On the Perils of Being an Evil Capitalist

[MachineGhost]

I tried to get a personal signature loan yesterday so I could see what interest rate I would get for investment purposes or not (they were offering as low as 6.99%).  My FICO score is 800+, excellent.  Unfortunately, they wanted me to call to finalize the online application which was A LOT more nosy than the paper application that I stupidly pre-shredded.  The script walker on the other end didn't understand much of anything, including that I wanted to get the loan to diversify my credit with an installment loan to improve my score further, or that the money was just going to sit there in the bank account.  He needed a valid reason to proceed with the script, so after some annoying back and forth I just said to pay off some credit card bills.  Bingo, but I would have to provide that info at the end of the process so they could expliclty pay them off.  That's fine with me since it doesn't amount to a hill 'o beans and I would get the rest.  He also didn't seem to grasp the concept of Social Security income.  Finally, he decided that despite asking for it separately on the app as consideration, total househould income would just be excluded and so *snap* immediately I got denied, game over, hard inquiry.  I even asked, but no co-signers possible either but got some B.S. reason why not.  It's obvious these sharks just want to trap you into pissing away borrowed money on consumption items.

It may be a blessing in disguise because I don't think I really need the stress again of dealing with making several hundred dollar payments a month for a couple of years -- that feeling didn't explicitly hit until I had to call.  Still, its highly annoying how the system treats you like an idiot if you're an evil capitalist with no wage-slave job.  On the plus side, all the credit and CC monitoring thingies sure raised a firestorm within 24 hours.  I also forgot I had a fraud alert that should have prevented a lookup in the first place -- it must have expired!

What's also insulting is the rates (17+% APR) I would have to pay from the P2P lending sites.  Excuse me, I can lend as much as I bloody want and make millions, but when it comes to borrowing msyelf, I'm a deadbeat?

Next time (if ever), I'll be less truthful and setup a ghost company and employ myself as a C-suite executive and pretend I have several kids and a station wagon while earning six figures.  But I didn't know how strict things have become about income verification after the subprime bubble, so I didn't feel like pushing it this time.  The P2P sites definitely verify your income which is a new standard compared to the no doc, liar schtick of the last two decades.  I bet that still holds true for credit cards.

Take my advice and do not ever retire!  It's not easy to undo.

[MachineGhost]

Good story, but if you don't really need the $ and your sole purpose was to diversify your credit [And you need to do this why, when your FICO is already above 800?!], go to the local furniture store the next time they have a "12 months same as cash" sale, and treat yourself to a new chair or lamp or whatever. The cost of the item will likely be less than the interest you pay on a 7% loan over 2 years, you get the installment loan on your credit, and you get a new chair as a bonus.

Huh, great suggestion!  Diversifying my credit is not critical, but it would just be nice to do since I won't ever have a mortgage, but I do want to get something out of it for all the bother.  Obviously, the P2P lending sites using stricter standards don't think my credit is all that hot compared to the FICO scoring regime.  Which is the point.  I need diversification.  I'm still pissed at Bank of America for suddenly cancelling a credit card I had since 1989 due to inactivity.  That dinged a chunk.

I think I'll name my new chair Pugchief's Throne in your honor! 

[madbean]

I'm still pissed at Bank of America for suddenly cancelling a credit card I had since 1989 due to inactivity.  That dinged a chunk.

I have a Chase Mastercard that I only keep in the off chance that I might need it, so to keep it active I set up an automatic payment for the full balance from my bank account and then an automatic payment from the card for my water bill. So they get at least 12 charges a year and apparently that keeps them happy enough. I have no idea what this does to my credit score.

As for trying to do things like opening accounts just to increase your credit score, I have found that results can be unpredictable. And I say this as someone who once wrote credit modeling software. They just gave me the algorithms and I coded them and never did understand most of the logic behind it.  One thing they didn't take into account was someone like me who uses a cash back credit card to pay for everything but pays it in full each month. Their model dinged me for the average balance on the card. I don't know if FICO and others do the same thing or not but I think this might also be the reason I can't seem to get my score over 800 even though I have a long and impeccable history.

[MachineGhost]

One thing they didn't take into account was someone like me who uses a cash back credit card to pay for everything but pays it in full each month. Their model dinged me for the average balance on the card. I don't know if FICO and others do the same thing or not but I think this might also be the reason I can't seem to get my score over 800 even though I have a long and impeccable history.

Yeah, that's one of the things you got to plan around if you actually want your balances to show up as $0 on your credit report, otherwise it will always show the existing balance up to and after a recent payment since they only report your balance on the due date, i.e. two billing periods.  I forget how you do it, but people rebuilding their credit take advantage of it.  Maybe I ought to give it a shot and see what happens.

[madbean]

madbean, I'm curious... What are the sorts of things that increase / decrease one's credit score?

There isn't actually one single model that is used for all credit scores so it's impossible  to say exactly what will affect it and you may have noticed that the credit bureaus only explain it in vague, general terms. I didn't write my code for any of the major credit bureaus so I can't clue you in on any of their secrets (though I think TransUnion probably owns my software now).

The models I coded were mostly intended to predict who would accept an offer for a high interest credit card (up to 29%) while still being marginally credit-worthy. They bought the data from Equifax and then mined it for this purpose. So you probably wouldn't want to be someone with a high score according to their model. To my surprise and embarrassment I actually received an offer from them not long after I finished the software. That was when my first wife was still alive and had lots of open accounts with high balances, so I figured that was the reason. But still today, 20 years later, I occasionally get offers in the mail for high interest credit cards with embarrassingly low credit limits, even though my score according to Credit Karma is almost 800 and I have several cards with 20k limits.

The funny thing about writing that code is that I had no way of determining whether my scores were accurate or not because nobody ever sat down and hand-calculated what the scores were supposed to be based on a sample set of credit reports. If you saw how complicated the models were you'd understand why nobody wanted to put forth the effort to do it. So I just handed the software off to them and that was it. Apparently it worked out for because they never asked me for their money back.

[MachineGhost]

I found this at Discover:

[align=center][/align]

FICO is still the gold standard for lending decisions.  The others are just marketing fiction schemes invented by the credit bureaus, though the P2P lending portals may be using them.

[quote=http://www.thetruthaboutcreditcards.com ... ore-range/]
FICO score range: 300 – 850
FICO NextGen Score range: 150–950
VantageScore range: 501 – 990
Equifax credit score range: 280 – 850
Experian PLUS Score range: 330 – 830
Experian’s National Equivalency Score range: 360 – 840
TransRisk New Account Score range: 300 – 850[/quote]

EDIT: This is how you pull off the $0 balance trick... http://www.creditsesame.com/blog/credit ... o-balance/

[madbean]

FICO is still the gold standard for lending decisions.  The others are just marketing fiction schemes invented by the credit bureaus, though the P2P lending portals may be using them.

When I acquired my last mortgage, the broker told me the credit scores were nothing but a marketing scheme and a joke. He said as long as I didn't have any bad credit history he could get me the same rate no matter what my score was. Having once worked for Equifax, though not in the credit bureau part of the business, I found that to be a very interesting observation.

[FarmerD]

I once naively believed one's credit score was based on one's ability to pay back the loan.  What I couldn't understand was how someone like me (no debts, never carried credit card balances, paid home mortgage early) could have the same score as someone I know who is financially unstable (missed payments, loan default, etc)

The VP of a bank corrected by thinking.  He said your credit score is based on how much money the lending institutions thinks they can make off you.  He said there was a bell curve for loan profitability for the bank.  On the left side of the apex is people who have shown inability to pay back loans and on the right side of the apex as people like me who rarely use credit, promptly pay off balances, and are fully collateralized.  People at the apex are people who live on the edge by taking out lots of loans but somehow still have paid back the loans thus representing the most profitable customers for banks.  Therefore they get the highest FICO score. 

[WiseOne]

MG, are you simply trying to get your credit score up to 850, or are you genuinely trying expand your access to credit?

If you don't have a HELOC you could try that.  Way better than Lending Club; any unsecured loan is going to make the lender nervous and command very high rates.  It makes me realize that the deadbeats applying for P2P loans have already failed at the usual methods of efficiently borrowing money:  raiding the savings account, HELOC withdrawal, and new credit cards with 0% balance transfer.  My brother used the latter trick repeatedly to start his business, and ended up debt free having never paid a dime in interest.

[MachineGhost]

MG, are you simply trying to get your credit score up to 850, or are you genuinely trying expand your access to credit?

If you don't have a HELOC you could try that.  Way better than Lending Club; any unsecured loan is going to make the lender nervous and command very high rates.  It makes me realize that the deadbeats applying for P2P loans have already failed at the usual methods of efficiently borrowing money:  raiding the savings account, HELOC withdrawal, and new credit cards with 0% balance transfer.  My brother used the latter trick repeatedly to start his business, and ended up debt free having never paid a dime in interest.

Just the score but I wouldn't mind more credit also as I don't need it, but after going through this, it made me realize what you realized.  These P2P lender's really are a last resort and I wonder who's going to be the real sucker at the end of the day in the next downturn.  It's easy to just walk away from an unsecured personal loan -- I did it myself once (it rolled off).  And I'm not sure someone with their credit already in the gutter is really going to care about another ding when they're just struggling to survive day-to-day.

OTOH, if LC feels that I'm worthy of 17% APR + fees with a FICO score of 800, then perhaps they are doing their job in screening out the undesirables as much as possible.  BTW, Prosper decided I was worth only 8% APR + fees but capped the amount to $2K! And they're even telemarketing a followup.  Hilarious.

Still, I'm awful curious how much having an installment loan on record would improve both my FICO and/or the P2P lender scores.  I want to get to that AAA low rate.

[WiseOne]

These P2P lender's really are a last resort and I wonder who's going to be the real sucker at the end of the day in the next downturn.  It's easy to just walk away from an unsecured personal loan -- I did it myself once (it rolled off).  And I'm not sure someone with their credit already in the gutter is really going to care about another ding when they're just struggling to survive day-to-day.

Bingo!  I think Lending Club survives mainly because most people are actually honest.

There are all kinds of creative ways to take advantage of P2P lenders and it's amazing more people don't do it...why couldn't a newly graduated student borrow the maximum simultaneously from Lending Club and Prosper, pour it all into student loans, and then declare bankruptcy?  They'd lose nothing and instantly drop their SL's by a hefty amount.

[MachineGhost]

There are all kinds of creative ways to take advantage of P2P lenders and it's amazing more people don't do it...why couldn't a newly graduated student borrow the maximum simultaneously from Lending Club and Prosper, pour it all into student loans, and then declare bankruptcy?  They'd lose nothing and instantly drop their SL's by a hefty amount.

I think the big stumbling block is P2P actually verifies the stated income, as in they literally want to see tax returns or paystubs.  I have a lot of annoying straggler loans that never get funded because it never passes review, so I suspect there's that bottom of the barrel deadbeat element that is continuously trying to get these loans.  P2P don't just check that what is reported on the credit file matches what was put on the application like with a credit card app or traditional unsecured personal loans.  This is actually a good thing.

What's rather annoying is Paypal Credit doesn't report to the bureaus at all.  Doing so would have solved my FICO problem long ago.

[Libertarian666]

Maybe I'm missing something here, but why would anyone want to borrow at personal lending rates to get money to invest?
Sure, if you can get a 0% credit card advance, I can almost see it, but it's still leverage, which I always shy away from as too risky, unless it is a non-recourse mortgage at a ridiculously low rate.

As for credit scoring, I agree that the "sweet spot" for credit card issuers is people who run a balance all the time. They even have a pejorative name for people who pay the balance off every month: "freeloaders".

[MachineGhost]

Maybe I'm missing something here, but why would anyone want to borrow at personal lending rates to get money to invest?
Sure, if you can get a 0% credit card advance, I can almost see it, but it's still leverage, which I always shy away from as too risky, unless it is a non-recourse mortgage at a ridiculously low rate.

As for credit scoring, I agree that the "sweet spot" for credit card issuers is people who run a balance all the time. They even have a pejorative name for people who pay the balance off every month: "freeloaders".

It's not leverage; it's a profit from arbitraging the interest rate difference.  But more practically, the loan paybacks are amortized so if you're going to borrow to fund them, it needs to be an amortized loan as well.  I was going for 48 months as that is about the average of the 36 and 60 that my loans' composition currently is.

In other news, I had no issue getting a credit card today despite making up a number for the income.  So that aspect has certainly not changed in the slightest.

[Mark Leavy]

MG - thank you for starting this topic - and thanks to all of the others that have commented and thrown some light on how the credit system works.

I've been curious as to what happens when one completely steps away from the system.  About 8 years ago, I got rid of all debt except my mortgage, and then 2 years ago, I sold my home and haven't had any debt at all - nothing for the credit agencies to care that I exist.  I use cash and debit cards with Visa and MC logos for everything.

Last year, I checked all of my credit reports and they were blank, and had scores ranging in the 700's.

I was thinking it might be useful to have a real credit card for some reason.  Hell, I don't know why, so I applied for a Citibank Amazon card and was flat out refused.  I have no debt and a high net worth and I claimed the income that I had been pulling the year before when I actually had an income.

In the end, I just laughed and wondered what it was that made the system go round.  This thread explains a lot.

[MachineGhost]

In the end, I just laughed and wondered what it was that made the system go round.  This thread explains a lot.

It sounds like -- as the rich evil capitalist that you are -- you would need a secured credit card to ever get one again!!!

[Pointedstick]

I see the consumer credit system as yet another trap for poor and lower middle-class people. Once you get to a certain level of wealth and financial savvy, you simply don't need it anymore and are immune to its predations. You spend sensibly so you don't run up credit card debt or rely on payday loans. You have an emergency fund so you never need an emergency credit advance or to use a HELOC or something. You have enough money to buy modest vehicles in cash. You rent or have a modest house with no mortgage. Once this describes you, what's the advantage of consumer credit, other than strategic arbitrage that comes up every once in a while?

[Libertarian666]

I see the consumer credit system as yet another trap for poor and lower middle-class people. Once you get to a certain level of wealth and financial savvy, you simply don't need it anymore and are immune to its predations. You spend sensibly so you don't run up credit card debt or rely on payday loans. You have an emergency fund so you never need an emergency credit advance or to use a HELOC or something. You have enough money to buy modest vehicles in cash. You rent or have a modest house with no mortgage. Once this describes you, what's the advantage of consumer credit, other than strategic arbitrage that comes up every once in a while?

One word: points.
For example, I can stay in a good hotel for a week or so every year or two with no cash payment, based on my consumer spending on a credit card, which of course I pay off every month. The same goes for flying, especially on otherwise hideously expensive overseas tickets. And of course there are signup bonuses that make that even more lucrative.

[Pointedstick]

I see the consumer credit system as yet another trap for poor and lower middle-class people. Once you get to a certain level of wealth and financial savvy, you simply don't need it anymore and are immune to its predations. You spend sensibly so you don't run up credit card debt or rely on payday loans. You have an emergency fund so you never need an emergency credit advance or to use a HELOC or something. You have enough money to buy modest vehicles in cash. You rent or have a modest house with no mortgage. Once this describes you, what's the advantage of consumer credit, other than strategic arbitrage that comes up every once in a while?

One word: points.
For example, I can stay in a good hotel for a week or so every year or two with no cash payment, based on my consumer spending on a credit card, which of course I pay off every month. The same goes for flying, especially on otherwise hideously expensive overseas tickets. And of course there are signup bonuses that make that even more lucrative.

Well heck I could do that too; I also have credit cards that I use like debit cards and pay off every month (although I usually take the cash back rather than saving the points for travel). But that's not really using consumer credit the way it was meant to be used; it's more of a financial hack!

[MachineGhost]

One word: points.
For example, I can stay in a good hotel for a week or so every year or two with no cash payment, based on my consumer spending on a credit card, which of course I pay off every month. The same goes for flying, especially on otherwise hideously expensive overseas tickets. And of course there are signup bonuses that make that even more lucrative.

Amen to that!  I use the cashback sites stacked with cashback credit cards for all online shopping (preference always goes to a larger discount coupon code which doesn't generate any cashback, though).  At the end of the year, I donate the proceeds to my charitable endeavors.  It also helps take out the sting of those despised use taxes that more and more out of state online retailers are [illegally] starting to collect.  That's the major reason VitaCost.com lost 95% of my business.  I'm starting to do it for groceries too, now that Walmart has some "ready for pick up" items attached to the inventory at your local locations.  It's far from perfect, but its certainly better than wasting time traversing traffic, people, aisles and checkout registers.

[iwealth]

Oh credit card points how I love thee..

In late 2013, my wife and I applied for FOUR Chase Southwest Airlines credit cards, two each personal, two each business. All were approved, and we had to spend $3k on each card to get 50k bonus points per card. We accomplished the spending, and then spent $10k additional on one card to qualify for Southwest's companion pass just in time for the new year. The pass entitles you to fly a companion for free  the rest of the year you qualify and the entire following year.

So two full years of companion pass and 210,000 Southwest points. The annual fee is $69 per card, so * 4 = $560 for the two years, but the points were enough for both of us to take over ten roundtrip flights to various destinations.

Luckily I was able to spend the required $22k to generate all of the qualifying points and the companion pass without buying anything I didn't need. Much of it was business related spending and we paid off a reliable family member's tuition (which was paid back within 3 months), stuff like that, but wow what a perk...and over $80,000 in unused credit lines to boot.

[Libertarian666]

I see the consumer credit system as yet another trap for poor and lower middle-class people. Once you get to a certain level of wealth and financial savvy, you simply don't need it anymore and are immune to its predations. You spend sensibly so you don't run up credit card debt or rely on payday loans. You have an emergency fund so you never need an emergency credit advance or to use a HELOC or something. You have enough money to buy modest vehicles in cash. You rent or have a modest house with no mortgage. Once this describes you, what's the advantage of consumer credit, other than strategic arbitrage that comes up every once in a while?

One word: points.
For example, I can stay in a good hotel for a week or so every year or two with no cash payment, based on my consumer spending on a credit card, which of course I pay off every month. The same goes for flying, especially on otherwise hideously expensive overseas tickets. And of course there are signup bonuses that make that even more lucrative.

Well heck I could do that too; I also have credit cards that I use like debit cards and pay off every month (although I usually take the cash back rather than saving the points for travel). But that's not really using consumer credit the way it was meant to be used; it's more of a financial hack!

I don't care how it is "meant" to be used. Actually, I take that back: I get a kick out of gaming the credit system (legally, of course)!

[MachineGhost]

Prosper kindly notified me of the reasons my loan amount was downgraded by 92%.  Keep in mind my credit score is 829 out of 850 in the rating they use (seems to be FICO):

The reasons you did not score well compared with other applicants are:

•Lack of recent installment loan information
•Too few accounts currently paid as agreed
•Taking new debt increases debt payment to income ratio too much.
•Too few bankcard accounts with balances of 1000 or more reported in last 6 months.

Seriously on the last one???

Key factors that adversely affected your credit score:

•Lack of recent installment loan information
•Too few accounts currently paid as agreed
•Length of time accounts have been established
•Ratio of balance to limit on bank revolving or other revolving accounts is too high

Seriously on the last one???

[WiseOne]

+1 on the joys of gaming rewards credit cards!

MG, you just don't fit into the mold of the typical P2P borrower, who by definition is a financial idiot.  Also - what are your favorite cashback sites?  That's something I haven't started playing with yet.  I've found that in general, coupons only exist for the things I very rarely buy.

Has anyone gotten one of those prepaid Target Redcards?  I heard of a rather awesome hack with them:  if you can get your hands on one, you can load it with up to $5K/month at any Target with the credit card of your choice, then use the card's billpaying system to pay the money right back to your checking account.  If you have that Fidelity 2% Amex that's an instant $100/month tax-free, which is not a bad return for two trips to Target ($2500 daily limit).  I expect that loophole will close at some point, especially if enough people start doing it.

[Greg]

+1 on the joys of gaming rewards credit cards!

MG, you just don't fit into the mold of the typical P2P borrower, who by definition is a financial idiot.  Also - what are your favorite cashback sites?  That's something I haven't started playing with yet.  I've found that in general, coupons only exist for the things I very rarely buy.

Has anyone gotten one of those prepaid Target Redcards?  I heard of a rather awesome hack with them:  if you can get your hands on one, you can load it with up to $5K/month at any Target with the credit card of your choice, then use the card's billpaying system to pay the money right back to your checking account.  If you have that Fidelity 2% Amex that's an instant $100/month tax-free, which is not a bad return for two trips to Target ($2500 daily limit).  I expect that loophole will close at some point, especially if enough people start doing it.

I'll have to look into that Target idea. that sounds pretty cool!

I use giftcardgranny.com for buying other people's unwanted gift cards for purchases I know I'm going to do. I also use eBates whenever possible as well to suck as many percentage points off of my final purchase as possible.