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State of the Credit 2021: FICO? What FICO?

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Travel Credit Card Offers 5/29-6/5

Your excellent FICO credit score is worth less nowadays than it used to 10  years ago. That’s the truth. Just thought I’d let everyone know. 🙂

I wrote this post mostly for newbies in response to a few emails I received in the last couple of months. But even if you’re a veteran you can still find a few interesting tidbits (I think).

It’s been over 20 years since I began leveraging my solid credit file for free travel. It’s been eight years since I wrote my first book, Travel Free. It’s been six years since I released the Second Edition.

One would expect a lot of things to have changed over the course of 20 years, and they have. One thing hasn’t changed, though. One can still travel for next to nothing if they play their cards right (yes, pun intended!).

Has it become harder? You bet! 

But for newbies who haven’t been busy chasing credit cards with high welcome bonuses it’s much easier. Even today, during the COVID-19 pandemic. 

But first, the basics.

  • Pay off your balance every month!
  • Pay off your balance every month!
  • Pay off your balance every month!
  • Do not pay any credit card fees, as in ANY FEES AT ALL except the annual fee (and only when it makes sense).
  • If you occasionally incur a late fee by mistake (we’re still humans, not robots), call and ask them to waive it, but don’t make it a habit.
  • Use your miles and points wisely and don’t overpay – think of your miles and points as money. 

This is not your grandfather’s FICO score

This subhead might sound stupid, but no one cares nowadays if you have excellent FICO credit score.

Well, OK, let me walk it back a little. It’s not as if the card industry doesn’t care at all about FICO. It’s just the rules have changed.

Back in the day, anyone with an excellent credit FICO score and a pulse (in that order) could get as much plastic as they wanted. FICO was the king. You were almost guaranteed the approval if the bank’s computer received the right number from the credit bureau.

Nowadays, I wish it were that simple. Here are the enlightening words of David Rabkin, an AmEx executive VP.

FICO is not as helpful for the moment the way it used to. It’s still helpful, but we need to see a lot more.

Here, let me try and interpret what Mr. Rabkin means.

  • If you don’t have a decent FICO score, you’re still SOL. Nothing’s changed here. This is why FICO is “still helpful.”
  • But even if you do have an excellent FICO credit score, it might mean squat because there is still a whole bunch of other considerations thrown into that coveted approval of your application.

So what does your outstanding FICO score mean to card issuers right now? Watch and weep.

But doesn’t my excellent FICO credit score mean that I’m reliable?

Sure, and if banks were in the business of not losing money, they’d be all over you. Unfortunately, for their purposes, you and your FICO score are not that hot.

The times have changed. People simply aren’t paying as much in fees as they used to. The industry still enjoys great profits, but these profits are slipping. According to American Banker, late payment fees were halved from almost $23 billion in 2009 to less than $11 billion in 2018. Cash advance fees went down over $40 billion in just one year, between 2017 and 2018 (this number sounds kind of excessive to me, but that’s what their study says).

Does it mean the card industry is in trouble? Oh, no!

Interest charges and auxiliary fees used to be their profit centers, but in the last few years, these dynamics have shifted somewhat. The industry seems to be more focused on interchange (swipe) fees, and they have been rising steadily. That was the case even before the COVID-19.

This is where you supposedly come in with your credit card application.

Now the bank has the dilemma. Since they presume you might not pay interest and all the fees they throw at you, they at least want you to use their product(s) exclusively. Which is a tall order when you hold quite a few of the little plastic thingies in your sock and insist on optimizing every single transaction.

And did I mention that the card industry hates gamers? No? Well, they do hate gamers! And I suspect it’s not just business. It’s personal. 🙂

Here is how they look at you

If an honest dialog between you, a points junkie highly intelligent credit consumer, and the card industry were possible, it would probably go like this.

“Do you ever pay interest?”

“Never!”

“Late fees?”

“Ha!”

“Cash advance, balance transfer fees, foreign exchange fees, anything?”

“What are you, a comedian?”

“How about the annual fee?”

“Ugh, if I must. But that’s for the first year only, then I’m killing this puppy.”

“Fair enough, but are you using our card everywhere so we could at least enjoy the swipe fee off your purchases?”

“For the lousy 1% cash/points/miles back? What am I – a moron?”

Now you know why the industry isn’t impressed with your 800+ score. And every time you open up a letter and read something like unfortunately, we are unable to approve your request at this time – it’s them telling you where you should take your excellent FICO credit score and STICK it.

No, COVID-19 didn’t help either

Plus, there is a credit crunch going on right now. People are losing jobs left and right, so, of course, banks have tightened up the rules for new approvals. They don’t want to end up holding the bag.

Interestingly enough, though, the 2020 credit crunch is very different from the 2008 Great Depression. Before then, people were spending like there was no tomorrow. Today, people tend to know that tomorrow isn’t always bright, and they need to prepare for it.

“In the first three months of 2020,” according to Experian, “consumers on average kept debt increases minimal, improved their average credit scores and decreased delinquencies across all debt. In 2008, consumers saw debt spike significantly, improved their scores by only two points and reduced delinquencies at a slower rate than 2020.”

Basically, consumers seem to be more responsible, more aware and more cautious today than they were 12 years ago. And yet, banks are still tightening the belt.

So, I asked them why

At the CardCon Expo, the credit card conference run by my friend and money expert Jason Steele, I had a chance to “interrogate” a few very smart people.

The gist of their responses was interesting to say the least.

They aren’t convinced this is for real. Here is what I mean.

Bankers agree that consumers have been holding up quite well so far – but they think it might be because of several dynamics.

  • The stimulus and unemployment payments continue to substitute for the lost income (partially, of course).
  • People spend less because malls, shops, restaurants, bars, clubs, theaters and other venues are either closed or working at a reduced capacity. That doesn’t even touch on travel, which is almost totally shut down.
  • Banks are helping consumers to avoid delinquencies by extending their payment terms.

I would add that the eviction freeze might have contributed to the fact that people have more money on hand than they would have otherwise.

To recap? It’s not all bad

Getting these mouthwatering big juicy bonuses has become harder due to tectonic shifts in the credit card industry and consumer habits (and let’s not forget the COVID-19 pandemic), but you can still do your thing. Not the way we did 10-15 years ago with 5-8 cards app-o-Ramas, but newbies still have considerable advantages. Apply for one card at a time and space out your applications. Find your comfort level. Easy does it.

The vaccines are already here. This pandemic will become a memory one day, and probably sooner than you might think. And you’ll be ready to traverse the world on your own terms for next to nothing.

I could drink to that!

Featured Image by: GotCredit

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