You are hereCredit Scores are (Nearly) Everything part I: How I “got religion”

Credit Scores are (Nearly) Everything part I: How I “got religion”


By Dave - Posted on 10 July 2008

 
I thought it was clever financial planning. Banks thought it looked like deadbeat behavior.
 
Friends ask why I gravitated from academic philosophy to investment management and personal finance. And some wonder why I'm so preoccupied with credit scoring. This true story might shed some light on these questions.
 
In early 2000, I received a pre-screened offer for the then-newly introduced American Express Blue card. In addition to providing membership rewards points, the card came with 12 months of 0% interest on purchases, and no annual fee (unlike the green Amex Charge card I'd carried back in college). Since I'm a big Costco shopper, and in February of 2000 Costco switched from accepting only the Discover Card to accepting only American Express, the offer seemed like a good fit. A week later I noted with causal approval the $20,000 credit line they offered me, but did not I did not attach any significance to the fact that this was the largest credit line I had been granted up until that time.
 
During that same period, my wife and I began completely finishing our basement, a project that would run some $25,000. Shortly after our marvelous contractor had begun work, I realized that paypal would allow me to send money to him and charge the payment as a purchase, with all the credit card fees would be on paypal. (Ah yes, those dotcom glory days, when startups spent like druken sailors to gain market share!) By now you can see where this is going: I asked my contractor to set up a paypal account, and then used my shiny new Amex to paypal him $19,500. It worked like a charm! Now I had free use of that money (minus monthly payments) for a year, and enough rewards points for a free plane ticket. It briefly occurred to me that my creditors hadn't seen me do this kind of thing before. But then I thought well, showing creditors that I'm able to carry almost $20,000 in debt without missing any payments, then pay the whole thing off, should make me look like a BETTER borrower, right?
 
Wrong.
 
Fast forward three months. I'm trying to open a new brokerage account with a very attractive promotional offer. And I'm declined! I was both puzzled and irked, thinking, “I've never missed a payment, Amex gave me this big line, I have no bounced checks or other bank issues in my past...wht's the problem?” I called up the brokerage, and got a fast-talking but friendly gentleman in customer service. He called up my application, and said “oh, that's why.” I asked, “what?” He replies, “I am not supposed to tell you this, but it's your credit score. You're at a 570, and that's a ways below our cuttoff.”
 
Well, I didn't know what 570 score meant, so it was time to do some research online. A few minutes later, I understood that I was being ranked in the bottom 5-10% of all borrowers nationwide, among the ranks of those with recent bankruptcies and legal judgments in their names. After requesting my free credit report, I found no negative “derogatory” notations like late payments, judgements, et cetera...just the dutifully noted $19,000+ balance on my Amex. A bit more research confirmed what is no doubt obvious to many of you reading this. By nearly “maxing out” my largest credit line, I looked very risky to the FICO people—much like a borrower likely to file bankruptcy.
 
This is when it donned on me that by using credit, I had also opted in to playing a game of sorts with significant consequences for my financial well-being. That the game was not disclosed to me in advance, and that its rules were unclear and evolving made the game no less real or urgent. I resolved that from then on, I would make sure that I would understand the rules well enough to not be similarly compromised ever again. After studying this area for awhile, I concluded that with patience and discipline, this credit game could be played not just to avoid losing one's good credit rating, but to win extra income, liquidity, and financial security. And since 2000, credit scoring has only grown more important.
 
A primary goal of www.rethinkingmoney.com is to help others win what I have come to see as the personal finance game. The formational experience I just described drove home for me the idea that sometimes, we may be playing this game without even recognizing that we are doing so. I hope that we here can help you avoid traps like the one I fell into years ago—or get out of ones that you may already be in now.



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