Joys of department charge cards

If I was going to buy the item anyway and the department store was having a sale and I was to get an additional 30% discount tied to a charge card application, I took that option. It was not long before I had picked up a few charge cards which I have since closed. In case you did not hear of this from another source, the moment I closed them, much to my surprise my FICO took a bit of a hit. Though I did not understand it at that time, it seems the FICO gods punish you for terminating even meaningless financial relationships such as department store charge cards.

Bad news of charge cards is not limited to that. Here are some things worth considering:

1. And this required an inquiry: Even if you do not get the card, the pursuit of a charge card will involve an inquiry on to your credit report and that will cost you some points. The severity of those inquires is minimal beyond 12 months but if the habit is repeated you will be surprised how these things could add up. Note that auto or mortgage related inquires within a 30-day span are treated as one inquiry but this does not apply to charge cards. Wasting FICO points on an inquiry towards a department store charge card simply is finding new ways to make things worse.
2. It is not a credit card: Hence, when a financial institution is looking at my FICO to assess credit worthiness, instead of positively, if anything, these cards pointed to my feeble attempt to get any form of credit where the best I could do is a department charge card. In a wonderful game of chicken or egg, major credit agencies want to see other major credit agencies on your FICO report hence department charge cards border between useless and even more harm.
3. Not all stores do charge cards: Please note some stores have branded cards in cooperation with a large financial institution. For example, a major wholesale outlet and American Express might have a collaborative credit card. Please note this is a credit card and not a charge card as the party establishing the credit line is American Express, a major credit card issuer and not the wholesaler. The key is to remember that banks like to see peers on your FICO.
4. Percentage of credit used is often going to be bad: The way FICO is computed, a large number of things play in unison but your percentage of credit used on a single card plays a major factor. Even if only one card has over 50% credit used, it starts negatively impacting your FICO quickly. For example, you have a credit card for $3,000 and a charge card for $300. But because the store name matches the charge chard, you feel that $150 purchase should be on the charge card instead of the credit card. You are thinking your loyalty to that store will be rewarded but what you just did is informed to the FICO gods that you have used up 50% of your credit on one charge card when you could have put the same purchase on the credit card and it would have been only 5% credit used. This use of the charge card will punish your FICO.
5. Average revolving credit will suffer: Let’s assume you had two credit cards for $1,000 and $3,000 and happen to go to a store, noticed something you have to have, got approved for the store charge card and went home with your purchase. Lets us even assume the store was generous enough to give you $500 credit limit on your charge card. Beyond the fact that a single purchase on that charge card will make your percentage of credit used high until you pay it off, beyond the fact that each inquiry including this one will negatively affect your FICO even if for about 12 months, what you have done is harmed your average revolving credit for a longer term. Before you walked into that store, your average revolving credit was $2,000 ($3,000+$1000, with the whole thing divided by 2 for your pair of cards). If we now did the same math for your three cards, you just took it down to $1,500 a 25% reduction. Most often, any action that reduces your average revolving credit will harm your FICO.
6. The pain in closing these cards: Talk about timing but when I finally closed my charge cards I did it almost together a few months before I wanted to start the search for mortgage pre-approvals. I could not have picked a worse time to make such a horrible decision! I should have waited after the approvals to do this where it would have saved me money and grief. Needless to say, it went down. When you close out these cards I suggest you do it about a year or two before you need to apply for any new credit. Even if I had done it just after getting my mortgage, I could have saved myself a bit with better rates.
7. Average age of accounts: Like the mere act of closing them wasn't painful enough, I discovered this little problem related to charge cards years after I had closed them all. A car loan you got 20 years ago will still be on your credit history today. What I discovered is that those charge cards that at least were helping me keep a high average age of accounts (includes both open and closed accounts) all of a sudden some 5-10 years after I closed started dropping off my credit report entirely which in turn reduced by average age of accounts. The one remaining meritorious thing about those cards is also now gone.
8. Insult to injury: There is nothing as critical as making sure payments are made on time. Failing to pay on time even for a charge card will come to bit you a whole lot later. If you forgot to pay on a particular month, the store might be giving you a break for one month but it might come with a larger cost such an automatic increase of your APR on that charge card coupled with a report the FICO gods which could prove even more painful over the long term. Please note that any card with late payment did not go away from my credit report for a minimum of 5 years and but was all gone by 7 years.

I have thought about something good I would like to say about the charge cards even the fact that they saved me money when I needed it at that very moment. The truth is that when it is all added up, the pain far exceeds the value.

Last but not least, if you found this to be a waste of time in reading, my apologies to you. It is just an opinion but based on past experiences.

How I wish it all started

The short and honest truth is that I grew up pretty much financially irresponsible. I doubt many grew up any different but might have proved more responsible than me in their formative years. Well, I was not!

Don't get the impression I am mad at my parents. I am grateful to them for way too many things. But, they did not instill much in the form of good habits related to finances. They tried where they actually, I remember opened a checking account under my name but made sure all materials related to it were under their safe keeping so that nothing was lost nor mismanaged. Hindsight being what it is I wish they gave it to me so I can learn more from it.

This might shock many people but I had my first alcohol drink before I was 10. I to this day remember the buzz I got from it. And my parents gave it to me. It was important to them that I learned to properly handle my alcohol intake. I did have my brief undergrad and thereafter heavy drinking days but once I got to my mid to late 20s, those days were over. I was taught at a young age that past 25, most bad habits including smoking and drinking would end up affecting our body significantly where the damage could be irreversible. I had been told this so many times since I was very young that I today go around preaching this same choir.

Going back to the core issue, what I wish is that they gave me the same sense of responsibility about money considering both my parents are pretty responsible about finances. At least my mother is; my father is suspect; I am thinking I got those genes from him.

If and when I have kids, here is what I intend to do (it is so easy to make statements like this when one does not have any children):

1. Own checking account with on-line management: Kids need to understand ideally as young as possible (no, I am not a qualified child expert!) proper money management. Of course, if the parent is not an individual taking good care of own finances, it will be rather hard for the kid to pick up desired good habits. And parents are busy and hence might not feel the time to invest in this. But think of it this way. Do you want to be stuck with kids who can’t afford to move out well into their 20s?
2. Proper budgeting and handling of expenses: I am guessing parents are laughing out loud at this point. Consider this. Each kid knows the complete set of things he/she wants (not need). But, rarely do kids consider how much they each cost as they home the parents will solve the cost problem. I did not say don’t buy it, but don’t you want to teach them how much it costs? Looking back, I think the root of most of my problems was that I did not think my “wants” will really cost that much and I was willing to invest time into anything but doing the bills.
3. Own credit card: Note this is not a debit card. And no bank is going to agree to give a kid a credit card. Hence, it has to be with the parents as the guarantee. As for my reasons on why this is a good idea, I have a few of them:

• They do not need the credit: My little rule on FICO is that if you are going to do something to mess it up, do it when you do not need any credit. By the time you need the credit, make sure it is clean. A 12 year old kid does need credit. Even if the kid messes it up, the lessons on how long it takes to fix it I think will be well worth it. Many parents (as did mine) co-sign their kid's first auto loans. Don't you think the kid needs to understand why the loan under the parent's FICO is cheaper than under his/her own FICO? The kid did not need the credit at 12 but probably will by 16 or 17.
• It takes time to fix FICO problems: To get rid of most of my FICO messes, it took 7 years. I am guessing no kid will declare bankruptcy as that might take 10 years to clear. Would you rather they found out they messed up their credit when they are about to enter their 30s (as I did) or when they are in early teens and realize the cost of a bad FICO is going to be worse as times goes on?
• Need to build credit history: I got my first credit card while studying for my undergrad. I had no credit history before that point. And even that I messed it up nicely. There is a saying that there is no such thing as bad publicity. Today, even my bad credit history is to my benefit. As much as I hated that credit card that has me 30-day, or 60-day late on payments, that bad information is now all gone and what remains is history that goes back a long time. Imagine racking up history since you are a kid? By the time a kid gets to early-20s, he/she already has over 10 years of credit history! At that time, my credit history was barely 2 years old.
• Preemptive strike against stupid moves: Not that having a credit card in hand will necessarily prevent such moves, but when I got my first credit card, as you might have guessed by now the one I got was the easiest to get which was a department store charge card. Technically, that is not a credit card. I wish there is a way I can go back and reverse this moment but that that is now stored under lessons learned. I will write later about all the wrong with these cards.

Last but not least, if you found this to be a waste of time in reading, my apologies to you. It is just an opinion.