FICO Fundamentals: Understanding Your Credit Score
Many people, even my family and friends, do not get what I do in this miles and points hobby. Even to this day after so much amazing travel largely paid for with miles and points.
Why people don’t get it confuses me. Banks are willing to give us a bunch of miles/points if we get their credit cards! All you need to do is be disciplined, pay the card off in full at the end of EVERY month, and then enjoy free travel or for sure save a lot of money when traveling.
As the expression says: It is not rocket science! One repeated objection I hear is that people have excellent credit scores and this will ruin it. No, it won’t!
Ok, since this is a common objection, let’s take a look at the topic of credit scores and learn all about your credit score.
Whether you’re a newbie or a veteran when it comes to understanding how your credit scores work, you’ll learn a whole bunch from reading and taking in this information.
It’s been over 10 years since I began leveraging my solid credit file for free travel. It’s been nine years since I co-wrote my first book, Travel for Free. And just so you know, Travel for Free has been updated many times.
One would expect a lot of things to have changed over the course of those years, and they have. One thing hasn’t changed, though. You can still travel for next to nothing if you play your cards right! Yes, travel credit cards played right gives you a full travel deck 🙂
Has it become harder? You bet!
But for those new to the miles and points hobby, 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.
Does Anyone Really Care if You Have an Excellent FICO Credit Score?
Sort of. No one cares nowadays if you have an excellent FICO credit score.
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 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 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.
Let’s interpret that a bit:
- If you don’t have a decent FICO score, you’re still out of luck. Nothing’s changed here. This is why FICO is “still helpful.”
- But even if you do have an excellent FICO credit score, it might not carry enough weight because there are other considerations thrown into approvals on your application.
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, you’d have every card you ever applied for. Unfortunately, for their purposes, you and your FICO score are not what matters most.
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.
Does it mean the card industry is in trouble? Nope, not at all.
Interest charges and auxiliary fees used to be their profit centers, but in the last few years, these dynamics have shifted. 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.
That’s a tall order. Why? Because you might hold quite a few of theses credit cards and insist on optimizing every single transaction. And guess what? The credit card industry frowns upon you using cards in this way. They want ALL your business to go to them!
When you don’t pay interest, late fees, take cash advances, or pay foreign transaction fees AND you ARE NOT using their card everywhere so they can at least enjoy the swipe fee off your purchases, are you really that valuable a customer to them??
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 your excellent FICO credit score isn’t impressing them one bit.
No, COVID-19 didn’t help either
Plus, there is a credit crunch going on right now. People are losing jobs, 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.
And yet bankers have their own take on this topic.
Bankers agree that consumers have been holding up quite well so far – but they think it might be because of several current 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.
It’s not all bad news though, if you’re looking to score some free travel using miles and points gained from travel credit cards.
Getting these big juicy bonuses has become harder due to shifts in the credit card industry and consumer habits (and let’s not forget the COVID-19 pandemic), but you can still enjoy the hobby! Especially if you’re a newbie. Newbies still have considerable advantages. Apply for one card at a time and space out your applications. Find your comfort level. Easy does it.
As hard as it might be to imagine, this pandemic will become a memory one day, and maybe even sooner than you might think. And then we’ll be ready to travel the world for free or almost free!