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An Introduction To How Credit Scores Are Calculated

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For a long time I had referenced credit scores in post, but never really wrote anything introductory like this, rather just talking about things like the best credit cards for reselling. In truth it’s a topic I understand but never considered myself an expert in. So I asked William Charles of Doctor of Credit, who is truly an expert in this stuff to write the following Introduction to How Credit Scores are Calculated. -Trevor

How Credit Scores are Calculated

Trevor asked if I might be interested in writing a guest post on how credit scores are calculated and here we are. In this post I’ll try to give you a primer on the different types of scores and how they are calculated. There are two major credit scoring algorithms:

  • FICO Score
  • VantageScore

To make matters even more confusing for you each of these scores has different variations and model numbers (e.g FICO offers a FICO Bankcard Enhanced 8 model that aims to be more useful to credit card issuers). That being said, it’s important not to get bogged down by the details and instead focus on the overarching scoring criteria instead. Remember that the aim of credit scores is to determine how ‘worthy’ an individual is of credit without manually having to look at their credit history. This lets lenders make split second decisions on whether to extend you credit or not.

General Credit Scoring Factors

Almost all credit scoring algorithms will look at the following, with slightly different weighting of importance:

  • Payment History. The importance of looking at payment history data should be obvious. If you had two friends and one had always paid you back on time and the other was always late in paying you back who would you prefer to loan money to? The same is true for any financial institution and this is usually why payment history is the most important scoring factor.
  • Credit Utilization. Your credit utilization is the amount you owe divided by the total amount of credit you have available to you. For example if you have one credit card (ridiculous I know) and it has a credit limit of $10,000 and you’ve used $1,000 of that limit your credit utilization will be 0.1 or 10%. The thought is that if somebody has used a high amount of the credit currently available to them then they are likely to be under financial strain or duress and more likely to default or become delinquent on their loans. It’s important to note that credit utilization traditionally has had no history (e.g credit scoring models will only care about what is currently being reported) but this is changing over time so expect utilization history to be more of a factor in the future.
  • Length of Credit History. This helps qualify the rest of your data. If you’ve never made a late repayment and you’ve had a credit card for 20 years then you’re less likely to be a risk than somebody with no late repayments who has had a credit card for six months. This usually incorporates other factors as well such as age of newest account, oldest account and average age of accounts.
  • Recent Searches For New Credit. Similar to credit utilization too many searches for new credit can be a signal that somebody is under financial duress and might be more likely to default/become delinquent on their loan obligations.
  • Types Of Credit Used. There are two types of credit: installment & revolving. An installment loan is where you borrow a fixed amount and pay back the loan over time (think mortgage or auto loan) and revolving credit is where you have a fixed credit limit and can use/payback the loan as you see fit (think credit card).

FICO Score

This is the most used credit scoring brand (I think the last official figures were that it was used in 90% of all lending decisions, but that data is somewhat old). Their scoring breakdown or weighting looks like this for the classic score:

  • Payment History: 35%
  • Credit Utilization: 30%
  • Length of Credit History: 15%
  • Recent Searches For New Credit: 10%
  • Types Of Credit Used: 10%

As I mentioned at the start there are different variations of the FICO score that are aimed at specific markets like credit cards, auto loans, mortgages etc. In general these use similar criteria but put more emphasis on those types of loans, for example an auto specific score would pay more attention to late installment loan repayments. Discover offers Credit Score Card and this provides a free FICO score (you don’t need to be a Discover cardholder). It’s also quite a common credit card benefit.

VantageScore

This is the second most used credit scoring brand and a brainchild of the three nationwide credit bureaus. VantageScore has never given specific weighting breakdown like FICO, instead they provide us with the following information:

Extremely Influential

  • Payment history

Highly Influential

  • Age & Type of Credit
  • % of Credit Used (also known as credit utilization ratio)

Moderately Influential

  • Total Balances/Debt

Less Influential

  • Recent Credit Behavior and Inquiries
  • Available Credit

Experian used to provide the exact breakdown on their website and it was as follows:

  • Recent credit: 30%
  • Payment history: 28%
  • Credit utilization: 23%
  • Credit balances: 9%
  • Depth of credit: 9%
  • Available credit: 1%

There are lots of sites that provide free VantageScores. One of the more popular sites is Credit Karma.

What You Should Do To Improve & Maintain Your Score

Once you understand how credit scores are calculated, what you should do becomes a lot clearer. Here are my tips:

  • Always pay your bills and repayments on time. You’re hopefully doing this anyway to avoid late payment and interest charges but remember that your payment history is the key scoring criteria for both of the major scoring models. If you’re forgetful then set up automatic repayments.
  • Keep your utilization low. It’s generally considered best to keep your credit utilization at 1-10%. Keep in mind that the credit utilization is based on what is reported to the three nationwide credit bureaus and they all have different reporting dates. This means even if you pay your balances in full every month you might be reporting a large balance. You can see what date card issuers report to the credit bureaus on Doctor of Credit.
  • Product change instead of canceling. Credit length is important so instead of cancelling a credit card with an annual fee why not see if there are any useful no annual fee options you can product change that card to instead? That will help keep your average age of accounts higher than cancelling would. (Note: Currently FICO allows closed accounts to continue to age on your credit report until they fall off after 7 years so this isn’t hugely important. I believe they will be making changes to this in the next scoring iteration as it doesn’t currently make sense from a risk perspective).

You can also try doing things like making sure you have both revolving and installment loans. Most readers will have lots of revolving credit reporting, but you can use something called the secured loan trick to get an installment loan reporting as well.

Questions On How Credit Scores Are Calculated?

Feel free to ask below and I’ll do my best to answer them. Obviously this is just an introduction how credit scores are calculated, and you should do your own research but hopefully this is helpful to some readers. Thanks again to Trevor for inviting me onto the blog. Credit scoring is actually why I originally started my own blog so it’s nice to share this sort of information!

Priority Pass cards, United Devaluation, Wrong Journalists, 5/24 Rule

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The Weekly Travel News Roundup is a collection of headlines from around the internet that caught the attention of the Tagging Miles team. Content on these blogs do not necessarily reflect the positions of Tagging Miles, and should not be considered endorsements. Have a great story we should read? Contact us now and let us know.

Travel:

  • Doctor of Credit has a quick tip for differentiating Priority Pass cards that come with different benefits.
  • On July 4th this happened… At the time when I read in real time on twitter I was going through a variety of emotions, now I just shake my head.
  • Too Little Too Late from American for elite members… Gary received an offer, though I didn’t. I suspect that might be because I’ve had a total of 4 revenue segments on American this year as an Executive Platinum.
  • United announced another devaluation. It’s not horrible but it’s certainly not good news. I still need to dig deeper myself, but Gary has a good overview.

Miles and Points:

Tagging Miles:

 

Do this now if you have the Chase Fairmont Visa

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Last week the Blogosphere was rattled with news that Chase Fairmont Visa holders would have their cards converted to Chase Sapphire Preferred cards in August. For some this may not be so rattling, but, Fairmont, like SPG, attracts a rather dedicated bunch. If you don’t believe me, just check out my review of the Fairmont Southampton, which I did in two posts.

Chase Fairmont Visa

But, there is still something you can do to extract some remaining value from the Chase Fairmont Visa!

Getting the last of the Chase Fairmont Visa Benefits

First of all, the Chase Fairmont Visa is a great card. Its got some great benefits, but, at this point, this post only matters to you if you already have the card. You see, in addition to all of the great sign-up benefits that there were, there’s also a little bit of an Easter Egg in that if you spend $12,000 per year, you get a free night. So far as I am able to figure out, this annual free night is based on your card member anniversary–read: when your annual fee hits–rather than calendar year. Why is this important? Because, if your annual fee is in August or, probably the following 6 months, you might be able to get some reprieve from the $12,000 spend.

What to do?

Update #1: Start considering your spend now. If your annual fee is anytime from August to to the end of the card being offered, The letter says that the required spend drops down to $6,000 for the annual free night benefit.

Update #2: Of course, if your annual fee is in June or July and you aren’t quite at the $12,000, or even $6,000, you may want to call and see if they can move your anniversary date further out, so you can meet the necessary spend for the annual free night. That’s what my father was able to do (see comment below).

Wrapping Up

Its a big shame that Chase and Fairmont are parting ways. We’ve really enjoyed the benefits of the Chase Fairmont Visa, its just that good a card, and Fairmont is that good a hotel chain. But there is still some opportunity to get a bit of value from the Fairmont card, that is, putting some spend on it between now and 15 August when it gets converted to a Chase Sapphire Preferred. Spending $6,000 may either be huge, or not a big deal, depending on how you feel about manufactured spending, but, for some properties, this can be an arbitrage opportunity. I say that, because there is always a cost to spend, but many Fairmonts can be, well, pricey. So, do the math, make the phone call, and please share a comment on your experience.

Citi ATT Access More Clarifies 3x Eligible Categories

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Yesterday Citi ATT Access More cardholders got some bad news. Citi clarified what purchases receive 3x Citi Thank You Points. For some this is a big deal, for others its not. For many, this was a very lucrative train that unfortunately is coming to an end.

Why the Citi ATT Access More 3x Clarification Hurts Some

The Citi AT&T Access More card is one of the most lucrative and dynamic points earning credit cards on the market. Earning 3x Citi Thank You Points (TYP) on nearly every online purchase is amazing. Some even found other ways to make the card work for them even better, paying their rent or mortgage. It was a great gig.

Citi ATT Access More 

It shouldn’t come as a great surprise that the Citi ATT Access More would clarify further what purchases are eligible for 3x Citi Thank You Points given how it was being used. Specifically stating that you’ll earn 1x for rent, real estate, and gift card purchase or reload isn’t terribly unreasonable. Of course how they execute this will still be interesting.

Resellers should be unaffected, but be vigilant!

The Citi ATT Access More card has been and will continue to be my go to credit card for reselling. I think Matt puts it best:

Citi ATT Access More

That said, I think it is important to be vigilant. Whenever changes like this happen, mistakes can happen. It could just as easily happen that a legitimate online retailer gets coded from earning 3x to earning 1x just as easily as Plastiq or other bill pay vendors can be coded differently. 

Furthermore, I don’t think resellers should be terribly concerned about this development unless they leverage things like the MileagePlus X App for gift cards, or otherwise buy gift cards to stack discounts or miles promotions. I’d advise for folks that do that, to test with low dollar amounts and validate the results before going in big.

Conclusion

Overall, this is a net loss for many. For resellers, I’d say its less bad news, but there is still risk whenever things get coded differently. 

Were you leveraging the Citi ATT Access More card to pay your rent or mortgage? Will you keep your card?

Credit Card Primary Car Insurance Is not Equal

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Recently I did a one way car rental from Orlando, FL to Maryland. You see, in the April to May time frame, one way car rentals are super cheap if you’re going north. So, what else was I to do? I booked myself a Full size SUV, with the plan to pick up some things from my parents house, and do some sourcing along the way to fill the rest of the way. Of course, it was on the drive from my parent’s house to my favorite Florida restaurant, Highjackers–aptly named since it is on the grounds of the Palm Coast Airport–that my father asked which card I had paid for the rental with. Since we planned this as a business trip for our Reselling Business, logically I had put it on my Chase Ink Plus. That’s where the conversation changed.

You see, my father was reading the fine print of miles and points before I could read, well, at least close to it. His initial position was that I should’ve paid with my Chase Sapphire Reserve–a card I had recommended to him last year after getting it myself in the pre-launch release. Well, after reading Dia’s post on the Chase Sapphire Reserve’s Travel Insurance being insufficient, I had to dig into this Primary Car Insurance question!

It is important to note that all of the credit cards and coverage in this post are specifically Primary Car Insurance, meaning, this insurance is what you would refer to before you would contact your normal car insurance provider. This is meaningful because it could save having impact on your car insurance premiums.

Chase Sapphire Reserve Primary Car Insurance Coverage

The Chase Sapphire Reserve benefits are fairly exhaustive, but to summarize the important pieces, coverage is up to $75,000 for rentals not to exceed 31 consecutive days. Chase does specifically identify what is not covered, but also caveats that it is not an exhaustive list, here are their examples:

  • Antique automobiles; vans designed to carry more than 8 people; vehicles that have an open cargo bed; trucks; motorcycles, mopeds, and motorbikes; limousines; and recreational vehicles
  • Expenses reimbursed under your personal auto insurance policy, your employer or your employer’s insurance
  • Any obligation you assume under any other agreement
  • Injury of anyone or anything inside or outside of the vehicle
  • Leases and mini leases
  • Any violation of the auto rental agreement
  • Loss or theft of personal belongings

Unfortunately, the above descriptions make it hard to determine if you’d be covered for some rentals with your Chase Sapphire Reserve. The Chase Sapphire Preferred is very similar in coverage.

Chase Ink Plus Primary Rental Car Insurance Coverage

I typically rent cars for business purposes. The nature of my business–Reselling–means that I often need a car with greater capacity than those that I own. Of course, when I rent for business purposes, I want to use a business card, and because the Chase Ink Plus offers primary car insurance coverage, it is my first choice as a card to use. I cannot highlight enough: to be covered, you must be driving for business purposes. 

There’s not really a conclusive list or guidance that I could find, however I did call the Ink Plus folks and they gave me a rough idea of the guidelines, which I will summarize below:

  • There is not necessarily a dollar value limitation
  • You are covered for Economy through Luxury Vehicles
    • When asked for specifics, I was told that the Cadillac Escalade and Lincoln Navigator are both covered. 
  • Trucks or anything with an open cargo bed is excluded (like the Sapphire Reserve)
  • Expensive vehicles are excluded
    • When asked for specifics, I used the BMW X5 – which is in fact excluded.
Primary Rental Car Insurance

This is not the car for you, if you want to be covered!

I was particularly disappointed with the responses here for a few reasons. Particularly because, if I have a business, I might need a vehicle with an open cargo bed. Second, as a business owner, I’d like to know what vehicles are or are not covered, so I can make sure my employees stay within the necessary bounds.

It is important to know also that the Ink Preferred and Ink Cash also offer primary insurance coverage. 

Diner’s Club Primary Rental Car Insurance

I realize that not many folks use Diner’s Club these days, however they do provide primary car insurance. They provide two levels. One for regular card holders, and a higher level for those Carte Blanche card members. Here are the details:

  • Receive primary coverage, anywhere in the world (except where prohibited by law), when the entire cost of a car rental is charged to a Diners Club Card.
  • For most card members there’s usually no need to file a claim with your own insurance company, so your personal insurance premium won’t be affected.
  • The insurance covers physical damage and theft of the vehicle, reasonable loss of use charges, reasonable towing charges, and includes Secondary Personal Effects insurance.
  • Protection applies to rental cars with Manufacturers Suggested Retail Price up to $75,000 for covered damages. For Carte Blanche card members, up to $100,000 for covered damages.
  • To qualify, you must decline the rental agency’s collision damage waiver (CDW), saving up to $16 per rental day.

Citi Prestige and Premier Primary Rental Car Insurance – Only outside of the US!

This is where I think the Citi Thank You Card portfolio of credit cards fails. Citi Prestige provides primary car rental insurance only outside of the US. While this can be positive, I personally think Citi is missing the boat here in that for a premium credit card, primary rental insurance in the US should be standard.

American Express’ Primary Rental Car Insurance is an extra cost

So, you have your American Express Platinum card (personal $550, business $450), and you want to rent a car. Well, Be careful! Because American Express wants you to enroll in another program in order to be covered. In other words, so far as I can tell, you don’t get any coverage for the base annual fee. 

Wrapping Up

Overall, I was very surprised with what is, and is not covered by credit cards that offer primary rental car insurance. In truth, I expected coverage to be much better, given how much credit card companies promote this as a benefit. I was particularly surprised that business cards specifically do not cover pick-ups. I mean, how many businesses could see value in renting a pick-up truck over another vehicle? Similarly, “expensive cars” which is a vague term to begin with, are excluded from Chase credit cards coverage. So if you get an upgrade, you may be at more risk than if you had a standard car. Ironically though, a Cadillac Escalade is covered, but a BMW X5 is not. This is unfortunately both very confusing and frustrating.

Have you looked into what your credit card truly offers for primary rental car insurance?

AMEX Business Platinum is killing 50% rebate – Get some extra points!

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AMEX Business Platinum is killing the 50% rebate. I can’t begin to put to words how I feel about the matter. I’ve not even leveraged this particular benefit–it was only first announced in October. 

AMEX Plat, American Express Business Platinum, AMEX Platinum is killing the 50% Rebate

Image courtesy of American Express.

AMEX Platinum is killing the 50% Rebate – but what was it?

American Express enhanced the AMEX Business Platinum card benefits with a 50% rebate when you use Membership Rewards “Pay with Points” program. What does that mean?

  • For economy flights – you choose an airline, and Pay with Points and you get 50% back.
  • For Business and First Class – you don’t need to choose an airline, just do Pay with Points.
  • Expect to receive that 50% rebate 6-8 weeks later

Why is American Express pulling it back?

Perhaps the obvious reason is, that it is such a lucrative benefit that people might be using it more than American Express intended. I can’t blame people for using it. Nick had an excellent post to highlight the true value of the benefit. For many, it seemed like a no brainer. That said, some of us–me!–didn’t happen to have a huge cache of Membership Rewards points, and so with American Express rolling back the benefit so soon after rolling it out, those of us long time cardholders are left holding a bag so to speak.

American Express’ reasoning for giving new card holders better benefits than loyal cardmembers

When I called in, the reasoning I was given, was that the 50% points rebate was actually written into the legal terms. I get that, since its probably the 4th most highlighted benefit on American Express’ sales page. But, they really could give longer term loyal cardmembers a similar bonus, instead they are hiding behind the original terms of the application. 

Poorly played American Express! 

Getting a few more points

Reading this news, I was unhappy! I was almost as unhappy as I was with the Alaska Air no-notice devaluation of Emirates awards! So, I did what any normal, rational person would do. I called American Express and threatened to cancel my card! Incidentally, the statement closes tomorrow with my annual fee. Maybe that gave me a bit of an edge. I reached out to a few friends and the results varied.

  • My result: 10,000 Membership Rewards points for keeping my card open. 
  • A friend’s result: 15,000 Membership Rewards points (after initially being told to pound sand) because Massachusetts requires pro-rated annual fee refunds.
  • Unfortunately my wife, who’s annual fee is not yet due, received nothing, but her annual fee will be coming due soon.

Did you call to complain? Did you receive anything for it? 

Get up to $50 cashback with Discover Android Pay

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Discover was pretty awesome 2 years ago with Apple Pay, now, you we have the chance to get up to $50 cashback with Discover Android Pay

Discover Android Pay

The promotion is pretty simple, use your Discover Card with Android Pay for 10 transactions and get $5 per transaction, for a total of $50 cashback with Discover Android Pay.

Maximizing Discover Android Pay

How can you get that $50? Well, there are a number of retailers that accept android pay. One of the easier ones is staples, it could be as simple as 10 packs of gum across 10 transactions. 

Will you use Discover Android Pay more because of the $5 per transaction enticement?

Welcome to April! Q2 5x Opportunities

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We’re into April, which means that we have new Q2 5x Opportunities, courtesy of Chase, Discover and Citi.  So consider this a reminder to get out there and maximize your points and cashback.

Q2 5x Opportunities – Chase Freedom

Chase Freedom’s Second Quarter 5x is for Grocery and Drug Stores! Only a few years ago, this would elicit giggles of glee! But fear not.  There have been some amazing deals lately. Just look at this deal that Doctor of Credit shared, in which FQF decreed that you must use “Washtubs, not teaspoons.” While this deal has ended, history suggests that similar deals will come in the future.

Q2 5x Opportunities

Q2 5x Opportunities – Discover

Wholesale Clubs and Home Improvement. Spring is here! For homeowners, this is a great opportunity. For folks who frequent Sam’s Club and BJ’s Wholesale club, this is for you! For resellers; remember that Sams Club and BJ’s both sell a variety of gift cards, so if you can’t find products for resale, you could at least maximize your 5x by getting gift cards for stores that you can find products for resale. 

Maximize your Q1 5x

 

Q2 5x Opportunities – Citi Dividend

Citi Dividend gives us similar pleasure as Chase Freedom gives us, with drugstores. I’m not really sure how fitness clubs fit into the mix. Logically, that seems more like a first quarter thing, but maybe Citi is trying to remind us that we only have a couple months before we’ll want to look good in a swimsuit. As I think about it, maybe I do need to get to the gym a bit more…. All that aside, drugstores are great for gift cards. So, if your gym doesn’t give you $1500 worth of spend–and I hope it doesn’t!–then the drugstore is your option. Hopefully you don’t have some crazy, never ending cold, and instead can leverage some Vanilla Visa’s!

Maximize your Q1 5x

 

Conclusion

As we enter a new quarter, it avails us the opportunity to make a plan to maximize rotating category bonus rewards. Historically, second quarter is a pretty good quarter for maximizing, though I see a whole lot less of home improvement stores than in past years. 

What is your plan to maximize all of your 5x? How do you plan to do it, manufactured spending? Reselling? Organic Spend?

Targeted – Earn Bonus World of Hyatt Points

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A targeted promotion from Chase – Earn 4,000 World of Hyatt Points when you spend $4,000 on your Chase Hyatt Credit Card.

Bonus World of Hyatt Points,

How to Earn 4,000 World of Hyatt Points

It seems like a pretty easy promotion, spend $4,000 between 1 April 2017 and 30 June 2017 on your Chase Hyatt Credit Card, and you essentially get double points.

How can those points stack up? Well, Chase offers up a few examples:

Bonus World of Hyatt Points

It is important to mention that you do need to register – since its targeted, the e-mail link looks to be specific, but its hard to tell, because, as of this writing, the page comes up as under maintenance.

Overall, this is nice, because it could in theory stack with the World of Hyatt spring promotion of double points beginning with your second stay.

Did you get targeted for bonus World of Hyatt Points for spending on your Hyatt Credit Card?

 

Is it time to get more strategic about credit card applications? 

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In the past few months, we have seen a bunch of developments. We’ve seen greater restrictions, great new sign on bonuses, but, yet still, a new churnable credit cards. Is it time for a different strategy for credit card applications?

Greater Restrictions

Three of the big credit card issuers have made rather meaningful changes to how one receives bonuses, or whether one is approved at all.

The fact is, it is getting harder to churn sign-on bonuses.

Great New Cards and Sign On Bonuses

There have been some nice bonuses of late, although more importantly, is the growing competition in the premium card arena. Of note:

All indications point me toward the thought that this is not the end. We are still waiting to see what Citi will do with their devalued Prestige offering. I think we might also see a new Chase Business Card, as Doctor of Credit implies when he reports on the Chase Ink Preferred (link above). We might also see a new offering from American Express, although I anticipate it would be difficult to create a new offering without devaluing the Platinum cards.

New Churnable Credit Cards

Okie, we’re pretty weak here, I’ll admit, but there are a few churnable credit cards that may make sense.

So, yeah, the pickings may be slim here, but, for some, that may never have had a Delta AMEX (me!!!), there are other cards that are quite tempting.

Wrapping Up

My point in this post was my attempt at working out my own credit card strategy over the next 18 months. Normally, I work in 18 month timeframes, it seems like a reasonable balance between one and two years. Of course, 18 months used to be the magic number with Chase and Citi, that is changing to 24. So what is my conclusion? Given that my wife and I play the two player game, I might apply for cards, and let my wife sit on the sidelines–or vice versa, depending on her preference. The challenge here though, is the fact that there are some cards that just make too much sense to pass up, like the Chase Sapphire Reserve, when it was briefly leaked, which both my wife and I were successful with. So, yeah, I’m not sure what I’ll do if another Chase Sapphire Reserve-like offer comes about, but, barring that, I’m thinking its going to be the two-player game.

What will you do? 

 

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