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Am I Becoming A Credit Risk?

Contributed by mm | November 6, 2006 6:34 AM PST

One of the most exciting things on my regular trip back to Seattle is to fetch my postal mails. In fact, in each of the last three trips, my first stop after touch-down was always the UPS Store where I maintain a mailbox. It is always fun to open envelopes with new credit cards I applied weeks earlier, and occasionally, some checks from people who advertise at PFBlog.

It seems that wind has changed this time around. One mail notified me that my credit application to Chase PerfectCard (0% Intro APR, 6% gas rebate) has been denied. FirstUSA/BankOne decided to close one of my oldest credit card due to too many new accounts. American Express, in its turn, my Amex Costco TrueEarnings account is under "financial review" and has been temporarily "restricted." When I called Amex, I was asked to provide my income information and authorize Amex to get my tax information from IRS.

I did enjoy a brief honeymoon with card issuers earlier this year -- compared to the end of 2005, I have squeezed another $30,000 from free or very-low-APR balance transfer offers from my combined credit lines of about $100,000. By the end of October, I have over $45,000 in such lucrative offers, which allows me to easily take home a couple grand a year from carry trades by depositing the balance transfer proceeds to high yield savings accounts like EmigrantDirect, which offers 5.05% APY with no minimal opening balance.

The golden days are probably over. Besides these hate mails from Chase, FirstUSA and Amex, my credit score, as reported by the free credit profile in my Providian account, has declined from a consistent 720s in the last 12 months to 662 in October. I can understand these banks' concern -- after all, if one's credit utilization flirts with 50% and the absolute amount of the debt hits $50,000, the chance is the cardholder is on a slippery slope.

I decided it is time for me to refrain from applying for more cards or exploiting more balance transfer deals. After all, you don't want to play too hard to get the existing balance transfer deals ruined. Maybe over time, I can prove to the bank that their money is in the right hands who can capably handle large amounts of "debt."

P.S. I will probably close out the Amex Costco card. I haven't been to Costco for quite some time, and this card is probably the only one that I am paying an annual fee (literally it is the annual membership fee to Costco).

P.P.S. The silver lining is I still received a new Citi Professional card ($100 gift card after first purchase, 0% APR balance transfer for 12 months, see PFBlog review) under the name of my wife for a credit line of whopping $15,000. In about a month we will have $60,000 in "free money" working for us ... not bad at all for $3,000 free income just by a few mouse clicks.

This Post Has Received 16 Comments. Share Your Opinions Too.


Trent Commented on November 6, 2006

I agree that this might be a good time to stop applying for new accounts and pay off that balance for a while. Give your credit rating some time to recover and then get back in the game.


Rich Slick Commented on November 6, 2006

It irritates the hell out of me that banks seemingly only method of determining your credit risk is through the use of the FICO score. The more I discover about FICO the less and less I like it and the more I think government should intervene to regulate that company.

It seems to me that banks should rely on your whole financial picture rather than # of accounts you open and credit utilization.


Robert Commented on November 6, 2006

I took the free 20k for 12 mos from Citi and used it to pay down an 8+% home equity line we have for that time while i save up enough to pay it all off. Because i transferred the 20k from one credit acct to another would my credit score stay the same? Or would it drop because the heloc is on a home and a different type of debt? My analysis was paying off the 8% equity line saved us more money than investing in a 5% savings acct. Since you have to pay tax on interest which offsets any deduction you get from a heloc.


Rich Slick Commented on November 6, 2006

Robert, I think your FICO would take a hit because revolving credit card accounts have a higher impact than fixed loans (mortgage/HELOC) and this is yet another reason why it irritates me so since your transfers have nothing to do with you ability to pay.

Lastly, why do banks keep offering 0% APR for 12 months at a time? If the only reason is in the hopes that you'll miss a payment (or damage your FICO) and get nailed with 30% APR then this type of "bait and switch" tactic needs to be regulated as well.


Harry Commented on November 6, 2006

It most likely because of your debt/credit limit ratio is too high.
To solve this problem, you can try to get bigger room for each card, and only borrow 35%-50% of the limit. take over 90% of the credit limit from one individual card, will hurt your credit score.
Of course, it's hard to resist not taking out ALL the money from 0% APR.

I have around 200k total credit limit back in Canada, which didn't hurt my credit score.


jj Commented on November 6, 2006

You don't need to miss a payment for these to turn profitable for the banks. All you have to do is use the card once! In the fine print, you'll see they apply all payments to the lowest interest part of the balance. So if you spend $100, say, on something and you had a $5k balance transfer, you can't pay off the $100 (at 16% or 18% or whatever) until you have paid off the whole $5k balance transfer. This is how they get most people.


John Commented on November 7, 2006

I've got $76k. Just applied for another. Last grant was $4k, but the one before that was $30k! And the one before that was $27k! Those are huge. I apply until they stop me. Then I coast on the zeroes until they're gone. Then I pay them all off and do it again. If one bank says no, well, perhaps you can try another bank before truly stopping asking. It doesn't hurt to ask, does it? It doesn't risk default clauses, does it? People talk in somewhat mystical terms about the system. But let's get down to brass tacks: Who cares what your FICO is? What's it hurt to ask twice and possibly get denied twice? Once you pay it all off, your FICO is reset rapidly, and apparently (in my own experience) some dents in the FICO suggests a more attractive customer, not less.


Rich Slick Commented on November 7, 2006

John,

FICO scores are now being used for everything from setting insurance rates to whether or not you get a job and my complaint is that stupid score has nothing to do whether I'll file an extra insurance claim or competent for a job. It doesn't even successfully tell a bank that I am or am not a credit risk.

The FICO score doesn't say: This guy has score of 500 because he has 75k in credit card debt but that's ok because he's arbitraging the credit and he's got that money saved over at HSBC earning 5% and can pay you back anytime.

The FICO score says: 500 (deadbeat).

Of course, now I'm wondering how much credit out there is from arbitrage. I have 40k, John has 76k, Harry has 200k, and mm has 45k.

That adds up to $361,000 in arbitrage with just a handful of people!


JC Commented on November 9, 2006

OK, since nobody else is saying it, I'll bite.

I hate to be the party pooper here, but I think this whole credit "arbitrage" is fairly pathetic. Yeah, you get the "free money" and then put it in the high yield account, etc. But is this really a smart move? Is this how millionaires made their money?

I concede: you can make a couple hundred bucks a month if you do it right and play the game with the banks and juggle 30 accounts with promotional rates. But is it really worth it? Yes, you CAN do this. But that begs the question: SHOULD you do this?

For me, the couple hundred dollars a month income isn't worth it. To truly be a long-term financial success you need to major on the majors. This credit 'arbitrage' is a sideshow.

But if you get kicks and giggles out of sticking it to the man, then knock yourself out.

JC


Rich Slick Commented on November 9, 2006

No, millionaires often use leverage to become millionaires. George Soros borrowed heavily then bet against the British Pound heavily-He became an instant billionaire. Donald Trump does the same with Real Estate. Milken did it with Bonds. All of this is a training exercise for me on how to borrow, manage and ultimately leverage the cash. Next stop for me: Borrow 30k at 0% and arbitrage it on the currency & options market. No guts no glory.


pab Commented on November 9, 2006

Fair enough: use credit if you want to make money, but don't complain about the numerical scoring system that is used to determine/predict credit risk. Although it may not be perfect, it is a good representation of someone's credit history and a fair indication about the their repayment ability.

Now that the score is catching up with the above mentioned processes, who blames the credit card companies from not wanting to extend more credit? So you want to borrow $30,000 and invest it elsewhere? Guess right and receive the "glory." Guess wrong and you might not be the only one that loses - so could the credit card companies.

What I'm getting at is that we receive these great offers because of the credit score that we had, and they approve the offer because it makes sense. But after so many inquiries and so many accounts things start to turn. The mix of credit and the availability of credit is affected. And as your score goes down the offers slow down and not all accounts are granted.

Perhaps we forgot how we research potential borrowers on Prosper.com that mm has discussed. Don't we each have our own qualification process? Too many accounts, to many things going on at once? Why should it be any different for us even if we have full intentions of making good on the debt? I don't know about you, but if it were my money that I was loaning out, I'd put a limit on when enough is enough.

I learned this lesson years ago at a young age of 18. I was approved for my first credit card, a MBNA MasterCard. I also applied for a Visa from my credit union and was approved. I thought I'd diversify some more and open a Sears store card, also approved. With a MC and Visa, why not get an AMEX credit card to establish even more credit faster? AMEX gave me my first credit lesson with a denial, which I rightfully deserved. Although I have never missed a payment on any of the credit cards, mortgages, home equity loans, auto loans, etc. that I have had since, I was moving too fast and it was quite frankly bad behavior. I would have been a good, paying customer, but this was too much going on and I'm glad AMEX played the game right.

Kudos to you, mm, for realizing that it might be in your best interest to SLOW DOWN and revisit this later. It is also good that you are overseas and not in the market for a home loan or car loan, because the couple of hundred dollars that could be made per month wouldn't compare with the potential higher interest rates that you could be charged due to a lower credit score if the lender uses risk-based pricing. Not to worry though, 662 won't be too hard to bounce back from.


MM Commented on November 10, 2006

Pab, thank you for the comments. I cosnider this as leasing my high credit score for a fee and I'll probably jump any time I can trade 100 point for $300/month. LOL.

JC, yes, I don't count on these carry trade to make a living, but if it only takes me 2 hours (submit an application form, set up online account & recurring billing) to make a risk-free $300-$500, I'll not complain.


Rob Commented on November 16, 2006

I do the same thing! It's amazing that I found this blog. I was wondering if there were other people out there who were investing their 0% interest rate ccs into short-term CDs or savings accounts. I have 57K and keep the utilization at 35% on all of my 0% cards and invest them into NASA Credit Union CDs. Due to the low utilization, I do not lose pts on my credit score and have recurring billing setup to help get some history on my reports.

You are right to slow down... and once your score bounces back up and you return Stateside, you may want to consider taking out a mortgage or two and getting some investment properties. This is what's on my agenda. I'm not doing this for the extra couple hundred bucks a month free cash... but to get my credit history established enough so that I can get the lowest interest rate on the market when I apply for a mortgage.

I have also setup a Corporation which I have a paydex, checking account and telephone number for and am establishing a credit history for my company as well (by getting accounts from Uline, UPS, Lowes, Staples, etc...) and the corporation will manage my investment properties (which will be commercial).

I suggest not having more than 5 hard inquiries on your credit report per year because they do stay on your credit reports for 2 - 3 years and will affect your score.


Michelle-Consumers Union Commented on November 20, 2006

Watch out those "balance transfer switcheroos!" The credit card company can jack up your interest rate at any moment, whether it's because of a late payment or after it's introductory period. Too many balance transfers, as you noticed, also lowers your credit score. That?s just one of the credit card traps that can trip up consumers and lead to spiraling debt. Consumers Union, the nonprofit publisher of Consumer Reports, has put together a lighthearted animated holiday-themed satire about abusive credit card fees and practices. Check out ?It?s Always Christmas Time (for VISA)? at www.creditcardreform.org. Be sure to take action after viewing the animation!


MoneyMan Commented on December 4, 2006

I think a couple of things you might be overlooking that damage your credit score are the age of your accounts (having new accounts hurts your credit score) and the number of recent credit inquiries (they do one whenever you open an account and too many of them hurt your score). But hey if you are inclined to make money off of this, hat's off to you!


riskpreferrer Commented on April 10, 2007

I have been taking advantage of promotional rates since 1998. I did it first at a rate of 7.9% because it was less than my rate on my car loan. I moved later to arbitrage on the difference between credit card promotional rates and money market rates. I have even paid down my home mortgage with a 2.9% credit card good until the account is paid in full. I have one credit card account to which I can make transfers, and on which I can also write checks. This works great as a conduit. I also have a home equity line of credit which I have not yet used, but which offers me comfort if I happen to get caught without a new promotion when an old one runs out. I have been amazed that one can have over $100K in credit card debt and still qualify for a college condo loan at favorable rates. My total credit available on credit cards probably exceeds $500K. I have noticed that it is difficult to get new cards when there is high debt outstanding on existing cards. However, most of the companies keep trying to get me to bite on paid off acounts by offering new transfers. It is also more rare that fees are waived. However, as long as the fee is capped and I am able to transfer enough that the arbitrage will cover the fee, I will take the offer. Also, since we itemize deductions, I am able to deduct transfer fees and promotional interest on Schedule A as investment interest. In over nine years since I have started taking advantage of promotional rates, I have only been caught once or twice by tricky wording. I have been able to stop the bleeding quickly in each case. Each has taught me a lesson about reading the fine print and keeping a copy of it. Credit card companies are not infallible. Recently, I have helped my father make a few bucks leasing his credit score to get enough money for an annual vacation. It amazes me that banks will lend tens of thousands of dollars unsecured to someone whose life expectancy is probably about ten years.


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