Credit Improvement Lessons

I’ve learned many things during my credit improvement journey that I would like to share.  By reading this blog post I hope that knowledge will help you on your credit improvement journey.

  • For couples, the path to better credit can and should be a shared adventure
  • Discussions with you partner can be challenging! (But worth it.)
  • There are no quick fixes, except, perhaps for one
  • It feels liberating to get reduce your debt burden

My newest learning are largely about the emotions of finance. Whether you are in a relationship or not, money, credit, debt, personal finance, and even wealth management is an emotional process.

When it comes to finance I am extremely logical, almost like a Vulcan.  My wife’s financial personality is more emotional, perhaps like a Romulan’s.  If you don’t relate to the Star Trek references, perhaps you can relate to “Men Are from Mars, Women Are from Venus.”  I’m not saying that all men are less emotional about money, or that all women are more so.  I have seen couples where the roles are reversed.

Either way, it is rare that a couple has little emotion about money.  We all have our hangups, and some are financial.

Now, if you are currently single, I can relate too.  When I was single, I had impeccable credit and finances. I was also lonely.  I went on occasional dates, and I turned off some first dates when I picked them up in my 15-year old Saturn.  I could have afforded a brand new car, but I was too young for that to be in my financial best interest.  Believe me, you are better off without someone who complains about your car being too old!

When I finally met the right woman, my finances remained impeccable, but hers were different.  I would say that about half of our fights over the years have been about money, and that ratio became higher after we got married. My number one lesson about money and love is:

Talking about money is important, listening about money is doubly so. Knowing when to talk, when to listen, and when to postpone the money conversations is critical. Patience is better than pushiness. Your partner is likely listening — it may just take them a few days to process what you are saying.

I realize this post has focused on money and relationships.  When you are single, financial strength leads to self confidence, which leads to not being single (however be choosy… pick someone kind and mostly compatible). When you are in a relationship, realize that talking about money means listening.  If you communicate with patience and honesty you will have fewer arguments and better finances!

I realize I left a teaser at the top. What is the one quick way to improve your credit score?  Simple: pay down your balances, if you can. (And avoid increasing them with dogged determination).

10 Months to Better Credit

My Credit Improvement Journey

The credit journey I began ten months ago has now fully paid off; I now have:

  • A higher credit score, 749, than when I started (747)
  • About 3 times the total available credit
  • 3 new credit cards with top-notch benefits
    • A total of $400 cash in signing benefits
    • 2% cash back on all purchases
    • 5% cash back on rotating categories
    • 15 months of interest-free balance transfer

Ouch! The Lowest Score Matters Most!

My wife has recently joined me on this credit journey. We are joining forces because we want to do a cash-out refinance of our mortgage to do some home improvements.

It turns out that when a married couple applies together to refinance a mortgage it is the lower partner’s score that impacts approval and rates. Specifically, the mortgage lender pulls three credit scores for each partner from Experian, Equifax, and TransUnion.  It then determines the middle credit score for each partner. Finally, the bank (or credit union) uses the lower of the two middle credit scores.

Late Payments can Hurt Both Partners

Due to a auto-pay mix up, I have two late payments just over 3 years ago on a credit card solely under my name. Strangely, this card started showing up on my wife’s credit report about 5 months ago. I called a credit agency and they claimed that this is perfectly legal for them to do!  They can put negative credit items from one spouse onto the other spouse’s credit report.  (They don’t tend to use positive credit information this way.)

The mix-up was my fault. I am now much more diligent in keeping up with my credit cards! It sucks that my mistake pulled down my wife’s score.  When the credit card showed up on her report her score dropped about 30 points.  The timing strongly suggests that the score drop and the inclusion of this credit card are related.

Credit Prep for a Mortgage Refi

In order to qualify for the best mortgage rates and terms possible our goal is to boost our lowest credit score (between us) to about 750.  750 gives us a little wiggle room to make sure the credit score that the lender uses is 740+.  Keep in mind that the credit scores you receive are not the same as the ones the lenders get.  That is why the 10-point safety margin is useful

We want to do our mortgage refinancing while mortgage rates are still very low. The easiest quickest way to pull up my wife’s credit score is to pay down more of her credit card debt — even if it is interest-free at present.

We are both self-employed now, so we face an uphill challenge with our goal of refinancing our mortgage.  Working together we hope to meet this challenge by having solid credit scores.

What’s a Good Credit Score (or Great Credit Score)?

The answer depends on for what purpose you’re hoping to use your credit score(s).  However, my short answer is:

  • Good Credit: 700-739
  • Great Credit: 740+

I’m basing this short answer on mortgage rates. A FICO score of 740+ should be high enough to get the best mortgage rate from virtually lender. A FICO score of 700-739 is sufficiently high to qualify for most mortgages but at likely a slightly higher rate (+1/8 %).

Your credit score is only one of several important variables that factor into a mortgage qualification decision.  Other factors include income, amount borrowed, appraised home value, and credit history details (from your credit report).

For credit cards a score of 720+ is a high enough score to qualify for all but the most selective credit cards. Credit card company each have their own proprietary risk measures that go beyond just credit score.

One thing I have learned is that if you have a big total limit from on credit card issuing bank, you will have a harder time of getting more total credit from that bank.  The issuing banks care about how much risk they are exposed to.

So, if your are trying to grow your total available credit in general it is best to do a little bit of homework as to what is the issuing bank.  If you already have 3 credit cards from Bank of America, applying for a 4th from them is probably not your best option.  Instead look for a card issued by another bank, say, US Bank, or Capital One.

Credit Score Challenge

My previous several posts have described a credit card experiment I started last August — about 8 months ago.  During 2014 I went from 2 cards to 5 and tripled my available credit.  Instead of paying off about $12,000 in business debt, I transferred it to a card with zero-transfer fee and an introductory rate of 0% for 15 months.

On thing I learned is that the credit-score simulators I used were pretty inaccurate. My score dipped, but over 8 months has recovered all but 10 points.  It tends to keep ticking up about 2 points per month — presumably because my “age of credit history” — the average age of my credit cards, really — gets a month older each month (obviously).

I have all of my cards on auto pay.  I have all but my “balance transfer” card set to pay the full balance every month.  Thus I never pay interest or finance charges.  For the “balance transfer” card, I have auto-pay set up to pay the minimum statement balance. On this card there is 0% APR on balance transfers until September. This card just sits in a drawer.  I will pay it off in full in September.  Until then I will continue to enjoy 0% interest.

I’ve benefited by my choice of cards.  It may be a small thing, but 1.5% cash back adds up after a while.  And 5% cash back on “rotating categories” can be nice depending on the categories.  I almost always simply apply the cash back rewards to my current balance.  Logging on to check my cash back is also a good incentive to review my cards for any suspicious charges.

I also have credit monitoring that double-checks for charges or other activity that may indicate “identity theft”, or simply errors like being double-charged for a purchase. Personal diligence is the first line of defense against ID theft, and anything like cash-back rewards that makes it fun to log into your account means you have a better chance of catching ID theft early.

I’ve read that credit card fraud often starts with small charges.  The criminal is just checking to see if you are vigilant or lazy in your credit monitoring.  If you catch these small charges quickly and get them reversed/cancelled you are likely avoiding big fraudulent charges later.

I hope you found these credit score articles useful.  Best of luck in your credit score journey.  And please feel free to shared your credit stories (or questions) by leaving a comment.

Credit Card Experiments, Continued

Quick Credit Score Update

Both credit score predictors were wrong.  One predicted a small drop (about 3 points) the other a small gain (again, about 3 points).  Instead my score dropped from 735 to 724 — 11 points.  However, two months later, it bounced back to 733, roughly what I expected.

I anticipate, that with continued paying of my full balance due every month, except on my one zero-interest, balance-transfer card, that my scores will gradually increase.  I will provide occasional updates as developments occur.


The Credit Score Game Continues

In the last post I wrote about how my wife’s credit score (783) was significantly higher than mine (747).  That just won’t do — I embarked on a credit-score-improvement quest that includes research and experimentation.

The experiment is already paying off in unexpected ways.  I got a $100 bonus and began using a 1.5% cash-back Quicksilver card as my day-to-day card.  This a small upgrade from my 1% cash-back card.  I also convinced my wife to get a Citi Double Cash Back card for most of our recurring monthly expenses that ends up saving us 2%.

I learned more taking with my brother about his credit card management techniques.  It turns out that he and his wife are pretty expert at credit-card savings.  He has various 5% cash-back category cards he uses to buy groceries and gas.  They also have 2% cash-back cards for non-category purchases.  He also uses a neat trick to stretch the 5% grocery purchases further… buying pre-paid gift cards at grocery stores for, say,  Home Depot or Target — effectively getting 5% off of purchases there too!  Financial savvy definitely runs in the family.

Let’s not forget mileage cards too.  My United MileagePlus Explorer Card is the only card I have with an annual fee ($95).  I fly often enough on United that it is worth it to me.  And recently between my wife and I we recently bought 5 tickets with United miles for myself and some family members  (Tip:  if you want to help someone buy a ticket with your miles, don’t pay to transfer your miles to them… instead simply buy the ticket for them with your miles!)

The Credit-Card/Credit-Score Experiment

As expected, getting two new cards temporarily lowered my credit score — from 747 to 728. However, it recovered a bit… to 735. So what did I do… get one last new card… The Chase Freedom Card with a $200 (20,000 point) bonus.

I decided to get a %5 cash-back “rotating-category card.”  It was the $200 bonus that caused me to chose this this particular one. The criteria for collecting the bonus is pretty simple: charge $500 of purchases in the first 3 months.  I view this as purchasing $500 worth of stuff that I would have bought anyhow — Christmas gifts and such — for only $300.

This third new card will probably cause another temporary downward blip on my credit score. What’s important about this last card is that it brings my total credit card limit (amongst all active credit cards) to $61,700.  This means that the debt (see previous post) of approximately $12,000 will get below the critical level of 20% of utilization of available total credit… which should help my credit score in the mid to long term.  In the meantime I am “floating” $12,000 in debt for free at 0% interest for 15 months.

What Next: A Credit-Score Challenge?

My personal challenge is “no more new cards until 2016.”  I’ve had my fun getting 3 new cards that I believe will 1) help my improve my credit score in the long-run, and 2) help me save money (via cash-back programs) on purchases.

Onc challenge will be in keeping some activity on all of my open cards, and earning maximum cash-back while resisting the temptation to overspend just because there is a small reward.  I hope to have a zero balance before the teaser 0% APR rises to some ridiculous level (of, say, 19%).  I will keep you updated here.

9.2% Unemployment, not just for Europe

Not hiring 2011 When did I wake up in Europe? I want to go home, to the USA that I remember.  9.2% unemployment is for France and Italy.  I’ve been to these countries — nice places to visit — but not to work hard and get ahead.  High unemployment is cultural, normal, systematic.

Is Germany the new USA?  It’s the only European country doing well.  Germany has pride and strength of purpose.  Germany has its fiscal house together.

Is the USA becoming the next France?  Jobs for government workers, modest jobs security for those with jobs, and very few prospects for the unemployed and for recent college graduates.

The fixes for our current economic mess are not rocket science.  I agree with Bill Clinton’s recent comments… the corporate tax rate needs to be reduced.  The U.S. government needs to reduce the self-employment tax that is a huge drain on U.S. small businesses.  Congress and the Administration need to encourage, rather than stymie, domestic oil and natural gas production.  Finally,  an intervention is needed to halt Washington’s latest spending bender.  Washington has been drunk behind the wheel of a massive M1 tank, trying to drive the economy, whilst drifting lane to lane and taking out the odd car here and there.   That tank, fueled by 14+ trillion of debt, is about to find the price of fuel is about to rise.

Now is not the time for platitudes, or experiments.  Now is the time for prudent action.

I am sad that the Space Shuttle is being retired.  Such action is merely a symbol of where the US Government, en masse, sees the USA heading.  This need not be the case.  The US, as a whole, has all that we need to succeed.  We are are free, independent, creative, and motivated.   The US has shown repeatedly the resilience to challenge adversity and thrive.  Why so few lawmakers can see this — communicate this — is baffling to me.  Are they simply economically ignorant?  Or indifferent?

Until some economically sane action emerges from Washington, I am hedging my personal finances.  I’m positioning against the real possibility of long-term, government-sponsored inflation.  I’m factoring in the likelihood of the government CPI (CPI-U Urban Consumer Price Index)  understating true inflation and overstating the real US GDP.

There is a chance, a glimmer of a chance, that the current debt ceiling negotiations will lead to economically sound changes.  I think the chances of that are less than 20%.  I will watch closely and act accordingly.

Just don’t call it QE3 nor Inflationary

Drilling for stimulus, finding inflationWhether it’s Barack Obama releasing 30 million barrels of oil from the Strategic Petroleum Reserve, or Ben Bernanke saying they might buy another $300,000,000 worth of U.S. Treasurys… even after QE2.  But, no, it’s not QE3… nah.

The oil gambit was, from a purely stimulative standpoint, an interesting move.   It would have been more effective when oil was at $110 and rising rather than in the $90’s and falling.  But, perhaps there was some political hay to be made.  Short term this was not an inflationary move.  However, someday, those 30 million barrels will have to be repurchased… which will have an inflationary effect.  It was a short-term political move.  From a geopolitical perspective, it also signals a US willingness to manipulate the oil markets… rather than being truly “Strategic” (aka for military and other strategic purposes).    Ironically the Obama administration is accusing others of oil price “manipulation” while they just did just that with the SPR oil release.

And for Helicopter Ben, QE and QE2, both unprecedented;  it seems that maybe a little more magic juice is called for.  He doesn’t understand the current economic problems, other than to call them (mysterious) “headwinds”.

The situation, as I see it, is inflation-triggering non-stimulus.  The magic “CPI” may not reflect this right away.  In fact I believe inflation is currently outpacing “CPI Index” inflation by 1 to 2 percent.

I’m not fully aware of the whats or whys of QE3, I just know that I’m not supposed to call it QE3.

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.