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


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

As you shop during the coming weeks, you're going to be bombarded with offers to apply for retail cards when you get to the checkout register. In most cases, you'll be given a discount on your purchases if you get instantly approved for one of these store cards. There is nothing wrong with a discount (we could all use them) but I'm hoping your thought process goes further than that.

Article courtesty of the Credit Matters Blog: http://www.CreditMattersBlog.com

It's my hope that this story makes you a more thoughtful consumer of credit.

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 CreditMattersBlog.com 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 creditboards.com, 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
Last Updated ( Sunday, 16 November 2008 )

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