Oops! Credit card faux pas

Discussion in 'American Express | Membership Rewards' started by newflyer, Mar 16, 2011.  |  Print Topic

  1. newflyer

    newflyer Silver Member

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    This new flyer is her exuberance to build miles has opened 4 new credit cards recently. Just spotted the following advice: "Don't apply for more than one or two cards per year to avoid the credit score concern." Now what? Keep them? Close them? Hoping not to goof up my credit score!
     
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  2. miles and smiles
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    miles and smiles Gold Member

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    That "advice" is not true at all. I've gotten 9 new cards in the past year, and my score has dropped only a few points. Some people get more than a dozen cards per year. One good place for you to read more is:
    http://frugaltravelguy.blogspot.com/
     
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  3. MSPeconomist
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    MSPeconomist Gold Member

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    Your score will take a hit if you close them, so don't do that. It would be best to keep your balance well below the (say, significantly less than half of) the credit limit on each card. Of course, it's best to avoid interest and fees by paying the balance in full before it's due each month.
     
  4. techboyds
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    techboyds Silver Member

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    There's no point in closing them now, without some advantage (like avoiding an annual fee, or in order to be allowed to open another card).

    The damage is already done- you've taken some inquiries (minor) and you've lowered the average age of accounts (a bit more significant). Closing them won't help now... even closed accounts stay on your credit report for years (I've seen reports ranging from 7 to 10, and I still see closed accounts from years ago on my reports). In point of fact, if you close them, they'll drop off your account just when they'd really start to actually help your average age of account.

    On the other hand, it's not all negative. Another big factor in the credit score (apparently, this is always educated guessing because Fair Isaac's formula is propietary and they don't reveal anything specific) is debt to credit ratio, and assuming you didn't immediately run up balances on those cards, that number should go down with the new credit, which is good.
     
  5. 2soonold
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    2soonold Gold Member

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    Haha. It is so very easy to get carried away with opening credit cards![​IMG]
    As best you are able; try to get cards with no yearly fee. Try to get an idea of what your truly disposable income is each year, and realize that the card fee is really small compared to that. But if you are truly sure you are getting little to no value from it, then close it just before it's second year renewal.
     
  6. Bikeguy
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    Bikeguy Silver Member

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    What do you call the person that graduated at the bottom of their medical class?

    Doctor.

    To build a credit score into the 800s is useless. All you need is to be above 700-720 to get all the lowest interest rates if you are in the market for a loan. So, if you know your credit score, you should be striving to always stay above 730, but not much more.

    The reason is any amount above 730 is a waste, that could be turned into frequent flyer miles and points from credit cards.

    Should you build higher and apply for several cards at a time? Maybe. That's what I like to do.

    Ingy has the most detailed explanations in his blog and in person at his seminar at the Chicago DO.
     
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  7. deant
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    deant Milepoint Guide

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    Agree that the damage has been done. The good news is that the hit to your credit score is not too much.

    However, before you apply for more credit cards, make sure which bureaus had the hard pulls. Also, you need to make sure that you don't apply for too many cards from one bank. Chase seems to be the worst about wanting time between applications. Many people have reported that Chase wants 5-6 months between the applications however YMMV.
     
  8. Eric
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    Eric Silver Member

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    I can tell you that I got a new credit card last month and my score jumped 22 points courtesy of Amex backdating. It isn't often that you open a new account and your AAoA actually increases. Thank you, Amex!
     
  9. Original Member
    Original Member

    Original Member Silver Member

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    +1 on this advice. I did the Citicard churn pretty actively before they cracked down. I lost at most 15-25 points in the whole deal. I also bought a house in Jan 2010 and no bank complained about the fact that I got a new CC in October.
     
  10. TennisPro
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    TennisPro Silver Member

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    I heart Amex, for this very reason! I got their green card years ago, as my first card, as a freshman in college. So now, every brand new Amex account I open, actually increases my average age of accounts, and so far, my credit score!! Yet another reason I love Amex.
     
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  11. TennisPro
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    TennisPro Silver Member

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    I have to sear your quote into my brain. For some unknown, and dumb, reason, I sometimes get tempted to go for FICO 800+. I have to keep reminding myself, that the benefit to that is exactly zero, and the cost, is thousands, possibly tens of thousands, of dollars in free travel via credit card signup bonuses. I also have to always remind myself, not to close accounts, but to either downgrade them to no fee, or use them as bargaining chips for new cards with the same issuer. I like to streamline things in general, and might have a little OCD, so it is tough sometimes to just sock drawer thirty cards, that I know I will never use again, and have a credit report that is as thick as a Dostoyevsky novel.
     
  12. jbcarioca
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    jbcarioca Gold Member

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    Most large issuers do not use Fair, Isaac to make their credit decisions. Whatever "debt to credit" ratio may be conceived to be there is no such ratio in existence. Credit scores are proprietary to individual banks for specific purposes, it is dangerous to generalize.
     
  13. jbcarioca
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    jbcarioca Gold Member

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    That is incorrect. Generic credit scores of roughly 770 and above usually receive the best offers. 720 is OK, but the best offers will not be available at that level. if you are not concerned with having the cheapest financial offer be assured that 700-720 is the 'sweet spot' for many issuers because people in that range on generic scores tend to be the least discriminating about the financial terms of offers, other than people below that range who present very much higher risks.
     
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  14. jbcarioca
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    jbcarioca Gold Member

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    Soem people can open multiple 'trades' with minimal impact. that depends on length of history, depth of history and past account behavior as well as time at residence and a few other factors. Most peopel who open more than 2-3 new trades ina typical six month period do see deterioration in their creditworthiness. the generic FICO scores often will not reflect that, while the proprietary scores will.

    Finally, credit brokers and credit card solicitation agents do not typically possess significant knowledge regarding the actual workings of the products they sell. their products are invariably higher cost than are directly originated products.
     
  15. cr34102
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    cr34102 Gold Member

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    ....but AFTER all earned points have posted from the card (learned the hard way..... don't leave 'em on the table)
     
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  16. techboyds
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    techboyds Silver Member

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    Those issuers that use their own propietary formulas aren't sharing either.

    I conceive it to be the percentage obtained by dividing the balance carried by the total credit available, both on individual trade lines and across accounts as a whole.

    This is sometimes called credit utilization, and if it doesn't exist, there are a lot of experts out there talking about nothing, like here, or this page run by Fair Isaac itself (which answers the original question, actually, so I'll quote it):

     
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  17. jbcarioca
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    jbcarioca Gold Member

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    Indeed that would be utilization. Typically in most credit card risk models that calculation, if it is made, uses only trades that have reported limits and reported outstandings. because the conventions for balance reporting to bureaux do not provide consistent balances (i.e. a non-revolving borrower often shows utilization because reporting is made on cycle date rather than payment due date). There are few that use this measure today because of proven inaccuracies and reduced predictive value of that variable.

    All reported trades are normally not used for utilization because many lenders report installments as a function of original loan amount, while others report outstanding balance as loan amount. Either way a utilization ratio using such data is so distorted that the data is useless.

    In the event that utilization can be used and is calculated the lenders will infer income from other factors (that process is highly proprietary, but it quite good in some lenders cases) and will calculate a credit line/income ratio that in turn will have direct effect on scores, sometimes quite large. No generic score that I have seen has used this type of data.

    I agree nobody will show any proprietary models. For third parties that do such work there are quite severe non-disclosure agreements. I am under those for several major issuers, thus I can only speak in generalizations.

    In other models, such as those for mortgages, there is a debt/income ratio normally used. That is far more specific and has good predictive value but requires verification. Self reported data is less useful.
     
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  18. jbcarioca
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    jbcarioca Gold Member

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    To produce a 800+ generic FICO score you need to be middle aged, in the same house you own and with the same job, same spouse and same credit for 15 years or so. Once you get that score you will then largely be free of credit card offers because nearly all credit card issuers screen offers from people with bureau scores about, say., 780. The screening is actually done with proprietary models, but prospect scoring usually uses quite generic data so closely tracks generic FICO scores.

    Offers are made using a mix of response models and risk models, among other things. Response is usually the inverse of risk, so lenders try to balance that by screening very high scores from offers because high score respondents produce negative selection; which is to say if a person with a high score accepts a new offer of credit, other things remaining equal there is something wrong.

    This is probably too much information.

    BTW, credit unions and membership-qualified organizations (e.g. USAA) use quite different criteria and these generalizations may not apply.
     
  19. techboyds
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    techboyds Silver Member

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    I appreciate the dialogue, but I'm having a problem. You are apparently kept by various legal agreements from commenting more specifically (or citing sources, obviously), and I can understand that completely, of course, but what you are writing in this thread sometimes contradicts both my personal experience as well as information garnered from a variety of sources (such as ingy's blog mentioned earlier in a post you disagreed with, and I'd note that he too has apparently worked in the field). To wit, in this court document we find that:

    Now that's about 2 years old, now, but it fits with what I've read more recently as well, and it puts the combined market share of Fair Isaac and VantageScore (which is a joint venture of the three major credit bureaus) at around 80%. I doubt that's gone down much, if at all.

    As we already discussed, of course, a lot of this is secret and proprietary, but according to FICO themselves, 30% of their score is based on utliization, and according to Vantagescore, it makes up 23%.

    I'd be willing to bet that most other scoring models at least take it into some consideration, since the two "biggies" do, and because while I can see that low utilization might not be a great predictor of problems, a person that's maxed out all his credit cards is probably sending up a few warning flags.

    Even if, however, none of the other roughly 20% utilize (get it? get it? ;)) utlization, it would appear that the vast majority (again, around 80%) do so.

    I suspect that you're not going to be able to convince me otherwise, either, because even if you're right, you're too restricted to prove it.
     
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  20. TennisPro
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    TennisPro Silver Member

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    Actually, that is not too much information at all!! I am very appreciative of you giving us so much information, as it is verrry helpful to me. I can tell you know your stuff, and I really appreciate you taking the time to share. Now I know, not only is it unlikely that I would be able to achieve a FICO of 800+ right away, but even if I can in a few years, it would still be potentially undesirable, because I would be screened out for many pre-selected offers. So you make me feel much better about my current strategy of maximizing sign-up offers. You also relieve some weird stress that I had about not having a FICO over 800. Now, it looks like I can just kick-back, stop worrying so much about all my inquiries and sock-drawers full of unused cards, and just enjoy being in the actual sweet-spot to maximize offers while still maximizing approvals, of around a 760-780 FICO. So thank you!! :)
     
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  21. TennisPro
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    TennisPro Silver Member

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    Here is one possible explanation. Fair Isaac Corporation may still garner a 74% share of the revenue for sales of credit scoring products, but that may only be because large banks such as Chase, do not sell their proprietary scoring models, and only use them in-house, so those models are not included in statistics based on "revenue from sales of credit scoring products". In other words, credit decisions that are based on a lender buying a service from a third-party such as Fair Isaac, may only represent a small slice of the total of all credit decisions, because many lenders develop models that are not sold, so generate no revenue, and therefore are not included in the "market share" statistics, because they do not generate any revenue independently.
     
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  22. techboyds
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    techboyds Silver Member

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    Well, according to this article from Bloomberg, those "large banks" don't include Chase, Wells Fargo, or Bank of America:

    They're even getting complaints:

    And finally, according to FICO:

    Emphasis theirs.
     
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  23. TennisPro
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    TennisPro Silver Member

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    I agree with you about mortgage credit decisions still primarily using FICO scores. This is at least partially attributable to the fact the Fannie Mae & Freddie Mac have FICO score requirements to purchase loans.
    However, based on posts by jbcarioca, and other posts I have read, I am not convinced that large bank credit card credit decisions still primarily use FICO scores. For most folks on these forums, it is credit card approvals that are important. Most folks on here that are getting approved by the prime issuers offering miles, can easily get approval for a mortgage, so what lenders use for mortgage credit decisions is less important here.
    You may be correct, that big banks still use generic FICO scores for credit card decisions. I just want to find out the truth, like you.
    In any case, the large bank proprietary scoring models, are probably very similar to generic FICO scores, just tweeked for individual bank profit-maximization, and desired credit portfolio composition factors. So, your generic FICO score, is still probably the closest indicator the public has access to, to find out how large banks may view credit card credit decisions.
     
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  24. TennisPro
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    TennisPro Silver Member

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    And just to clarify my post above, just because "90% of the largest banks use your FICO credit score for credit decisions", does not mean that they use it for credit card decisions. My theory for debate, is that although 90% use it for mortgage or other credit decisions, a smaller, possibly much smaller, percentage, use it for credit card decisions. I am guessing they use proprietary scoring models, that may resemble FICO scores, but are tweeked. For instance, on here we all know that certain big banks weight "inquiries" and "new credit lines" as heavy negatives, enough to disqualify even somebody with a very high generic FICO score. The more knowledge we gain of actual factors used for card decisions by various creditors, the more we can optimize our credit card bonus mileage maximization strategies.
     
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  25. techboyds
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    techboyds Silver Member

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    First, it might well be true that banks use FICO for mortgages, but not for credit cards, but I very much doubt it. That seems rather random and inefficient. I've certainly seen little documented evidence of this.

    It does, however, fit with my personal experience and that of what I have read that banks use slightly different FICO scores for different applications. As an example, I had a WAMU card several years ago that gave me a FICO once a month, but it was clearly marked as a credit card FICO, differentiated apparently from the standard score.

    It is also certainly true that individual issuers have their own processes beyond the FICO. Several years ago, a lot of people on another board I visit were engaging in what they called "App-o-ramas", which is effectively applying for 10, 20, or even more credit cards at one time (so that each bank does not see the others on the credit report), thus obtaining ridiculous amounts of credit, to then be used in 0% interest offer arbitrage. This has since died out, for the most part, for a number of reasons (few good 0% offers, stricter banks doing more frequent account reviews, etc.).

    I bring this up, though, because at the height of this, Penfed offered a pretty good card with a bonus of 5% on gas, and a lot of people that had no trouble securing literally hundreds of thousands of dollars of unsecured credit couldn't get the Penfed card, because they wouldn't approve anybody that had more than a couple of cards or what they saw as too much credit, regardless of FICO.

    Second, though, I think you miss the mark when it comes to concerns about credit cards or mortgages. I think most people are very much concerned with maintaining their ability to obtain important loans such as this or a car loan. It's easy to get a credit card, and anybody playing this game no doubt has several, so the worst loss would be whatever offer one was going for.

    Should one screw up one's credit score enough to impact a new mortgage, though, that can cost literally tens or even hundreds of thousands of dollars over the life of a loan.
     
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