Gaming Your Credit Score

Trying to tailor your behavior around your credit score is like trying to structure your life around the tax code. Both are bad ideas.

The AARP magazine has some horrible financial advice - what of it isn't merely banal. In the "my 2 cents" column, one columnist advises a client about how to cancel a credit card without affecting their almighty credit score. She notes that it is "OK" to have a large number of credit cards, provided they are all paid on time, and that this actually will increase your credit score.

All of that may be true, but it is not good advice. Why?

Credit Scores are designed to give financial institutions an idea of your creditworthiness. If you pay your bills on time, and your debt is low, chances are, you have an excellent credit score. In short, you have nothing to worry about in terms of getting credit, because, as the old saw has it, in order to borrow money, you first have to show you don't need it.

And if you don't need to borrow money, why borrow? Even 0% interest rates are no "bargain" on cars with inflated prices. And old people reading AARP should be (should be) in a position where they have little or no debt.

Now granted, in any system, there is a means of gaming the system. Our evaluation system at the Patent Office was case in point. You could do a good job and get a fair score. Or you could game the system and get a better score, but perhaps not do as good a job. The gamers may have had short-term gains, but in the long run, they often were not as happy or successful than those just doing their jobs well.

The same is true of the credit scoring system. Trying to "game" the system by having multiple open lines of credit and taking other actions with an eye toward boosting your score may work - or it may go horribly wrong. Many of the things the credit score people score you positivity on, are things that can personally work against you.

For example, having multiple open lines of credit might increase your score. But on the other hand, if you run these up, you may find yourself unable to pay them off. So goodbye good credit score, and hello bankruptcy.

And again, while 70% of Americans claim to pay off their balance every month, 70% of Americans also carry a balance every month. Clearly, at least 40% of us are lying.

In addition, the more credit cards and other debt instruments you have, the greater the likelihood you will miss a payment, miss a statement, or otherwise loose track of your finances. Simplifying your finances is a much better idea than having a fat wallet full of plastic.

Rather than try to "game the system", I think a safer approach is to have very few credit cards. Pick ones with reasonable credit limits and LOW INTEREST RATES. That way, if you do get into trouble (unexpected emergency) you can pay off the balance in a reasonable fashion.

Many credit card companies today offer rates lower than 8% - sometimes far lower. Having a 22% "miles" card in your wallet is like having a loaded handgun. If you ever use it for an emergency, good luck paying it off. And those frequent flyer miles are impossible to use, anyway.

Gaming your credit score is, in a way, like structuring your life around the tax code. Yes, the IRS gives you a credit for buying an electric car. This does not mean you need an electric car, however. If you make all your decisions based on "well, there's a deduction or tax credit" then you'll own two homes, a farm, several "alternative fuel" vehicles, and a windmill. If you want these things, great. But wanting them because there is a tax credit or deduction is silly.

Think about it. Who would go out and have children, just for the tax deduction? It makes no sense, financially.

And by the time you retire, your credit score should be excellent and you shouldn't need it (the two go hand in hand, oftentimes). You should own your own home by then, and you should own your own car as well. Seniors drive very little, and there is little point in buying new cars all the time and financing them, if you are driving only a few thousand miles a year.

And if your credit score is poor, chances are, all the gaming in the world isn't going to improve it much. The big ticket items - unpaid debts, bankruptcy, foreclosure, delinquencies, and the like will tank your score no matter what. You can't fix that by the few extra points you get for having an old Sears card or for having an open line of credit.

And bear in mind that not all credit reporting agencies score the same way. And not everyone goes by score alone. Open lines of credit can damage your credit, as it limits how much you can borrow. I've been declined for a credit card, not because of my credit score (which is excellent) but because I already had other open lines of credit.

Similarly, bankers look at your open lines of credit with a dim view. They know that regardless of some computer-generated "scoring" system, that a consumer can go heavily into consumer debt and never get out. Do you really want to write a mortgage to someone with $100,000 in open credit lines? They could go out tomorrow and run it all up, and you'll have to foreclose on their property.

The only people that go by the credit scoring system are often the people you are least likely to borrow money from - consumer lending agencies. These are the types of people who charge the highest interest rates on loans. Yea, the guy pushing the loan through at HFC might only care about your score. But chances are, a mortgage lender is going to look at more than just a number. And opening lines of credit to improve your score will surely backfire in that scenario.

So forget gaming the system. A better approach is to use good old fashioned common-sense. Borrow less. If you need to borrow, get the lowest interest rates possible. Work toward being entirely debt-free as a lifetime goal. Learn to live on less "stuff". You don't really need a jet ski, trust me!

And stop obsessing about your credit score!

Closing a Credit Card Account

Paying off and closing a credit card account is a wonderful feeling.  They will refer you to a "closing specialist" when you close the account.  Listen carefully to see if you can get a good deal, but don't be tempted by the siren song of more debt.  In most cases, you are better off just closing the account.

Hopefully, if you have followed some of the advice here and elsewhere, and cut back on spending and paid down your debts, you will reach a point where you have paid off one or more of your credit cards.

The question is, should you keep that card, now that it is paid off? As it is hard to survive in this economy without a credit card, I would not suggest closing all your credit card accounts. But it does not pay to have multiple credit card accounts.

Many Americans have two, three, four or more credit cards, all with high balances, as well as store cards, gas cards, and other consumer debts. I would suggest it is better to have one, low interest rate credit card (6-8%) with a reasonable balance limit ($5000) than to have all these open lines of credit.

If you don't have a lot of debt, and need to borrow money, trust me, you'll be able to. The idea that you should keep a credit card open "just in case" you need a line of credit later on is troublesome. Human nature being what it is, an open line of credit is a temptation to spend - a temptation that you will give into, eventually.

Not only that, but an open line of credit will lower your credit score. Even if your credit card is "paid off", if you have a $20,000 credit limit, it shows on your credit report, and will lower your score and make lenders more reluctant to lend, as you could rack up a lot of debt, in not a lot of time.

So, once you have paid off a credit card (preferably the higher interest rate cards first) it is probably a good idea to close the account. This can be done by phone. When you call the credit card company and tell them you are closing the account, they will switch you to a "closing specialist". Some consumers get upset that they have to talk to yet another person. However, this "closing specialist" chat can be an opportunity.

You see, now that the card is paid off, you are in the catbird seat. If you have been making payments on time, then they don't want to lose you as a customer. Before, when you had credit card debt, you were not in a position to negotiate anything. But now, with one foot out the door, you may be able to wrangle concessions.

For example, I closed a Citibank Visa account a couple of years back. The card had a high interest rate and it was no bargain. The closing specialist asked me why I was closing the account and when I told him it was the interest rate, he immediately offered me a lower rate, if I would stay on with them. When I demurred, he put me on hold for a moment and then came back with a new offer: If I would switch to a Mastercard, they would lower the rate to 5.99%.

That's a pretty attractive offer - lower than many people's mortgage interest rates, these days. And far below the average interest rate on most credit cards (14.5%) Not only that, but they were willing to do a balance transfer from a higher rate card with zero percent interest for 10 months. Now note that balance transfers can be tricky things - see my posting on this subject. But in some instances, they can be used, if you are very, very careful, to save money and help you pay down debt.

The point is, once you have paid off a card and threaten to leave, they are willing to do things to keep you onboard. This can be an opportunity, so look into it.

Other card companies might not be so eager to keep you on. Barclay's Bank, for example, did not have much to offer me. It was a mileage rewards card, and as I have learned from hard experience, these are often no bargains. When I paid off the balance on the card and closed it, they sent me to the "closing specialist". He was not able to offer any serious interest rate cuts (to less than the other cards I have) but did offer a balance transfer. However, at this point, such a transfer makes little or no sense, as my base interest rates on my cards, and the remaining balances are low.

It made better sense to close the card. By the way, once you close the card account, make sure you monitor the account (through the card website) for at least a few months. While the card may show as closed, the account will remain active, as recurring charges or late closed charges may still appear. You may still own the card company money. Once the card has been closed for several months, make sure you check the status on your free annual credit report (the really free one, not the con-job that is advertised heavily) to make sure it shows as closed.

If you are closing a credit card account, congratulations. Hopefully this is a step toward more financial responsibility and a brighter future. Once you pay off debt and become debt-free, you'll find that your opportunities improve. The best loan terms and interest rates are offered to people who "don't need the money". So just as getting into debt can spiral into a pit of increasing indebtedness, higher interest rates that are increasingly hard to recover from, once you are out of debt, your financial options improve accordingly - you are offered better terms and better deals.

And that, in a nutshell is what this blog is all about. Once you get out of the debt lifestyle, you can live a life that is twice as rich - or work half as hard, if you want to. How you spend your money makes a huge difference in how your life is lead. Unfortunately, for many Americans, life is one long continual string of debt that ends only when they die.

We don't have to live that way, if we choose not to.