A Portfolio of Credit Cards for Specific Purchases?

Jenelle wrote in recently and described her way of using credit cards:

Unlike your advice to minimize your credit cards, I actually have eight open credit cards that I use all the time. These cards cover all of my purchases but each one has a particular bonus program that I can take specific advantage of. Twice a month, I just log onto the online service for each card and pay each one off in full.

In essence, Janelle is describing having a portfolio of credit cards, enabling you to use the one with a very high reward benefit with every purchase. In some ways, this plan does make a lot of sense, but there are some severe drawbacks as well. The trick is finding a routine that works for you. Let’s take a closer look.

My Would-Be “Credit Card Portfolio”
In order to figure out what this situation would look like for me, I went through all of my spending over the last month and figured out several general areas of spending, mostly based on where I spent the money. From there, I started looking for cash back credit cards (or those that offered cash rebates) that specifically lined up with those areas.

Gas expenses (21% of spending) could be shaved big time if I focused exclusively on one gas station. For instance, the BP Card earns 5% cash back on all purchases at BP, so if you use that as your exclusive station, you’ve got an immediate 5% rebate on all of you gas spending.

Other automotive expenses (5% of spending) could be covered by the Discover Open Road card, which gives a 5% cash back bonus on all automotive expenses.

Online shopping (21% of spending) allows you to use something like the Amazon.com Visa, which gives you 3% in rebates for all purchases at Amazon.com, which works well for us since we buy bulk items there, among other things.

Department store shopping (14% of spending) almost always offers a decent rewards credit card for in-store shopping. Since we mostly shop at Target (a Super Target is the nearest department store to us), we can get a card there that gives us a 10% off coupon for an entire shopping trip for every $500 run through the card. If you shop there spending $100 every trip, saving up big purchases to spend $300 when you have a 10% off coupon (saving $30), that means you save $30 on every $500 in purchases, or about 6% back.

Grocery store shopping (29% of spending) and other purchases (11% of spending) would perhaps best be covered by the American Express Blue Cash card, which offers 1% cash back up to $6,500 worth of spending, then 5% cash back on all purchases after that. If you spent $12,000 on the card in a year (by running some of your bills through it, for example, and doing all of your grocery store shopping with it), for instance, you’d wind up with an effective rate of about 3% over the course of a year.

So let’s say I spent $1,500 a month through these cards at the percentages described. On the gas card, I would spend $315 and earn $15.75 in cash rebates. On the other automotive card, I’d spend $75 and earn $3.75 cash back. On the Amazon Visa, I’d spend $315 and earn $9.45 in rebates. With the Target Visa, I’d spend $210 and get $12.60 back. On the remaining card, I’d spend $600 and earn $18 back. All told, my returns would be $56.55 over that month on spending of $1,500 – that’s approaching a 4% return on the spending. For my life, at least, it would work pretty well, at least at first glance.

Dangers and Drawbacks
As with anything involving credit cards, there are a lot of dangers and drawbacks to this plan. As I said before when commenting on the credit card “holy wars”:

look at credit cards as being like a very dangerous power tool. If you’re careful and take the proper precautions, they can save you time and shower some rewards on you as well. On the other hand, if you use credit cards with reckless abandon, you run the serious risk of some intense financial damage to yourself.

Using this “credit card portfolio” idea amplifies the above statement. A 4% return across all of your spending is nice, but it’s fraught with complications and potential traps.

There’s more maintenance effort. Having several cards with active balances on them means more footwork. As Jenelle described, she puts in significant time just maintaining the cards, going through a session twice a month where she logs onto eight different online accounts. Not only that, you then have eight accounts sending you all sorts of stuff in the mail – and you do get stuff, even if you opt out. Even if this whole process only added up to an hour each month, it’d still only net me a little bit more than the straight 3% I get from my current card use – is that extra hour of online busywork worth $14 or so? It isn’t for me.

There’s a greater risk of identity theft. Using this plan means you have more open lines of credit, which means a slightly increased risk of identity theft. If you have several cards, after all, it’s easier to lose one and not notice it for a while. If you have several numbers out there, it’s easier for one of them to be nabbed.

One mistake undoes the benefits. If you’re late even once on just one of these cards, you’ll undo the benefits you gained. In other words, to excel beyond just using one or two cards, you have to be eternally vigilant.

Having a lot of credit cards can make it psychologically easier to buy unnecessary stuff. “But I can get 4% cash back if I buy it” is not a reason that should be ringing through your head when considering a purchase. Instead, ask yourself whether the purchase is really worthwhile at all – ignore any “benefit” from the card.

Having a lot of credit cards with low balances and high credit limits can be bad for your credit score. Sure, your debt-to-credit ratio is low, but 10% of your credit score involves the types of credit you have access to and use, and having a lot of revolving credit is not a good thing.

Overall, there are too many drawbacks to such a plan to make it worthwhile for me. I’m not going to invest the time or energy to do that much card-hopping and account maintenance to just get an extra percent back on my purchases. I’ll stick with my original simple plan, I think.

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  1. Johanna says:

    Your numbers don’t work. If you spend $600/month on the Blue Cash card, that’s $7200/year, not the $12,000 you assumed to calculate your 3% reward. Instead, you’d get back $65 (1% of $6500) plus $35 (5% of $700). That’s $100, or 1.4%.

    Seems to me that if you spend that much on credit cards, it would be simpler just to use the Blue Cash for everything (assuming that American Express works for everything you want to buy). Once you’ve exceeded the $6500 in a year, there’s no advantage to using the gas card or the automotive card or the Amazon card instead of the Blue Cash card.

  2. Trent says:

    If you spent $18,000 on your Amex Blue over the year (that same $1,500 a month), you’d spend $6,500 at 1% and $11,500 at 5%, netting you a bit over 3%. That’s a solid plan if you run that much through your card, but I beat that with my Driver’s Edge alone and I don’t have to worry about Amex acceptance limitations or a need to charge up the card in order to get into the 5% bracket.

    As for the math being wrong, the “average month” was intended to be a truly average month. In real world usage, it would vary, so it’s impossible to gauge a “real” amount for the Amex Blue because it varies based on spending, so I used the estimate I calculated above.

  3. Trinity says:

    I think it’s well worth the time if you utilize the cards correctly.

    It’s not really that big of a hassle as you make it out to be. I don’t spend an hour paying my cards online and everything is filtered electronically through my email. Nothing’s sent really…so maintenance is low.

    As for your credit score, actually with the FICO changes, having multiple cards will INCREASE your score if they’re in good condition and balanced with other credit loans. This is not to say go open 30 credit lines but if you have 10 cards opened over the last decade or more then that’s fine. No harm done to your score, at least as my personal case proves.

  4. CP says:

    The Blue Cash is tiered based on types of purchase:

    Up to $6,500 in purchases:

    0.5% in General Purchases
    1.0% in Gas, Groceries & Drugstore

    Over $6,500 in purchases:

    1.5% in General Purchases
    5.0% in Gas, Groceries & Drugstore

    This card does not appear to be quite as attractive as illustrated in your posting, as “general purchases” earn much less than 5% once this $6,500 threshold is achieved.

  5. Justin Reese says:

    I have a pretty simple CC setup: I use no personal cards (pay with cash or debit card only), and use an AmEx SimplyCash for business purchases (paid off immediately after each purchase). No fuss, no muss.

  6. Johanna says:

    If $600 is what you spend in an average month, then $7200 is what you spend in an average year, so you should use $7200, not $12,000, to calculate your average reward. That’s how averages work (outside of Lake Wobegon). Your yearly spending can’t be both $7200 and $12,000.

    And if you calculate the total yearly reward, you will see that it doesn’t matter whether you put your gas purchases on the Driver’s Edge or the Blue Cash, as long as you’re already hitting $6500 on the Blue Cash anyway. It doesn’t matter whether the percentage reward for the Driver’s Edge is better than the average percentage reward for all your spending on the Blue Cash.

  7. CP says:

    The Discover Open Road Card has a relatively low annual purchase limit that can earn this 5% rate (especially for Gas Purchases), although in your illustration this annual limit would not be reached:

    Directly from the Discover Card Website, the following is stated:

    “5% Cashback Bonus on gas and everyday auto maintenance purchases for the first $1200 you spend in those categories every year.”

  8. FCC says:

    Awesome post!

    I’m a believer that credit cards do work if you use them right! So many people abuse them and blame the companies on their debt. If you can pay the bill off in full, you can save a lot.

    I’m a big fan of the BP card as well, it has saved me a lot of the years. Every penny counts :)

  9. gwen says:

    I don’t understand why people would have to log onto 8 sites 2x per month. Bill pay should be free. Just set it up to have each card as a payee. I check my account 1x per week and I know how much I have put on each card, so I just send that much out 1x week. Then, when the bill comes, it’s usually only a couple of dollars.

  10. Rob says:

    I guess I’m a little confused. You are willing to spend the extra time to make your own detergent to save money. But not the extra time it takes to log onto some websites and pay a bill?

  11. Dave says:

    The problem with multiple cards is definately keeping track of all of them. Most of the cards I see don’t just give you 1 or 5% off your bill, they wait until you get 5000 points which you then redeem for $50. If you’re only using your card for certain purchases, that could take years (after which, terms might have changed, or you could forget about it altogether). I have a cashback card that offers 5% on some things (gas, groceries) and 1% on everything else. So, I never lose track.

  12. I currently only have one credit card and I charge everything to it. I like the idea of saving money from all of the different types of cards, but i think the maintenance of so many cards would drive me crazy. Not to mention the fact I’d probably overlook something and get dinged.

  13. frugalrandy says:

    I recently got the Discover open road card to supplement my 5% BP card. The open road plan rebates 5% on tires and oil changes which the BP does not, unless you can find a mechanic that’s also a BP station. The catch on the open road card is you only accumulate 5% on the first $100 each month; spending above that mark gets a much lower number, maybe half a percent. $100 x 0.05 = $5 max per month, and you have to accumulate $20 in rebates to cash in. So that’s 4 months of consistent auto spending, and you can do that 3 times in a year ($60 on $1200) before it resets.

  14. Credit says:

    The following is false and represents a misunderstanding of the FICO model.

    “Having a lot of credit cards with low balances and high credit limits can be bad for your credit score. Sure, your debt-to-credit ratio is low, but 10% of your credit score involves the types of credit you have access to and use, and having a lot of revolving credit is not a good thing.”

    Having a lot of credit cards with low balances and high credit limits will increase your score. Having a lot of revolving credit is a good thing for FICO. The second sentence makes no sense at all.

  15. Journeyer says:

    I have to agree that there are too many dangers in having a “portfolio” of credit cards. This should ONLY be considered by those that are extremely disciplined in their use of the cards and confident in their ability to make full payments each month.

    I used to keep a credit card for the rewards program, but I was kidding myself about the economy of it. I was paying more in interest that I was earning in rewards because I wasn’t paying it off in full each month.

  16. Alexis says:

    I have the Target Visa, and it’s every $1000 at Target spent (or $2000 elsewhere) to get the 10% off coupon. Is there another Target card?
    Also, I have the Discover Open Road card, but sadly Discover isn’t taken at a lot of automotive places I’ve been. It’s still worth it for gas!

  17. JFunk says:

    I find it funny that, all other factors being equal, an hour of “busywork” a week isn’t worth $14 to you, but you’re willing to wear socks with holes in them, routinely go through your house daily to turn off lights and unplug appliances, and reuse disposable sandwich bags.

  18. Frugal Dad says:

    @JFunk: I do a lot of those other things, too, and for me they all represent cost savings with zero risk. Carrying a handful of credit cards to earn a few dollars in cash back or rebates involves a significant amount of risk, as Trent points out in the article. I could see this type of plan working for the ultra-organized, but I’m trying to move towards a simpler life, financially and otherwise.

  19. Luke F says:

    I still think this is a good idea to at least consider. Might as well get the most bang for your buck, even though it is a bit of a hassle!

  20. Bella says:

    It’s a good technique. I do a similar technique except in “Jars” as I read in a T. Harv Eker book.

    I am wondering if you have an idea of what should rrepresent, in percents, every type/area of expenses… you seemed to use some (21% gas, etc.)in your article, are they random?

    Thanks! Great job again!

  21. Sharon says:

    I have found BP gas to be so expensive that it would negate or nearly negate any 5% discount.

  22. Matt says:

    I agree with the gasstation comment — BP is always expensive.. and having to find one when you need to fill up may also help negate the benefits. I use the Chase Freedom card for everything. So my Gas and Groceries are always 3% off per month, and then whatever other big item per month is also 3%.. everything else is 1%, which isn’t much. Here’s what Chase Freedom is, copied straight from my credit card account. The $250 for $200 rewards gives you another 25% reward on top of that, if you’re willing to save up:

    You earn 3% cash back automatically on purchases in the 3 everyday categories where you spend the most each month.* There are 15 categories in all. Your spending habits may change from month to month — the triple rewards you earn for them will stay the same. You also earn 1% cash back per dollar on all other purchases. Here are the categories:

    Gas Stations & Convenience Stores
    Grocery Stores
    Quick Service & Fast Food Restaurants
    Utilities (Gas, Electric, etc.)
    Drugstores
    Cable/Satellite TV & Internet Providers
    Department Stores
    Pet Stores & Veterinarian
    Phone/Cell Phone Bills
    Movie Theatres
    Gym Memberships
    Beauty Salons & Spas
    Movie Rentals
    Dry Cleaners
    Local Commuting
    You have a choice when it comes to rewarding yourself:

    Reach $50 in rewards and redeem for a $50 check, or
    Save up $200 in rewards and redeem for a $250 check – that’s a $50 bonus!

    The only other cards I actively use is a Kohl’s card when necessary to get 30% discounts, and my fiance’ has a Meijer card for $.05/gallon and additional 2% off gas purchases when we’re near a Meijer, and 10-20% GM and 5% off food days.

  23. Matt says:

    And what’s with all the idiots who post comments trying to insult Trent? Whether it’s the amount per year he uses in his example, or whether he feels identity theft and accounting time isn’t worth $14/month… someone has to make a stupid comment and put down basic arithmetic to make themselves feel smart. It’s his IDEAS that matter, not his math. If you haven’t figured that out yet, please stop coming to this site (or at least, stop posting).

    And with the credit card comment: It DOES make a difference what type of credit you possess. Credit reporting agencies care if you have a large amount of debt you can pull from, because revolving credit cards are easily accessible (and are hence a credit risk). I should know, I worked with credit card companies for 2 years.

  24. I agree Trent. Having a portfolio of credit cards would put me into serious jeopardy. A few years ago, I opened a United Visa with the plan to run all my purchases on it and rack up serious miles. Instead, I charged some things I didn’t really need, got close to the credit limit, and have yet to earn a single free ticket or upgrade. I’m closing that card this month. For people who are disciplined enough to pay in full, rewards are great. For folks like me. . . well, there’s a reason the credit card industry is the most profitable one in America!

  25. George says:

    Trent, I agree with your overall conclusion. Its not worth it. There is greater risk of identity theft. The more credit cards you have, the more you end up on some mailing list for unsolicited credit cards arriving in the mail. Yes you are also correct about being late on a payment would undo the benefits. Its very easy to misplace a bill with that many credit cards. I think the most compelling argument is ruining your FICO score. Too many credit cards do impact your score in a negative way and this could cost you a lot of money in higher interest rates.

  26. margo says:

    Mydailydollars,

    You are not alone. I consider myself to be still operating with “training wheels” so far as credit cards are concerned. I ran up some serious debt in college when I was blissfully naive to the whole credit card scam. Now, 6 years out of school and 4 years out of that debt, I’d still rather keep some credit open for emergencies and the very occasional splurge– which is then paid off within the month– and pay my bills and buy groceries, etc. out of my checking account.

    I’m still not sure I could trust myself with a portfolio of credit cards promising me cash back. I suspect the “but I’ll earn 3/4/5% back!” would be a little too persuasive for me.

  27. I think that i would just get into trouble if I had more than one or two credit cards.

    Oh, wait! I did get myself into trouble trying to keep track of about 8 credit cards 6 years ago!

    I remember my wifes Victoria’s Secret Credit Card tthat we used to “finance” her underwear!

  28. yoth says:

    Matt,

    This is a blog where comments are allowed. I don’t think that questioning the math is harmful and certainly don’t understand why, if it is only the idea that is important, we need examples with numbers where math is involved. Certainly I don’t see why using real cards as examples would be good in that scenario.

    A good number of people come to the blog, IMO, because the opinions expressed here appear to be grounded in fact with solid examples. If the details are fabricated, that’s fine, as long as it’s stated. It’s a blog and creative license is expected. I just think that it’s expected that the readers will be told when it is taking place.

  29. yoth says:

    Now, that said, here is a website discussing FICO scores http://financialplan.about.com/cs/creditdebt/a/FICOCreditScore.htm

    They state the following:

    The formula used to calculate your FICO score includes information based on several factors:

    ~ 35% on your payment history
    ~ 30% on the amount you currently owe lenders
    ~ 15% on the length of your credit history
    ~ 10% on the number of new credit accounts you’ve opened or applied for (fewer is better)
    ~ 10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)

    Note that they say “new credit accounts” not “credit accounts” so I think that it’s safe to say that you could open all of these accounts and, if you keep them long enough, there will be no negatives directly associated with it. All credit is new at the beginning so the only way to completely avoid this issue is to never get a credit account.

  30. CallingItOut says:

    @Matt
    “And what’s with all the idiots who post comments trying to insult Trent?
    … SNIP …
    It’s his IDEAS that matter, not his math. If you haven’t figured that out yet, please stop coming to this site (or at least, stop posting).”

    So what your saying Matt is, “I’m and idiot and Trent has all the ‘right’ answers and anyone that dis-agrees should take a hike and in fact they are an idiot?” You should wake up/pull your head out of the sand/quit following the flock and realize that it’s in everyones best interest to think independently and challenge any notion that doesn’t fit with their values and above all knowledge base. That’s not to say there’s not value in what Trent’s writing, but it’s each person’s responsibility to evaluate what he writes about. As he’s said many times, the passion for writing is in his being, it’s in his sole. With that comes words and creativity. One’s passon for writing doesn’t make them a financial guru because they have a wonderful and entertaining writing style.

    If you THINK this site is the absolute core of personal finance you’d be sadly mistaken. Read the footer and you will be reminded:

    “This site is for entertainment purposes only. Trent is not a financial advisor and no information found on this site should be construed as financial advice.”

    So Matt (resisting the temptation of calling you the same name as you called some of Trent’s readers), back off just a bit and take this site for what it is…recreational reading; no more, no less.

    As a response to this subject, all the rewards in the world or the potential positive impact on my credit score wouldn’t make me sign up for unnecessary credit card. Cards can be a wonderful tool IF they are managed. In the same breath; BUT they have enabled people to spend beyond their means in an “easy” and perceived “convenient” way. Nothing is free…someone somewhere has to give up something for the “perks.” I have a card (zero monthly balance)that’s used out of convenience since I don’t often carry cash.

    I don’t feel good about using the card when I think of the collective damage they have enabled in our society. The perks don’t mean squat and individuals that get cards for them should really evaluate their personal finance goals.

  31. DB says:

    @Matt wrote “It’s his IDEAS that matter, not his math.”

    While I don’t argue with the intent of your post, I would argue that when the math is used in support of, and often to justify, the idea (as in this case) and convince the reader, then certainly the math DOES matter. If the numbers didn’t matter, they wouldn’t be used in support of the argument.

  32. Credit says:

    Matt: More credit cards with higher limits will increase your FICO score over time. It is important to correct false statements. In fact, to not do so would be disrespectful and causes people like George to misunderstand the impact on his FICO score, which could cost him thousands of dollars. I’m not sure what you do for the credit card company, but it’s clearly not in modeling or risk assessment. Similarly, checking the numbers or providing other perspectives increases the value of information presented on this website as long as it’s done respectfully.

  33. Jim says:

    There is good advice on both sides of this arguement. I use 3 cashback cards. That is a number that is easily managable for me, requires very little time (actually none if I were lazy because I have them set up for an automatic draft from my checking account each month). I get email and snail mail reminders when and how much will be drawn out. I do like to check and make sure all the transactions are accurate (about 10 mintutes a month. I maximize some of my payouts by getting vouchers from allied merchants that I will be buying from anyway, but mostly I take cash. BEST THING OF ALL, the payout is not taxed by the IRS. It’s the only way I know you can legally avoid taxes while earning money. I have 2 cards that give me 3-5% on specific purchases and one that gives me 1.4% (Emigrant MC)on all purchases, but it does require $10K in a savings account.

  34. Jon says:

    I’ve got 2 rewards cards.

    One is the Chase PerfectCard, which gives 3% cash back on gas. There is no need to accumulate points or a certain amount of money, you just get 3% back on your next statement (even if it’s only $0.50, which has happened).

    The other is the Chase Freedom card, which someone else mentioned. I generally spend enough to max out the $600 cap on the 3% cash back. I’m doing the $250 for $200 thing so the effective rate is 3.75%. Of course, anything over $600 is only 1% cash back. That’s the reason I got the gas card.

    So I pretty much get around 3% cash back. Since both cards are with Chase, there’s only one website to visit to pay bills. There’s also the option to automatically pay the full statement balance without having to log in, but I prefer looking over it anyway.

  35. Norman MIller says:

    I use the Amazon.com Visa card and I’ve very happy with it.

    I read alot as a hobby and use the $25 certificates to purchase books.

    I joined Amazon Prime to get the 2 day shipping free.

    I also buy a lot at Amazon.

    The $25 certificates go a long way to paying for the Prime membership and getting me free books.

  36. Allie says:

    Although the cash back or rewards does sound good, it seems like a lot of work to keep track of 8 cards. That’s 8 separate bills to check for accuracy, 8 different payments, and 8 different due dates to make sure you don’t miss. Missing just one of those payment dates would ruin the low interest rate (if you carried a balance) and would hurt your credit score. That seems like a lot of risk and headache for a small reward.

    For me, using two cards that give me the best rewards for the bulk of my purchases is a lot easier and safer. I guess it all depends on your risk/reward personality.

  37. JReed says:

    We do use several cards and while we get checks back from these companies, it is really the ease of bookkeeping that prompts us to do so.
    Each card has its purpose written in permanent marker right on the face. Health (we use hsa’s, so this gets paid right out of the hsa accounts);
    Material and supplies (paid out of business account; Gas and vehicle expenses; and Personal.
    The material/supply card lets me type in job names for each receipt, so that helps me when billing customers. Because two people are charging on the same accounts, the magic marker titles on the front keeps it consistent.

  38. Margaret says:

    I think it is fun to log onto different accounts and track the balances etc etc. Geeky, maybe, but fun. So for those people with the discipline and inclination, why not juggle the rewards to your best advantage? If you don’t enjoy that or find it too risky, then don’t. I don’t think it is odd to want to make homemade laundry soap but not juggle accounts. From what I’ve read, Trent sees the laundry soap as one big batch of fun slime science that also happens to save money. I personally am not interested in making the soap, but I would have fun with the accounting, so I’d be more likely to do that.

  39. Matt says:

    I can’t believe I have to requote myself to rebut yoth and credit’s statements. Sheesh:

    “And with the credit card comment: It DOES make a difference what type of credit you possess. Credit reporting agencies care if you have a large amount of debt you can pull from, because revolving credit cards are easily accessible (and are hence a credit risk). I should know, I worked with credit card companies for 2 years.”

    Yoth even put it down straight from the credit reporting agency: “10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)”

    The only way more credit cards with higher balances will improve your FICO score over time is if you’re comparing your score to what it was the minute after you signed up for all these credit cards… since, from yoth again: “15% on the length of your credit history.”

    And the point about the math was that people would rather focus on whether $6000/month or $7200/month or whatever per month is accurate, instead of the fact that the logic was sound. I mean, you might as well argue that Trent suggesting $1500/month spent on a credit card per month is $18000/year (anyone want to correct my math?), which is ridiculous and I’d be surprised if even 5% of credit card users hit this mark.

    And @CallingItOut… thank you so much for telling me what this site is. I had no idea that a blog called TheSimpleDollar wasn’t a professional financial website. Thanks for the update!

  40. Trent says:

    ANY online personal finance site you read, whether it’s “professional” or not, is for entertainment purposes only. An article written for a general audience is ALWAYS intended for entertainment purposes, whether it’s here or on MSMoney or the Wall Street Journal. I put that disclaimer there to make it clear to people – I think that’s the honest thing to do.

    As for this whole mess about the interest rate, the interest rate on that last card doesn’t matter. You can make it 1% (the worst rate you can get from Amex Blue – and if you were spending that much each month, you WOULD get better than that) and the argument still holds – the portfolio interest rate is still above 3% (3.17%). I arbitrarily made it 3% because the spending on that last card is going to be by far the most variable – you can’t pigeonhole it. Sure, you could come up with a calculation and pin it to some number between 1 and 5, but the argument still holds even at the minimum, so it’s basically pedantic.

  41. Rhonda says:

    hmmmm…all of that, plus the temptation of overspending on all those junk offers to save $14.00 each month? I save over $200 each month by sensible shopping and grocery coupons…it does take time (I’ve got 35 years in doing this)..but there is no risk from those “dangerous power tools”…

  42. Credit says:

    Yoth and Matt:
    Both of your analyses of FICO scoring models are wrong. The percent breakdown, scoring codes provided, and most advice on finance websites is either misleading or incorrect. The percent breakdown makes people feel comfortable with modeling because if the default modeling procedure was explained it would not make sense to most of people. However, it’s misleading because the actual variables used in the model include interactions between things like mix and length of history. These variables are quantified in ways that don’t follow the logical arguments that people make on most websites and if they were explained it would be easier to manipulate. In addition, the model is non-linear and you are assigned to a score card that determines how the variables are treated depending on your credit profile. The scoring codes are almost as misleading as the percent breakdown because the quantitative model cannot be translated into a logical sentence. Unfortunately, most web authors and people on TV do not understand modeling and try to simplify things so that they can write a nice concise article or TV segment with seemingly logical statements about how variables impact your score. However, in many cases including on The Simple Dollar the advice provided will decrease your potential FICO score. Finally, I reply because I value the content of this website. I have used many ideas on this website to streamline my life and in appreciation I would like to provide advice that others may use to save some money. Unfortunately, default models like FICO are used for all kinds of things including most insurance products, mortgages, car loans and credit card interest rates. Certain decisions like closing credit cards could cost thousands of dollars potentially nullifying years of coupon clipping and laundry detergent making.

  43. Trent says:

    Credit, a big part of the problem is that FICO keeps the formula for credit cards a trade secret, meaning that no one outside of Fair Isaac truly knows how they work. Our best bet is to interpret what they say, and that’s a sticky wicket.

  44. Credit says:

    It’s just a simple risk model for the probability of defaulting on credit obligations. They normalize the probability to a convenient score. If Fair Isaac revealed all the model coefficients, people could easily manipulate their score, which would make the score useless. There is so much money being made on the scoring models that it not be smart to post inside knowledge on your website. However, it is clear and in public domain that closing cards (especially old ones) will lower your score over time. Having many cards with high limits and low utilization will increase your score over time. Secured credit obligations like car loans and mortgages have less of an influence on FICO score, but having a few of them generally increases credit score. These things have an impact because the people who had that data in their file were more or less likely to default on their credit obligations when the model was developed or updated. It’s not perfect, but it’s better than people not getting a house because of the color of their skin.

  45. yoth says:

    Credit: I stated that increasing credit would not decrease a FICO score over time, while you stated further down that more credit cards with higher limits would increase your score over time. The original blog entry stated it would hurt your score. If you agree with your comment you must agree with mine. Both agree that it will not harm your credit score long-term although I mentioned (I thought tongue in cheek) that you could only avoid any harm by never getting any credit cards. You agree with the general sentiment that the blog entry has inaccuracies and Caveat Emptor.

    Matt: Your assessment was the extreme that I was (I thought) humorously calling out: the only way to avoid impact to your credit score is to NEVER get your first credit card. If you ever get one then you would be hit with the penalty of having opened a new line of credit, right? You cited length of credit, but I think that applies to the aggregate not the individual line of credit. Maybe it’s referring to average credit length but that would not be likely, I think, as it would heavily skew against those with a new line of credit. You also called attention to the distribution of credit. I don’t know if that is based on dollars or number of credit lines? Maybe Credit could speak more to these matters and perhaps dedicate a blog to this matter?

    Also, accuracy importance; you are right, the numbers don’t matter to you and maybe a good number of others. There is a recent blog entry on TSD covering left versus right-brained personal finance. This is potentially an example of the dialogue difference. Irritation at mathematical anomalies (notice, I’m not saying inaccuracies) are unimportant to you. It’s important to others, though, and to keep those people satisfied with this blog and driving revenue to TSD, that accuracy has to be present.
    Maybe there could be a retractions/corrections section at the bottom of the entry?

  46. I used to have about 6-8 going, and that was indeed too many for me to keep up with.

    Now I have a Discover Gas(5% back on gas), an American Express Citi card(4% back, but I can use it at Costco, and it has something like 4-5% back at drugstores and grocery stores), and a Chase Freedom card. All of these save the Discover card also have a 1 point per dollar kind of thing for purchases that aren’t gas or drug or grocery stores.

    I also have some other random cards that give me coupons regularly just for owning them(Victoria’s Secret and JCP), but I don’t usually use them.

  47. JReed says:

    I don’t see this as for entertainment purposes only….I use this site to gather information on what other people are doing to stretch their incomes and manage their money. I learn from Trent but I learn much more from the other bloggers…they are a sharp and shrewd portion of the educational value of this site. Accuracy and truthfulness should be valued and acknowledged.

  48. Credit says:

    Yoth:
    I agree with your conclusion, but not with the analysis, I should have been clearer.

    Several brief points on FICO scoring that are in public domain are below.

    General modeling: The purpose of a FICO score is to estimate the probability you will not pay your bills. Fair Isaac gathered a large amount of data for people who did and did not default on credit obligations and what was in their credit report. Using this data, they developed a model that is applied to your data. The model does not make value judgments and should be relatively unbiased, but it isn’t perfect because of variable choice and inaccuracies in training data. Also, the model may contradict what you logically deduce about credit scores including the less cards/lower limits is better fallacy.

    Scorecards: You are assigned to a scorecard or sub-population based on information in your credit report including people with bankruptcies, no late payments, thin files, etc. Data in your file will be treated differently depending on your scorecard. For instance, someone may lose points when a bankruptcy is removed because they moved from the bankruptcy scorecard to a non-bankruptcy scorecard and compared to the new population they are predicted to be more likely to default. However, they may have a higher potential score in the future on the non-bankruptcy scorecard. Similarly, someone with a thin file scorecard may lose more points for inquires or utilizing a high proportion of their unsecured credit limits than someone with more established credit. The scorecards and models change continually to account for trends and improved modeling techniques.

    Many banks have their own internal scoring models that may incorporate FICO score and other data they feel is not represented well with FICO, but are important to them including income, job type, zip code, and the number of doors on the car you drive. They may try to get this information from you and/or a database like ChoicePoint’s. Also, upon manual review they may ask you to do things that will lower your FICO score, but make them feel more comfortable like closing credit cards or lowering limits.

  49. James says:

    Credit cards are controversial. However, in my view its probably better to avoid credit cards all together. Just get a debit card or check card and go to all cash. Why bother running the risk of incurring high fees?

    Best,

    James

  50. I have two different gas cards (Discover Open Road and Pentagon FCU) for 5% back; Amazon Visa for 3% back on Amazon stuff and extended warranties; and an AmEx card for eating out (3%) or Costco.

  51. Fantastic post! I wholely agree. Well put.

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