With banks now raising fees, raising minimum payments, raising interest rates, and raising balance transfer fees the “golden credit card age” is effectively over and I have huge doubts that it will ever come back.    I do foresee a new golden age of alternative “money” and let me give you a simple example.   My son (too young for credit) has figured out how to barter with gift cards.    He swapped a Best Buy gift card for cash, at a discount, and bought I tunes gift card with cash.   He is bypassing the need for credit cards by simply utilizing the gift cards themselves as bartering tools and cash swap instruments!   He doesn’t see the need for credit cards, he sees transactions as paying cash for “store specific credit vouchers” to buy goods and services.   Since he buys music and TV shows off of iTunes, he buys iTunes gift cards and never hassles us for credit card numbers.

I think there is going to be a new golden age of alternative “money” circulating the world in the form of gift cards on occasion sold at a discount.   Ever notice how you can get more bang for your iTunes buck at Costco?

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The math simply doesn’t work at 5% for any type of arbitrage.   I generally borrow in 25k blocks and generally did about 50k at a time and at 5% balance transfer fee we’re talking about $1,250 in balance transfer fees per 25k!    The math could potentially work if the terms were for 12 months or longer  at zero percent and it were possible to find an investment with 7% or higher return but that’s asking a lot during these turbulent times and most balance transfer offers are for 1.99% with 5% balance transfer for SIX months!

I’m guessing other banks will soon follow suit and up their balance transfer fees.  I think Bank of America recently raised theirs from 3% to 4% for all balance transfers.

I feel sorry for small businesses that use this tactic to float their payables while they wait for payments from customers and I can only surmise that it’s going to kill a good percentage of small business owners.   This is one of those “unintended consequences” of re-regulating the banking sector but I don’t think there was much of a choice.

I’m feeling a bit nostalgic.  For almost a decade I borrowed hundreds of thousands of dollars and arbitraged my way into some quick cash over the years and that’s all gone now.

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In one scenario, I can imagine a bank looking at a person charging a few hundred dollars at a divorce attorney’s office and assume that the customer’s marriage is in trouble and the credit lines need to be pulled.

In another scenario, I can imagine a bank looking at a person charging a few bucks for resume or placement services and assume that the person is unemployed and pull credit lines.

The real damage however is consumer over-reaction to these policies that force credit card users to simply stop using their cards for fear of lowered credit lines which result in lower credit scores which in turn sets another cycle of lowered credit limits or increase in APR’s in a vicious downward spiral.

The net result is more damage to an already fragile economy as consumers stop spending for fear of having their credit scores decimated.

I’ve been a critic of Dave Ramsey a few times on my blog and I vowed not to speak of him again BUT I am beginning to come around to his world view on credit cards.   The credit scoring industry simply wields too much convoluted power in the grand scheme of things and at this point, the banks & credit scoring philosophy is damaging consumption and the economy.

Credit card banks and credit scoring agencies are completely powerless when consumers pay with cash.   There is no record or “trace” of where, how, when, and why consumers are shopping and that may be part of what we need to get this economy going again: fearless consumers.

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I’m beginning to wonder if the banks are involved in these shenanigains as many credit card banks have been increasing interest rates on consumers credit card because of the financial crisis.   So if FICO artificially drops people’s scores then bank can “justfy” raising rates right?

Unfortunately, the banks are largely supported by tax payer dollars right now so why are consumers paying higher interest rates AND higher taxes to support these banks?   This is the scam of the century if you ask me.   The poor suckers that carry credit card debt are being screwed twice:  higher interest rates and higher taxes.   The banks?   They get rewarded twice:  Huge profits when the gamble pays off, bailout when it doesn’t and now higher interest on credit card loans.

And the people keep bending over and taking it…..I just don’t get it.

I just unloaded all my credit card debt and have ZERO credit card debt other than the routing stuff that floats on my AMEX monthly.   I’m curious to see what my December FICO will show.   My score has been continously dropping for the past three months for no apparent reason.

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With the existing credit crunch and depositors skittish about keeping more than 100k in any FDIC bank, I’m wondering why and how banks are able to loan out so much money at low interest rates when they supposedly don’t have any money to lend out.

In any event, I’ll likely borrow 25k at 0.99% and try to turn a few grand out of it fairly quickly and boost my existing 40k arbitrage up to 60k+ to churn some quick profits and improve my cash flow this next quarter.   The fee is capped at $99 so I’m looking at paying $200 in interest and fee to hopefully churn out 2k in profits.   Not bad for a couple of months worth of work if all things go well…..

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I’m wondering if this is why American Express had poor results this past quarter vs. simply being a “tapped” out consumer.   I’ve encountered problems with AMEX at discount outlet stores, fast food chains, and independent shops simply not taking Amex anymore.

Food for thought.

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In the past, the little card swipe device would prompt you to select Credit or Debit after you swiped your card or in some cases BEFORE you swiped your card.  Now, whenever I swiped my card, I was immediately prompted to enter my pin number.   I looked up at the clerk confused wondering why it was prompting me for a pin on a credit card and the clerk advised me to hit “Cancel” and select “Credit” at the next screen.  This happened at various retail outlets (Circuit City, ToysRus, etc) the exact same way.

There has been a battle for years over signature debit vs. pin debit vs. credit card charges and the fees vary greatly for retailers and banks.  If I understand the issue correctly, pin based debit purchases charge retailers as little as $0.12 where a credit or signature debit purchase would cost a retailer as much as 3% of the purchase.

Clearly, retailers have a monetary incentive to push consumers into using pin based debit and perhaps this is the reaction to all those cutesy mastercard and visa commercials portraying non-card users as losers.  Retailers are now defaulting to pin-based transactions on their card swipe terminals as you check out and it’s really annoying for me because hell would need to freeze over before I would ever conduct a pin-based debit transaction at a retailer.

On a side note, the retail experience continues to deteriorate rather badly.  I was in the market for two LCD TVs this year and I visited at least 6 stores trying to find the model I wanted.   After hours of fruitless searches, I settled for a single LCD TV and will wait until after the holidays for the second larger LCD I was looking for this holiday season.   I was also disappointed at not being able to find Nintendo DS at any of the dozen shops I visited either.   Luckily, I was able to purchase two Nintendo DS’s a couple of weeks ago online and those were safely delivered.   Apple iPod Nanos were plentiful but I was also unable to find quite a few other gifts: Stainles Steel Refrigerator with steel handles, a few Wii game titles, a few DS game titles, a few jewelry items, etc.

I’m working on a separate post titled, “Do Retailers Have It All Wrong?” to discuss a few issues I had with this year’s holiday shopping season.

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The real trick of course is to create an RSSIV (Rich Slick’s Structured Investment Vehicle) to bundle my debt and sell to unsuspecting overseas investors. Hopefully, with any luck, a judge will rule that those overseas investors don’t have any right to any of my possessions to collect on those debts should I be unable to repay those loans.

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I have 100k in credit lines amongst 4 cards. A few weeks ago I had 50k in arbitrage debt and I decided to unload 25k of debt since my 0% APR was ending.

My score at the time I had 50k in debt was 725.
My score after I unloaded 25k of debt jumped by 32 points to 757.

So by decreasing my debt by 25%, I increased my FICO by 4.3%

Put it another way…

50% utilization on 100k of credit = 725
25% utilization on 100k of credit = 757

Note that my FICO hadn’t budged a single point despite paying the minimums on all the 50k of debt (e.g. $500/month to each account) over the past 3 months; it had been unchanged at 725.

My next experiment is to actually close down one of my 25k accounts and see how that impacts my FICO score. I’ll be reducing the total amount of available credit from 100k to about 75k without paying off the remaining 25k in debt.

In theory, my debt/credit ratio will go up but will my FICO go up or will it go down?

25% utilization on 100k will become 33% utilization on 75k after I close the account.

Anyone want to guess what will happen? Will I be rewarded for doing the “right” or “Dave Ramsey” thing and reducing my reliance on credit?

Tune in to find out!

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I’m working on creating my own FICO simulator and it doesn’t seem as daunting a task as I initially thought.  From the info I’ve gathered, FICO score is broken down by:

35% Borrower’s History
30% Debt
15% Credit length
10% Credit Type
10% Pattern of credit use

Assuming 850 points is a perfect score then

Borrower’s History  = 297.5 max
Debt                      = 255 max
Credit Length         = 127.5 max
Credit Type            =  85 max
Pattern ?               =  85 max
Total                      850 points

With some of the categories, I feel fairly confident so I’m assuming I receive:

297 points for having good history – Never late on any payments over the last 10 years
127 points for credit length – The oldest account showing is from 1996; assuming good?  Not sure how opening/closing credit card accounts factors in.
85 points for credit type – Not sure about this but I have a mix of Home, Auto, Student, Credit Cards (all paid off except Home & credit cards)

I am a bit at a loss for how Debt and Pattern are calculated
85 points for Pattern – any ideas?
255 points for Debt – This one is perhaps the trickiest.

Adding my theoretical points (297+127+85) I get 509 and assuming I get half of the “Pattern” score that brings me up to 551 (considered sub prime!)

Clearly, Debt is a big factor (almost half) of your credit score.  I’ve read that anything about 50% utilization on a credit card is considered bad so how do we determine how bad that is?

If I currently have ~$73,000  in credit lines in 5 credit cards.  I have an AMEX with no limit and not sure how this fits in

Limit              Available         % Used

CC1       10,000                9,000             10%
CC2       18,000              18,000               0%
CC3       28,000                3,750             87%
CC4       12,500                3,750             70%
CC5         4,400                3,565             19%

Total        72,900             38,065            48%

Now the issue is does FICO use the overall total debt load or individually rate each one?  What are some theoretical ways to rate debt?

A total of 255 points are available for debt load so can it be that you lose 25 points for every 10% increase in debt load?  This would only work if the assumptions are based on total debt vs total available credit.

No debt = 255 points?
10% debt = 230 points?
20% debt = 205 points?
30% debt = 180 points?
40% debt = 155 points?
50% debt = 130 points?
60% debt = 105 points?
70% debt =  80 points?
80% debt =  55 points?
90% debt =  30 points?
100% debt = 5 points?

If somewhat in the ball park, then 50% debt load gets me another 130 points to bring my score to a total of 551+120 = 671?

If the debt factor is calculated individually then the math gets more complicated but not impossible.

The whole point of doing this exercise is to try to determine how badly FICO score gets “damaged” doing arbitrage deals.   As you can see, I have 40k in available credit that is just sitting there not doing anything for me.   You have to wonder what good credit lines are if you can’t use them without seriously damaging your credit score.

The more I think about how the FICO is calculated the more I think that it is seriously flawed.

There is no consideration given to how much a person has in savings.  A person with 70k in credit card debt with $0 savings is a much greater risk, in my opinion, than someone with 70k in credit card debt and 70k in savings.

There is no consideration given to income levels.  Again, a person with 70k in credit card debt with 30k in income is a significantly higher risk than someone with 70k in debt with 150k income level.

Ultimately it may not matter since a the new WAMU credit card grants you access to your FICO score every month.  I’ll try to periodically post how my FICO score is affected when doing arbitrage deals.

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