A Whole Lotta Nothing

Credit scores are bullshit: part 2

So we've had a lively discussion about my previous post on credit scores, and an industry expert on credit scoring showed up to argue with many here. The New York Times noticed and published his side of the story as well. He urged me on Twitter to try out MyFICO.com which is supposed to be more accurate. Well, I ended up trying it tonight and got a whopping 2 point difference on my credit score, with it still below 700 (690 vs. 692).

The best part is when it is being explained to me what my problems are, as this image captures:

Gee, I guess 16 years, 3 months just isn't a very long revolving credit history. Heck it is a few years shy of half of my entire life and "FICO High Achievers" average a whopping 2 years and 9 months more than me, which is such an incredible drastic difference that I can see your justification for docking me points on that one. /sarcasm

Like I said before, I understand the need for credit scores and how they are used, but much of the advice the credit reporting agencies have given me turns out to be conflicting bullshit.

They tell me to get a credit card to increase my score, and it ends up reducing my score (because I didn't know about the unwritten rules on how much of your credit line you are actually allowed to safely use). Now they say it's because I haven't had credit long enough when my oldest account is only 14% less than their suggested stellar achievement rankings. 

In summary: still bullshit.

Credit Scores are Bullshit

A couple years ago as I was getting a credit report from Experian (I was about to buy a new car and wondered where I stood credit-wise), I signed up for one of their monthly tracking features. I justified this waste of money because I'd had a credit card number stolen and wanted to watch my credit records for a while. Over the past year, I've watched my credit score start low and go lower, and I've come to the realization that it's complete bullshit.

My credit history is pretty ordinary: I got one of those credit cards that come with a free t-shirt and frisbee in college, mostly because I was amazed anyone would give me credit. The introductory $500 limit quickly went to $2k when I put some ski trips on the card, and I always carried credit at about 35-50% of the card's limit. After college I continued to use the card and watched my limit go to $5k and then $10k (as I carried more and more on it), and a few years after college the card's limit was at $20k. At the same time, finishing my Bachelor's degree and getting a Masters racked up about $25,000 in student loans (in 2011, 4 years of college only costing $25k is quaint!). I also owned a couple used cars with small car loans I paid off in time.

After I moved to Oregon in 2003, I finally got serious about my ~$30k in debt. My previous years of carrying thousands in credit and paying things off in time (but rarely getting ahead) ballooned my credit score into the low 800s. This was great when it was time to get my first home loan, and my second a couple years later. Once I settled into a long-term home, I started paying off my credit cards and school loans aggressively. By 2006, I had no balance on my credit cards and my wife and I finally paid off our school loans. I started closing my unused credit card accounts and shifted towards buying things with my bank's ATM/VISA card instead, so that I never carried a balance and the money came directly out of my checking account. I also followed the Get Rich Slowly mantra and focused heavily on building my retirement savings and over the years of maxing out my retirement with the help of an investment planner, I have a pretty good nest egg going.

You can imagine what all this fiscal responsibility did to my credit score the past few years. It dropped below 800 soon after I paid off all my cards and started closing accounts. For a few years I had no open credit cards and no open balances. I paid off two car loans and was paying ahead on my house loan, and each year I'd watch my credit score fall in the 700s. A couple months ago my credit score was barely above 700, and the main negative flag on my account was having no open credit card accounts, so before I took a recent trip I decided to finally sign up for one of those personal airline cards my frequent flier program has been pitching me and use the card on my vacation.

Today I learned that my credit score dropped into the high 600s and my risk just went from low to medium. The culprit? The credit card account I opened had "too low of a limit" (it started at $5k) and I had "too high of a balance" on it as I used it on vacation (I paid off the card as soon as I returned, two weeks before the first bill even showed up).

Financially, I'm in the best shape of my life right now. My house will be paid off in about 5 years at the rate I am going, I have a great retirement portfolio that I contribute aggressively towards and it continues to grow, and my business is doing well even as we've expanded with a new employee and several contractors. 

I had the highest credit score at a time in my life when I was leveraged to the hilt and I lived paycheck to paycheck. Now that I have my own business, a healthy retirement, and can pay for everything I need/want, I have a low score and I'm dubbed a higher risk even though my ability to pay is very high. I used to think a credit score was all about your ability to pay, but it's clear now it's more about how profitable you will be to banks.

Credit card changes before the deadline passed

Late last year, FRONTLINE did a great piece on the credit card industry and specifically covered the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009. The act is a good one, requiring companies to comply with new rules that make rate increases carry a 45 day warning with no retroactive rate changes on balances, and reduce late fees, obscure terms, and other gimmicks the industry is known for.

One drag was that it passed back in May of 2009, but it wasn't set to be enacted for 9 months (on FRONTLINE Chris Dodd claimed he was powerless against lobbyists to make it law sooner), but that happened to be just last week.

The credit card industry, ever the jerks, did everything in their power over the last 9 months to prepare for these new rules. You should probably take a look closely at your recent credit card statements, because chances are your cards slipped up to higher rates with no explanation because it was the last chance companies had to do it before the deadline.

My wife and I have excellent credit and we've both vowed to never carry balances for the past few years (after spending most of college and five years after drowning in credit card debt) so I'm used to seeing low rates that we don't even use because we pay them off, but I was surprised to find my cards now have interest rates of 10%, 17%, and 20% respectively. My wife's has a credit card that is hovering around 20% as well.

In the future, you will be notified but it's probably worth taking a look to see if they tried to get you just before the deadline passed for rate increases requiring 45 days advanced warning.

The New Honesty

Three times in the last week, I've been reminded by a cashier that what I was buying wasn't worth the money:

• Long Beach Airport, Terminal 3. A single Larabar was $5. Cashier says "you sure you want to get that, it's five bucks"
• Las Vegas, concession at Interbike somewhere. I grab a Crunch chocolate bar and the cashier says "dude, that's three dollars, you sure you want it?"
• Las Vegas, Mandalay Bay parking lot food service for the US Crit finals. Parched, and with no water supply I ask for a 8oz bottle from the bartender. He says "this is $4.50, you actually want it?"

Sometimes there is an upside to a recession.

A used car scam I once almost fell for

I saw someone I know selling their old car on craigslist and it reminded me of the time I sold my last car using similar means. I almost fell for a couple guys that showed up, test drove the car, then tried to buy it at a vastly discounted price. They were quite persistent and almost wore me down after a couple hours but dropped a few clues that they had done it before. It really felt like I was being conned, and I've been meaning to write it up since it happened years and years ago, so I might as well now.

I listed my car at $3,000, about 10-20% below what bluebook was telling me, but I knew the car had a ton of miles on it (120k) and I just wanted the thing sold (I probably would have taken anything $2500 and over). The first person to respond to the ad went like this:

1. A guy called within an hour of posting the for sale notice.
2. He had a sob story about his sister that needed a car very badly to get to school, and how he's ready to buy one for his sister asap.
3. He showed up with a friend who he said knew a lot about cars. They both rode along for the test drive.
4. We stopped at a supermarket parking lot after driving a bit, and the mechanic friend gave the car a once over, looking under the hood and looking around the entire car
5. Mechanic friend comes up from the tailpipe with oil all over his fingers, says the engine block must be cracked, sending oil through the system.
6. Guy sounds kind of bummed about the "cracked engine block" and we drive back to my place where I drop them off.
7. Before he leaves, guy offers $1,000 for the car, since his sister still really needs to get to school and his mechanic friend promises to fix the engine at a later date for a higher price.
8. I refuse, saying it's a ridiculous price. He offers $1200. I say no thanks, and leave.
9. The guys hang out in front of my building, calling 15 minutes later with an offer of $1300, and waits another 15 minutes to call again with an offer of $1400. I say no both times.
10. Three days later I sell the car for the list price, from someone paying cash and looking to refurbish the car top to bottom.
11. Original guy calls after one week from the same number, using a different name, asking if the car is still for sale.

I remember feeling weird about this guy and with enough red flags going off I walked away from it as soon as I could, but looking back on it, it was pretty obvious this was a common con-man style approach. I bet you could run a pretty decent business lowballing people and reselling their cars immediately after for market prices.

• He called soon after listing, trying to nab underpriced cars before anyone else has a chance to consider them
• The sob story was supposed to prey on my emotions, to help out another person in need
• Even though I don't work on cars, I now know that if there really was oil being sent through the exhaust, the car would spew blue smoke when driven, which it didn't. The oil was smeared on his fingers from another part of the car, for this bit of theater. At the time I didn't call them on this move but I did say it sounded highly unlikely to me.
• Friend said he could fix the engine himself for $1200 so the guy could offer less and say "well this car will do for now for my sister, but it'll cost me so much more to fix, can you discount your price a bit more?" This is also a bit of theater.
• The lowball offer and slightly higher offers backfired on the guy, pissing me off. I knew the car was already discounted about $500 what it should have listed for, why on earth would I take 1/2 of that still?
• Calling me back a week later under a new name was hilarious. I don't know if that was a mistake but it made me think he called a lot of people selling cars.

Keynote Index Fund

A few months ago I was thinking about Apple's rise in value after the iPhone and how Steve Jobs does a great keynote every year, and naturally I thought "I wonder if there's a way to make money off quick investments around the keynotes?" Then I thought "What if you did this every year, for just a day or two of investment?"

I ran the numbers and here they are, on this new 1-page website: Keynote Index Fund

Crap I love: Wesabe

After working on my own for a year, this past summer I finally got around to examining my finances. I did what most people do: I got a copy of the latest Quicken, spent a week entering data into it, and then I stared at graphs wondering how on earth my spending always seemed to go up when my income went up, even though it didn't feel like I was going on new shopping sprees.

I quickly found Quicken to be a bear. The category system is a pain, and every charge can only have one category attached. Making new categories and arranging subcategories would frequently crash Quicken 2007 for the Mac, making me lose work in the process. Like every other time I've tried to use some piece of financial software, I eventually gave up.

About a month ago, I started using the Wesabe beta (co-founder Marc Hedlund is a friend of a friend). The app has lofty aim of helping you track spending, realize your goals, and share tips with everyone. There are also social effects, where people using the same merchant can post reviews, allowing you to surf around for a new mechanic or grocery store based on other members' satisfaction and spending.

For me, the main draw was simply having a powerful web version of something like Quicken, but flexible like flickr or delicious. Instead of categories, there are tags. And you can put any number of tags on something, and sort spending per tag. This is a really big breakthrough. A few things I discovered from doing this:

• I tagged every gas station purchase with gas and auto. With a single click, I could see how much I spent just on gasoline each month and I could also see how much I spent overall on owning cars (by tagging all payments and repairs with auto).


• Among the dozens of gas fill-ups I had this year I noticed some were for roadtrips, so I could tack on a tag for that single trip (and add the tag: travel), then tag every other purchase from that trip with the city name. One click on the roadtrip city name and I could see how much that trip cost me, and I could also see how much travel in general cost me each month.


• I've taken to tagging any purchase that is a gift to myself, or an extravagance, or any non-necessary thing with: extra. In a click, I can see how much money I waste each month on silly gadgets, bike upgrades, and wacky t-shirts. There was never an easy way to get that kind of data from Quicken.

The other smart thing Wesabe does is make data entry easy. My bank gives me some ugly metadata that usually just features the address of the business where a charge was made. In Quicken, I'd have to memorize 1590 Booth Bend road equalled Lowe's Hardware and I'd have to categorize every purchase by hand. Wesabe is pretty slick in that you put a description in once for a merchant, then the app finds each and every purchase ever made at that same chunk of metadata, and automatically copies the tags and description for the first one you marked. Thanks to this feature, I tagged and described an entire year's worth of purchases in about 90 minutes. Now, I do weekly updates from my bank data and it takes just a few minutes to keep everything up to date.

The app is still new, and about the only drawbacks I've found is that the history reporting and graphing doesn't feel completely built out yet (and I've heard lots more is to come in that realm). I'm used to Quicken's graph magic and Measuremap and Google Analytics where you can click on any bar graph and figure out what exactly caused a spike. At the moment, the bar graphs simply report your patterns in spending but lack any sort of "zoom" feature to get more detail.

It didn't take long for me to fall in love with Wesabe. At every point where Quicken stood in the way of my progress with ease-of-use roadblocks, Wesabe makes it painless. Now that it's open to the public, the Tips and Goals sections might get built out more and the social aspects will kick in, but at the very least, the accounting section of the app is truly killer and helping me finally get a handle on my spending.

Wesabe (free, probably paid pro options in the future)

Give yourself a raise

Here's something obvious and kind of dumb I figured out this week. When you pay off a debt, you suddenly have a lot of extra money in your pocket, especially on an annual basis. I recently finished paying off my student loans and my wife is about to finish hers, and our old car is just about done with payments. All told, we'll be saving around a thousand bucks a month that would normally been sent away, which isn't too bad at all, especially on an annual basis ($12 grand in my pocket!). Then I started looking at all my bills as annual raises.

I bet if you check your own budget and monthly bills, you can find some ways to save. When you finish paying off that $300/month student loan, you'll get a $3600 raise. If you ditch a second car you were paying $500 per month for a loan/insurance/gas, it's like giving yourself a $6,000 annual raise. If you have a $850 monthly rent and you, say, move in with someone you're dating and they pay the rent, you'll make $10,000 more this year.

Brilliant!

Amazon is now offering a $79 unlimited 2-day shipping option and I have to say that's absolutely brilliant. It probably would take only 4-5 items delivered in one year to pay for itself, and make xmas shopping much cheaper.

Lots of businesses have programs to reward their heavy customers while still making a profit off their casual ones but I never would have thought Amazon could come up with a compelling package like this. Pretty cool that you can share it with four folks as well.

One less worry in life

I'm an adult now and I have a home and savings and have all my bills in check, but I can never forget what it was like being 18 with my first bank account, back when using an ATM was like playing roulette (and like any form of gambling, I walked away empty handed more often than with any cash). So even though it's been ten years since I've left an ATM empty handed, I can't get an irrational thought out of my head every time I use an ATM: that I'm surprisingly and suddenly dead broke. It's sort of an adult version of the "waking up naked at the exam" nightmare I used to have in college.

Until now. I was poking around my small town credit union website and discovered a new alert feature, where they send an email based on your account activity. So I setup an automatic email that goes to my cellphone's email address when the checking account is below a fairly comfortable level. The feeling didn't leave immediately the next time I used an ATM, but after I saw the feature work when a bunch of bills went through, I now know that it is instantly wired to my bank balance, even when I'm far from a computer.

A lot of stuff I've read about simplifying your life involves removing all those little irrational worries that clog your thoughts and keep you from getting things done and living happy. In addition to this small thing, I've been to the dentist for the first time in years and removed the other big irrational fear that my teeth would fall out any day now. It's been nice to remove these worries from my life forever, as I've got a whole bunch of new worries lined up to deal with. :)