Friday, August 8, 2008

When it Comes to Credit, it's Always Business

"If you need a friend, get a dog. It's trench warfare out there, pal." -- Gordon Gekko, Wall Street (1987)

I've always wanted to say that. Now I can. If you need a friend, get a dog. Indeed, don't look to your credit card company for friendship. It's not your friend. It doesn't care about you (miss a payment or go over your limit and see what happens). And it is certainly not looking out for you. The only thing it cares about is making a dollar off you. That's it. That's its business. Its goal is to exact as much coin from you as it possibly can. Always remember that.

Enjoy the benefits of the card. Enjoy the fact that you don't have to pay interest when you pay your card balance in full every month. But always sleep with one eye open when it comes to these sharks. If you do, you'll never be surprised by some of the stuff that the credit card company does to you.

You know what I'm talking about. You come home from a long day at work and log onto your credit card's Web site. You're shocked to see that your credit limit, which was at $9,000 when you left in the morning, has been slashed to $3,000. Worse, you have a balance of $2,850, which means that you're nearly maxed out now. Your tough day just got a whole lot tougher.

Pissed, you pick up the phone and rip customer service a new one. Unfortunately, there's nothing that customer service is willing to do for you (in fact, they have no power to help you at all). Sir, they say, if you use the card responsibly for the next six months, there's a possibility that we'll raise your limit. Yada, yada, yada. Not satisfied, you demand a supervisor. After a few minutes on hold, you finally get your day in court. You've been a great customer, you've never missed a payment, you always pay more than the minimum, you're an all-around good guy or gal. You trot all of your attributes out. After your spiel, the supervisor, who understands your concern, says that the credit-limit decrease is final. The bank will not raise your limit.

It's now decision time -- for you. You'll either accept the situation for what it is, or you'll do something drastic, like request that your card be closed. You're going to pay the card off tomorrow, you stammer. Close my account right now, you insist. While you might get some personal satisfaction from closing the card right then and there, I'm here to tell you that more often than not this kind of knee-jerk decision rarely turns out well. Here's why: despite the fact that the limit has already been slashed, closing the card would only serve to increase your utilization ratio further (you'd be taking the available credit entirely out of your utilization computation (link here)). What's more, if this is your oldest card, you could also take a hit there as well (though that will occur when the closed trade line eventually falls off your report some ten years from now). That's because FICO, in addition to looking at the average age of your accounts, also looks at the age of your oldest card. (I'll be exploring the topic of closed accounts next week; don't miss it.)

Before I move on, I'd be remiss if I didn't also mention that some people have points and rewards built up on their cards. If you shut your card down in the heat of the battle, there's a very good chance that you will lose access to those rewards. You won't be able to redeem them. Check the fine print in your agreement. Often, there is a stipulation that your rewards are only good while the account is open. If you're absolutely intent on closing your account, and you have a boatload of points, make sure that you secure those rewards before you do the closure.

What I advise people to do is calm down and make a sensible decision. Closing accounts and yelling isn't going to hurt the credit card company. If anyone's getting hurt, it'll be you. The card company sees you as business; look at it the same way. What's more, look at credit as a game -- a game that you always want to win. Don't let the card company get the best of you. The card that got its limit cut from $9,000 to $3,000? Feel free to pay it off. Then throw it in the sock drawer. But don't close it. Every quarter or so, feel free to make a small purchase on the card (to keep it from going inactive (link here) and getting closed). Then throw it back in the sock drawer. At some point in the future, you may want to use the card again. Or not. The decision will be yours.

Assuming you've been smart about getting credit when you can (link here) -- and not when you have to -- you've got another card (or several cards) that you can turn to while this one sits on ice. A wise man named George once told me to always have a backup, or two, or ten. He was referring to having a backup to American Express (link here) but the expression works for all cards. I'm a big believer in having backups. You never know when a credit-card company will do something to piss you off.

When that card company does piss you off (and it likely will at some point) just remember that when it comes to credit, it's never personal. It's always business.

You'll do well to remember that.


Don Miguel said...

Nitpicky and I'm sure everyone knows what you meant, but a credit line decrease will actually *increase* one's utilization ration, not decrease it. Great blog and I look forward to reading more. You may have talked me into applying for Penfed!

Credit Matters said...

Don miguel, thanks for the heads up. My fingers got ahead of my brain there. I've made the change in the column.

In the newspaper biz, that error would have remained all day -- and we would have made a correction the next morning. In the blog world, I can correct the mistake on the fly. Nice.

If you do join Penfed, good luck. May you get a fat credit limit!

Take care.

A Texan said...

I'm guilty...I have taken things personally and need to remember that I shouldn't take it personally when I pay down my credit cards and rarely use them and they stop giving me increases. I surely hope they don't take it personally when I buy a bag of chips and soda with their card and PIF when the statement cuts so they won't be getting any interest off me.

Sorry Cap's just business

Don Miguel said...

Thanks! Pulled the trigger on Penfed just a few minutes ago. Asked for $10K and got an instant approval along with a nice offer for a car loan ($30.8K @ 4.5% for 60 mos.) that almost makes me wish I were in the market for a car. Asked for $10K which matches my lowest reporting CC limit because I didn't want to be too ambitious. I look forward to growing it over time, as well as to the 5% uncapped rewards on gas! Done applying for a while but your post comparing good scores with no apps to fancy cars that languish in garages got to me :).

Credit Matters said...

Texan, you got it. It's just biz. If Cap One doesn't want to grow with you, or they irritate you, just sock drawer them until they do. In the meantime, just give the card some activity from time to time.

Apparently Cap One is supposed to be more generous if you use the crap out of the card. My problem is that I can't handle $300 increases every 3-6 months. I'd be an old man by the way that credit limit got healthy enough.

Credit Matters said...

Dm, congrats on the approval. Nice work. Penfed is a company that will grow with you over time. They've done their best to be my number one card. The vast majority of my spending goes through my cash rewards card.

Regarding that preapproval for the car loan, that's nice. If you had been in the market, Penfed would not have pulled another credit report if you chose to bite on the offer. That's what I love about these credit unions. They don't bury you with inquiries.

awedio said...

another fantastic topic!

Damn, wish I had this type of info 5 years ago.....I can only imagine the, I would be at the top of the credit "food chain"

Credit Matters said...

Awedio, thanks. Be sure to read Monday's story (which I publish at 12:01 AM Saturday morning).

I bet a lot of people will find the topic fascinating.

See ya then!

lupoman said...

Another great article Marcus!!

Without the risk of hijacking the comments to talk about penfed, I will just say that my Penfed application time is getting near, and i am nervous as hell! lol

I want the cash rewards, the overdraft thingy they have, and the car loan. After that i suppose i will be done with new cards for awhile, my Ficos have been daily drivers all these years, i might restore them and garage them for awile once approved for Penfed.

Credit Matters said...

Lupo, do me a favor, take your message and post it to the Penfed story I wrote early last month. I can address your comments there. Indeed, I will have some comments for you.

See ya there.

SpaghettiBender said...

Like one other poster said, they made the mistake of taking it personally.
This brings us back to the fact that credit is a game.
Never take it personally. It will destroy you in the end but the card company will still be in business.

Credit Matters said...

SB, exactly. It's a game. The card companies play it really well. We have to play it better.

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