Monday, November 10, 2008

If You Don't Have A Credit Plan, You're Doing Something Wrong

You're shopping at Gap, buying some blouses, shorts, and skirts. You get to the checkout line. The cashier, just as you're whipping out your debit or credit card, asks if you'd like to apply for a new Gap store card. You're told that you'll save 20% (today) on your purchases. Without giving it a second thought, you jump on it. Sound familiar? This happens all over America -- every day. You've heard of impulse shoppers. Say hello to impulse credit applicants.

I have a friend, a real sweetheart, who told me her story. She said that she had been, until meeting me, a real sucker for store-card pitches at the register. She'd apply for the card, get approved, make the purchase, bag the 20% discount (or whatever the deal du jour was at the time), and then be on her way.

Her story horrified me. Not so much because she was applying for all of these store cards (which was bad enough) but because of what she was doing afterward. Instead of allowing these store cards to age, she was running home -- after the purchase -- and canceling the account. How many times did this happen? Somewhere north of five times but less than ten times. (Excuse me while I catch my breath.) After hearing her story, I calmly told her to stop doing that. She agreed; she's now reformed. On top of that, she's made some really smart credit decisions since then. She's become a successful graduate in short order.

Still, I think her story is an interesting one. What's more, it gives me a chance to discuss the virtues of having a credit plan. Attaining credit -- and maintaining it -- should be done with purpose. Before I started accumulating credit cards, I sat down and thought about my goals (both short term and longer term). I knew that I wanted to get my scores higher, which has been accomplished (link here), and I knew that I wanted to get my utilization rates down (by getting high-limit cards). Those were short-term goals. Longer term, I wanted to get some cards that would reward me for using them. I also knew that I wanted to establish some good credit relationships -- with creditors that were well respected for different things.

Off to the Internet I went. It was there that I found, a site dedicated to all things credit. The real gem of the site, though, is the forum section. There, regular people discuss all kinds of credit issues. Want to know which credit-card companies consistently offer the highest limits? Which companies have the best customer service? Is there any way to get my APR reduced? What should I do about the low limit on my credit card? If you could have just one credit card, which would it be? I found answers to all of those questions. It was now time to put my plan into action.

After figuring out which creditors offered the highest limits, I made a short list of the creditors I was interested in doing business with. I ultimately chose Pentagon Federal Credit Union, NASA Federal Credit Union, USAA, Nordstrom, and Bank of America. Having figured out who I wanted to do business with, based solely on my desire to get high limits, I needed to find out which credit reports these companies pulled. After all, if they all pulled Experian, I'd run the risk of being denied toward the tail end of my list (because of too many credit inquiries). Once I figured all of this stuff out, I was positioned to make an intelligent decision about my applications.

Because I already had some inquiries on my Experian report, I wanted to limit the amount of applications that would require a credit pull from there. I figured that Bank of America was worth the inquiry. As for my Equifax report, I had very few inquiries there. As a result, I didn't mind adding a few more. Pentagon Federal (link here) (a perennial Equifax puller) and NASA made the cut. Nordstrom, which is very sensitive to inquiries, would have to wait. Ditto USAA.

Having narrowed down my choices, I pulled the trigger on my applications. I hit paydirt with all of them. Pentagon and NASA granted me significant credit limits. Bank of America, meanwhile, offered me a solid limit, though not as solid as the ones I got from Pentagon or NASA. Still, I was pleased. It was nice to see my game plan unfold the way I hoped it would. I ultimately parlayed those high-limit cards and used them as leverage with my other creditors (who no doubt felt compelled to offer me limits that were competitive). Higher limits beget higher limits (link here). Don't ever forget that.

Over time, I have added more cards to my stable. Nordstrom, which has its own bank, USAA, Merrill + (underwritten by Bank of America), American Express, and Saks Fifth Avenue (the Mastercard) are all now part of my credit portfolio. None of the cards were added without a reason. Nordstrom offers the best customer service around. Period. Merrill Lynch provides great customer service and a huge credit limit (up to $250,000). USAA, though I don't use the card as much now, provided a fat credit limit that I used in my higher-limits-beget-higher-limits strategy. The Saks Fifth Avenue Mastercard, meanwhile, has some great benefits (rewards). Additionally, the application was of the dual-card variety. You can apply for both the Saks store card and the Mastercard in one application -- with just one credit inquiry (sweet!). I recently added an American Express card to my portfolio because of its customer-service reputation (so far, customer service has been excellent).

To be sure, a good plan should also include a credit-card spreadsheet, which is used to keep track of your portfolio's every move. Read about my favorite spreadsheet here (link).

My point in laying all of this out is simple: it's smart to have a credit plan. New accounts have a deleterious impact on your credit score (length of credit history accounts for 15% of your FICO score). Each new card lowers the average age of your credit history. That's why I was hoping to offset some of that impact by getting high-limit cards that would help my utilization ratios (link here). Utilization accounts for 30% of your FICO score. I liked the trade off. And I liked my plan.

To this day I don't do anything in my credit life without first checking to see how it fits into my plan.

If you're smart -- and I know you are -- you'll do the same.

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Rada said...

I think my credit has come a long way over the past 6 months, but I definitely need a plan.

Right now im stuck.. My credit has improved tremendously but it's still not good enough for the likes of Nordies, Merrill+, and a AMEX Charge.

Everything I've acquired was based off my TU report so I guess it's time to buckle down and clean up EX, and EQ..

Credit Matters said...

That you were using your TU strategically shows me that you were planning.

But, in order to get the cards you're probably looking for, I suspect it will be necessary to work on that EQ and EX (which is what many of the creditors pull).

Best to you, rada. And congrats on your progress.

A Texan said...

What a great plan this is. I never really thought about it (or should I say took the time to think about a credit plan)

Thanks for a great blog. Looking forward to the next one.

Credit Matters said...

Texan, thanks for the praise. And I am glad that you're finding my column useful.

Be sure to visit often. I plan to keep this blog quite active. For now, I am writing daily. That could slow down just a bit (but only a bit) when I get back to school.

Thanks again. And good luck with your plan.

SpaghettiBender said...

Just popped in from Creditboards
Saw you had a blog, and what a great blog it is too!

Anyway, on the strategy, It's my understanding that you dont' even have to use the new card to get the discounts that day! My son applied the other day at a local department store and got all the discounts, but paid in cash!

Credit Matters said...

Spaghetti, thanks for dropping in.

That's cool about not having to use the card. But he did still have to apply.

And now that card is now on his credit report. What kind of limit did he get with the card? I always worry about store cards because the limits are so low.

Thanks again for stopping by.

Anonymous said...

I notice that out of the CCs you choose, there is only one of the traditional "major" banks as part of your portfolio. I am curious as to why you choose Bank Of America, versus say Citi or Chase (who I heard is very liberal with issuing limits)? Thanks.

Credit Matters said...

Anon, good question. Initially I started out with some oddballs. I was looking for high-limit cards first and I knew that Pentagon and NASA would fit the bill.

I eventually added major banks to the mix -- but only after my limits were fairly high.

I have a saying: higher limits beget higher limits (in fact, I have a blog entry on the topic).

Today, I have a card for every major bank (Chase, Citi, Amex, B of A). I've also got cards from BMW, Nordstrom, Saks, Juniper, and Wamu).

awedio said...

credit matters said "Nordstrom, Merrill + (underwritten by Bank of America) and Saks Fifth Avenue (the Mastercard) are all now part of my credit portfolio."

I assume they all grant credit limit increases without "hard pulls"?

Credit Matters said...

Awedio, after seven months of having the Nordstrom, you'll be eligible for a credit line increase -- without a hard pull -- at Nordstrom. Any customer-requested CLIs over $15,000 will require a hard pull. What's more, once you get your limit over $30,000, you'll be asked for financials.

As for Merrill +, it's underwritten by Bank of America. There is never a hard pull unless Bank of America notifies you that it's necessary. Merrill has an online request form. You'll notice that the form says there is no hard inquiry associated with the credit line increase. If one is required, the disclosure says, they'll notify you first.

Finally, Saks Fifth Avenue is good about giving increases on its own. A good spending and payment history usually does the trick. I'm not sure how Saks, which is underwritten by HSBC, is about customer-requested CLIs. Not sure if a hard is required.

Thanks for writing, Awedio.

awedio said...

this is a subjective question

knowing what you know, if you had to do it all over, which one of these entities are "must haves" & which one's would you get first

can you rank them from 1 to 10, credit cards, credit unions etc!

awedio said...

I asked the last question, because I'd like to "diversify" & "enhance" my current portfolio (obviously, with as few inquiries as possible)

My FICO's are btwn 780 to 800.

I'd like to get 2 more "premium" 5 figure limit credit cards & 2 LOC's

Credit Matters said...

Awedio, let me think about this for a day. I'll have an answer for you tomorrow.

I'll list all of my cards and I will rank them from best to worst.

Credit Matters said...

Awedio, instead posting my top picks here in this particular thread, I have decided to do an actual column on my portfolio.

I'll break it down, rank-order them, and give the high and low points on each of them.

This could be a useful teaching tool.

I'll write the column this morning; I'll publish it next week.

Fair enough?

awedio said...

Fair enough!

Maybe you can even add credit pull data (even though that might change from time to time)

Credit Matters said...

Awedio, I will add credit pull information -- if I can definitively attest to it.

Some creditors still to the same ones over and over. Bank of America loves Experian. That's never changed.

I'll do what I can.

Thanks for the column idea.

Anonymous said...

I opened 8+2 new accounts this year. The +2 being Amex backdated to 95'. After discovering creditboards I gained serious focus and shot for quality lenders in USAA, NFCU, and Penfed.

If I had it to do over again I would have skipped Chase which approved me for toy limit and raised me to toy+1 limit with hard pull CLI. Also skipped an app to Citi and Capital One which I was denied.

I had prime bank goggles on when I should have been looking for lenders with good customer service and an array of products which I would have need for in the future.

Wasted some INQ's but gained a foothold with lenders I will use for more than just credit cards for the rest of my life. I have far more credit than I have immediate need for but better to have it now instead of seek it in desperation later. said...

Anon, sounds like you're really focused now. Good.

Also, your last paragraph certainly resonates with me. Always easier to get credit when you're not desperately looking for it.

Carry on.

Anonymous said...

Is there one place you researced to find out what reports each company pulled? I do recall a thread on Fatwallet that talked about this, but I'm having trouble finding it now. Having a plan in most things is a good idea. By the way love the spreadsheet and wanted to know why you pull the pdf's for your cc statements when they are stored by the banks and how long to you keep the copies on your computer or flash drive? said...

I hang around There is a "credit pulls" section there. Check it out.

I store the PDFs on my own computer because most card companies only keep 6-12 months' worth of statements. After that, you must order them. I like having my statements readily available.

I am a digital pack rat. I don't see any reason to delete them off my hard drive. They don't take up much space and they're not flammable.

Anonymous said...

Thanks, I found the 'credit pulls' at useful tool. said...

Anon, glad you found it.

Take care.

The Lion said...

Ahh CM, a good one indeed. said...

I consider it one of my better stories, Lion. It's something that I wish I read when I was just starting out.

Anonymous said...

My goals right now is not to apply for anymore cards and pay off balances. I made the mistake of getting approved for 6 cards in the past year. So far, I don't have any CU's, but plan to later on. I would probably get denied because of my inquires and some of the balances on my cards. said...

Anon, sit tight. Let those cards age. That's your plan for now. Also, work on getting those balances down.

It will all come together. Time is your friend. Work with what you have now. Pay in full whenever possible, keep balances low, and let those accounts age.

It's all good.

Bob Wang said...

I was going, "Good Lord! A new article, and 26 comments already?"
Ah! A Golden Oldie :-) said...

Haha. Yeah, a very controversial post, BW. And on a Saturday to boot.

Yep. It's a golden oldie. I figured it was a good one to trot back out. Plus, this was originally posted back in July -- when no one read my blog. Go back to some of those stories from July. You'll see that there were not a lot of comments.

Bob Wang said...

If you want to talk about a blog no one reads... ;-) said...

You need a Web master, BW. What's the site's address?

Bob Wang said...

I'm embarrassed to say :-( said...

Well, that's probably why no one reads your blog. You won't tell anyone about it!

Bob Wang said...

I DID get a visitor from Afghanistan last month :-) said...

Funny. I have a reader, Lupoman, who is currently in Afghanistan. It was probably him. He clicked your name and saw your sites.

Bob Wang said...

Oh, then, welcome, Lupo!
Things must be boring over there ;-)

Hkbushido said...

I have a dream, does that count? :)

Cosmo's human said...

My plan is to pay all my bills on time mostly through my banks on line free bill pay scheme. I also pay triple the minimum when I carry a balance.

I'm just waiting to see what Chase will do about my two Wamu cards.

BTW, I am fine and thanks for the fine comment you left on my little Cosmo. It was raining most of the day, well on the verge of snow here in the greater Cleveland area, so no dog park today. Also, too cold for the human to play outside. said...

Cosmo, sounds like you've got your plan in place. Glad to hear it.

Anonymous said...

I had a nice credit plan until Amex decided to CLD me over 14,000 for no reason. I had under 50% untilized, now that number is going to increase dramatically and i'm waiting for AA from all my other creditors. Oh joy! said...

Anon, sorry to hear that.

As part of your plan, work on diversification, too.

Is the CLD already reflected on your credit reports? How do you plan on dealing with the CLDs? Will you replace it will higher limits elsewhere (by asking for credit-limit increases with your current card companies)? Planning on applying for another credit card? If you are applying for another card, would it make sense to apply for that card before the CLD gets reported?

Just stuff to think about.

dd50 said...

Great article.

I worked in Target for the holidays a few years ago and when no one wanted their card that is what they would tell people to open and then go home a close it. I could never do that because I knew the impact.

I have been trying to acquire cards that I want to keep and right now it is hard. My reports are almost clean (totally by 3/09 if not before) but when you don't have credit it is hard to get credit. I have 2 cards now and need to apply as it has been about 4 months since I did. Don't want Hooters or CJ or any of that stuff.

I am blacklisted from Chase, Citi, never had Amex because years ago they were all charge cards and wanted to give a big credit line. Didn't know that bigger was better back then. said...

dd, thanks. I was just talking with someone about this. If you don't have a plan before you walked into that store, you'll be susceptible to the come on. Most people don't understand credit. They have no idea that opening cards hurts their credit score. After all, if they got approved for the card, their credit must be pretty good, right?

And I have written about what you're talking about. When you need credit most, it's tough to get. When you don't need it, it's a lot easier to get.

Buffyfan said...

Even I have great credit and high FICO, this would have been so helpful in my 20s when I had a gazillion store cards and move money around to pay the minimums. Even though I have really high limits on my cards have no idea why they havent been cut but I am going to visit all links on the site to ensure I really have good credit plan

Hope you dont mind but I am going put your link on my blog. I love your site, I visit it everyday and think it is so helpful said...

Buffyfan, no problem putting my link on your site.

Thanks for being a regular reader.

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