the they taking the organization?

The data:

So the trend is not so good. Ever increasing debt implies more debt supply. Can the demand keep up. Not at current yields, no. Yields up, prices down.

Management? Fiscal discipline? Not anytime soon. Cash flow? The situation is not positive.

So I’m not very inspired to buy US Debt today. Maybe, maybe TIPS. But traditional US Bonds? Not with a credit report like this.

Creative Finance

The last few weeks have been busy for Balhiser LLC. First the small biz was denied a $50,000 line of credit from a bank despite an excellent credit credit score, collateral and cash flow. That’s where creative financing come into play. It occurred to me, as president of Balhiser LLC, that the real estate venture was a good investment, and the the bank had made an error by rejecting the application on the basis of “industry: real estate”. I came up with the idea of a risk-sharing loan that would pay the lender a percentage of gross revenue from the income property in proportion to the loan-to-value of the property. The “angel” lender turned out to be a non-bank individual. The terms of the gross revenue agreement include a minimum 6-month term at which point the loan becomes callable and repayable in full or in part.

The lender gets a good deal because they realize proportional gross revenue. Balhiser LLC gets a good deal because it receives financing to close the capitalization gap with a non-bank lender sharing the revenue risk. The classic win-win business deal. So long as the property goes unrented no “interest” is due.

As it turns out, a 12-month lease on the property was signed on January 27th. If all goes according to plan both my small biz and the private lender will do reasonably well. The lender stands to receive just over 8% return.