The biggest problem created by reward chasing (which I do, by the way, and heartily endorse) is that you can wind up hurting your credit scores if you chew up a big chunk of your credit limit—even if you play the game right, by paying balances off in full. I try not to use more than 30% of any card's limit (the lower the better; under 10% is ideal). If your issuer won't raise your limit, you can make two payments: one a few days before the statement closes, to reduce the balance reported to the credit bureaus, and another right before the due date to pay off any remaining charges.

PREVIOUSLY: Is It OK To Use Credit Cards For Everything, If You Pay Them Off Every Month? (Photo: crazyBobcat)

Rebekah asks:

I was wondering about Credit Cards. Specifically having to do with keeping multiple with no balance vs. none at all. How much does your credit rating get hit when you open a credit card, even if it is a store card? My husband & I pay off our credit cards every month but put everything on them for points reasons & to track our spending. We like to take advantage of the credit card offers with points attached to them since its an actual reward you can use, but is it really worth it?

Would we better off in the long run paying for the reward to ourselves?

First of all, congratulations on paying off your balances every month! Now, as far as having multiple credit cards open with no balance, I'll assume that we're talking about a few credit cards — and not some crazy high amount. Sound fair? Ok.

There are several factors that go into your credit score. You're asking about two of them: Recent credit inquiries, and total available credit.

Credit inquiries fall in a section of your credit score called "New Credit." This section makes up 10% of your total score. When you apply for new credit, (like a store card, or a credit card) a note is made on your credit report and it is figured into the "New Credit" portion of your score. Everyone's credit is different. Here's how Fair Isaac, the company that issues FICO scores, explains the situation:

Inquiries are a subset of the "new credit" category shown above, which accounts for 10% of the total FICO score. Their importance depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history.
...
For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO score at all. For most people, a credit inquiry will only decrease their FICO score by a few points.

Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.

So unless you've applied for six credit cards in the last few months, you should be OK, which is why for the sake of this answer we're assuming that you're not a compulsive credit card collector.

Now, on to the second part of your question. Is it OK to have multiple credit cards with no balances? Yep, that's just fine. Having multiple cards affects your "credit utilization ratio." Only you know how many cards we're talking about here, but the basic idea is that your credit score is affected by how much of your total available credit you've used.

Think of all of your credit cards as a big pizza. When you borrow money, that's like eating a slice of the pizza. The FICO score reflects how much pizza you have left. When you close an account — you're starting with a smaller pizza!

Now, this doesn't mean you should go out and apply for 90 million credit cards, but it also means that you shouldn't worry about having more than one card.

Here's how Fair Isaac explains it:

Say you have 3 credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500)
Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
Credit utilization ratio = 30% (2,000 divided by 6,500)

Now, if you decide to close credit card 2 because it's an old card that you never use, your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500)
Total available credit = $3,500 ($2,000 + $1,500)
Credit utilization ratio = 57% (2,000 divided by 3,500)

You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.

And finally, are credit card reward points worth it?

If you follow a budget and are not spending more in order to "earn" points — then yes. There's nothing wrong with using a credit card to collect points on things you would have bought anyway. The trouble is that many people don't actually do this.

Reward points are there to get you to spend more, and if you're worrying about it enough that you're writing in to us, perhaps you should take a look at your budget and decide if you're really getting a good deal.

Will closing a credit card account help my FICO score? [MyFICO]
Credit Inquires [MyFICO]
(Photo: ChrisB in SEA )

Credit card companies know that cash-strapped consumers are likely to start tapping their unused credit cards, and possibly default on the payments, so they're cutting off lines of credit for inactive accounts. Cynthia and her husband, who say they both have "excellent credit scores" and "use their credit wisely," came back from vacation to find three Citicards canceled due to inactivity. The last time they used them was last holiday season, and the cards had $14,500 in credit available on them.

While the credit card companies are completely within their rights, cutting off lines of credit can bring down people's credit scores because it decreases their amount of available credit, a factor in your FICO. And while closing inactive cards has always happened, the pace and scope has greatly increased in response to economic downturn. "I had read in the news that this would be a tactic credit card companies would be using, but I was surprised at how quick it actually happened," said Cynthia.

(Photo: yksin)

One good thing about PRBC is that your credit file is yours to view and share, and it doesn't cost you anything to access it.

The bad news: it's not free. If you use one of their online bill pay partners—Account Now, Billeo, or CheckFree—you'll have to pay PRBC $5 per month to have your payment information reported back to them. [Note: We incorrectly wrote that Billeo charges $5 a month for their services, when in fact Billeo is free to use for online bill payments, bill tracking, and reminders.] If you opt to pay your bills some other way or want to confirm past payments, the PRBC charges you $20 to verify up to 36 months of rent, and $15 for other types of accounts such as phone or cable.

Ultimately, we're not convinced a PRBC alternate credit history will help you secure a loan or a lower interest rate, and it may all be moot anyway for the next few years as lending grows increasingly scarce. It might help you with something like an apartment lease, though. If you're a young person with no real credit history, or someone who got financially slammed from a medical disaster, it may give you a way to prove you're not a deadbeat.

Payment Reporting Builds Credit
"Finally, Credit For Paying the Bills" [Washington Post]
(Photo: Getty)

Credit Karma [Official Site]

CreditCards.com reports that FICO announced it changed its mind during Congressional testimony yesterday.

Back in the day, adding an authorized user to your account was mainly used by parents to help their kids develop better credit scores. As the housing bubble ramped up, private credit score boosting companies would "rent" authorized user slots to strangers with poor credit so they could qualify for loans they shouldn't have. It was a contributing factor to the subprime meltdown. When FICO developed a new scoring system, FICO 08, in direct response to the credit checking industry's failure to accurately check and score credit, they said they were going to kill piggbyacking.

"Fortunately, we were able to come up with technology that makes it much harder to game the system," said Mike Campbell, FICO COO.

That's good news for responsible consumers looking to get better rates on their credit cards, mortgages, and other loans.

'Piggybacking' gets stay of execution from FICO [CreditCards.com]
(Photo: Special*Dark)

• CreditKarma.com: Gives you your TransUnion score. Advertising-supported.
• E-Loan: Experian score. Scroll down to "One-Time Credit Snapshots" and "Free Credit Score (Credit Score Only)"
• Prosper: Experian score. Information on how to do it here.
• LendingClub: Gives you a letter grade score, which you can use this chart to translate to a numerical score.
• Washington Mutual Credit Cards: Get your Transunion score when you log in.

• Another way these are useful is that if you check in periodically and keep track of the results, you can see how your score fluctuates and try to correlate its delta with any credit-related actions you took during that time. But, if you're shopping for a loan or a mortgage, you will definitely want to pony up the cash and get your real FICO score.

  [via MyMoneyBlog]

The FTC claims that CompuCredit didn’t properly disclose that it monitored spending and cut credit lines if consumers used their cards at certain places. Among them: tire and retreading shops, massage parlors, bars, billiard halls, and marriage counseling offices. "What they didn’t say was that you could be punished for specific kinds of purchases."

The FTC has a problem with CompuCredit not disclosing its usage-monitoring policy, but not with how it determines creditworthiness—and this is where it gets a bit creepy.

With competition increasing, databases improving, and technology advancing, companies can include more factors than ever in their models. And industry experts say financial firms increasingly are looking at consumer behavior, as CompuCredit did.

BusinessWeek says the worry is that companies may use race, gender, or sexual orientation to rank borrowers, and since companies never disclose their formulas for determining creditworthiness, consumers will be in the dark on what's being collected about them and how it's used.

"Your Lifestyle May Hurt Your Credit" [BusinessWeek]
(Photo: Getty)

Sallie Mae has publicly apologized for a coding error, potentially affecting around 1 million customers, that caused some consumers credit scores to drop over 100 points, and some consumers report that their dinged scores are already back up. If your score is not back to normal and you are in the middle of a transaction where your good credit is at stake, Sallie Mae said it will provide a credit reference letter. You can also call Sallie Mae customer service at 1-888-2-sallie. Sallie has pledged that the fix is in, but consumers can still take matters into their own hands by pulling their free credit report from annualcreditreport.com and disputing the incorrect information with Experian. Note, it's against Federal law for creditors to report false information to credit bureaus, and consumers can sue violators up to $1,000.

PREVIOUSLY: FICO Scores Drop Over 100 Points After Sallie Mae Recode, Potentially Millions Affected

(Photo: Getty)

Sallie Mae offers a variety of loan repayment options. One of these is a graduated repayment, with low non-principal payments for the first few years, with the payments slowly getting bigger over time. Before, this loan was coded the same as all other Sallie Mae loans. Now Sallie Mae has added the comment "Arrangements made with credit grantor to make partial payments" to the graduated repayment loans. To the credit bureaus, this comment is a black mark; ConsumerismCommentary says that it means that, "Sallie Mae is reporting the your loan balance is fully due immediately and that your payments are behind more than 60 days." Reader Jules, a victim of the credit score downgrade, writes, "Hopefully if enough of us complain this can get fixed soon, and hopefully before my credit card company notices and takes an opportunity to jack up my rate since I no longer have excellent credit."

The error appears to be limited to Equifax for the moment. Posts later on in the forum say that Sallie Mae officials are aware of the issue and are sending an update to Equifax later this week with a request to change back to the old way of reporting.

For insight into how just a few points lower on your credit score can affect your life, read How Much Do Credit Scores Really Matter?

*new error in Sallie Mae reporting* WTH happened - why is FICO contradicting itself? Please help! [myFICO forums]

"When a HELOC freezes over" [Money]
(Photo: Getty)

A couple of days ago I submitted a tip regarding my sudden inability to order a new GoPhone through the AT&T online store; my orders went through successfully, but were then later cancelled under mysterious circumstances no one I spoke with at AT&T could explain.
 
After several more calls and nearly an hour on hold I finally got to speak with supervisor Cheryl Johnson in the web store order processing department. Ms. Johnson then informed me that my orders were being cancelled because they had been unable to verify my credit history. This raises two interesting questions for which she had no answers:
 
1) What is suddenly wrong with my credit history in AT&T's eyes? I've ordered from them without any problems in the past, and my score is in the upper 700s.
 
2) Why is AT&T performing a credit history check on a GoPhone purchase in the first place? Everything is prepaid and there is absolutely no chance that anyone attempting to establish a new prepaid account could possibly defraud them in any way. That's kinda what "prepaid" means.
 
Ms. Johnson blatantly refused to answer either of these questions and simply read some pre-prepared rejection script that was obviously coming up on her computer screen as rudely as she could in an attempt to interrupt me in mid-speech. Once she finally ran out of things to parrot I asked why it was that a supervisor in the AT&T order processing department did not know how the AT&T order processing process worked well enough to explain to me why my orders were being cancelled, and she said that this was something the credit department handled. I asked for their number, and of course, they don't take inbound calls and Cheryl refused to transfer me. I asked her if she was in any way motivated to find out what was wrong with their system and help me, and, to her credit, she answered honestly with a simple "no."
 
So, beware: if you buy an AT&T GoPhone online they will make some ham- handed attempt at accessing your credit history.

Credit Score 620-659
APR: 7.115%
Monthly payment: $2,019

Credit Score 760-850
APR: 5.799%
Monthly payment: $1,760

The higher better score saves $259 per month, or $93,240 over the course of the loan. So how do you make your score better? Well, improving your score is sort of a universe unto itself but you can get started by first finding out your credit score by reading our post, "Where To Get Your Real Credit Score." Then, to learn how to improve your credit score, you will want to learn about "reason codes," as described in our post, "Know Where To Fix Your Credit Score By Getting Your Reason Codes." After that it will depend on your specific history.

(Photo: KUTV)

(Photo: KUTV)

Here's another customer's bizarre encounter with the bank's customer service department when she called to ask why her rate was raised:

Holley Pridmore of San Antonio said she's had a Bank of America credit card since 2002 and has never been late on a payment. But the bank recently increased her rate from 15.24 percent to 23.99 percent.

Pridmore, 49, pulled her credit history and called the bank. "If you can find a late payment in our entire history, I'll pay you $100," she told the customer service representative. "He said, `That's not really the point,' and I said, `Since when?'"

In letters, which were seen by or described to the Observer, Bank of America told customers that they could lock in their current rates if they sent the bank that request in writing and agreed to not use the card any more but to simply pay down the balance. If they wanted to keep using the card, they'd have to agree to the higher rates.

"BofA rate hikes anger customers" [Charlotte Observer]

RELATED
"Why Is Bank Of America Raising Interest Rates On Its Good Customers?"
(BoA executive eating gold: Getty)

The easiest explanation is that BoA is just trying to get rid of customers who don't make them any money, usually by carrying extremely low balances or no balance at all. But the anecdotal evidence suggests otherwise:

Michael Jordan, 25, a software developer who lives in Higganum, Conn., says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. The software developer, who earns $80,000 per year, says he was "shocked" because his payments had been on time and his credit score hadn't changed in the last year. In fact, Jordan says, he has only $4,500 in overall outstanding credit-card debt on two cards and that, on the Bank of America card in question, he had paid down his balance to $3,000 from $3,700 last August.

(Thanks to W!)

"A Credit Card You Want to Toss" [BusinessWeek]
(Photo: Getty)

Fair Isaac adjusted its FICO scoring system for 2008 so that it now prevents one of these score-enhancing techniques—you can no longer bump up your score by adding your name as an "authorized user" to a stranger's perfect credit account. But the new techniques still work, which really annoys not only FICO but the National Association of Mortgage Bankers.

For a $1,399 fee, TradeLine adds the borrower's name to a stranger's recently paid-off loan just before the account is closed. The account, with its perfect payment history, is then added to the borrower's credit record in 30 to 45 days.

Ted Stearns, chief executive of TradeLine Solutions, said he came up with what the company calls its "seasoned primary accounts" program using a "loophole" in the law. Adding a single account can raise a credit score by 35 to 40 points, he said. But most clients purchase three accounts, at $1,399 for the first one and slight discounts for subsequent ones, to increase a score from say 560 to 700, he said.

He emphasized in an interview that [FICO] is not a law enforcement agency, but would bring concerns to the attention of the Justice Department, Federal Trade Commission, the F.B.I. and attorney general's office if lenders started complaining about such practices.

The F.T.C. and other federal agencies declined to comment on the programs or to say whether any investigations were under way.

"Investigations are nonpublic and we don't opine over whether something is legal or not," said Frank Dorman, public affairs specialist with the F.T.C.

RELATED
"How FICO 08 Changes Your Credit Score"
(Photo: Getty)

The Doctor Will See Your Credit Now [The Red Tape Chronicles]
Medical industry plans to rate payment history [Chicago Tribune]
(Photo: yosoyjulito)

At the end we mess up and tell people to go to annualcreditreport.com for your credit score but then catch ourselves and say you can go directly to FICO.com for your score. It's important when trying to buy your credit score to read all the fine print because a lot of different places try to sign you up for a credit monitoring service that charges a monthly fee (including FICO.com). Check out this post, especially the comments, for places to get your score. Some credit cards will even give you your score for free. The other important thing to remember is that FICO '08 has only been distributed to one of the three credit bureaus so far, it may not be until later this year that these changes will fully go into effect.

+ situations where scores will rise, - situations where scores will fall

+ Mess up every so often
- Consumers who consistently mess up
+ Won't get dinged as hard when you apply for credit from multiple sources
+ Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time
- Spending near the limit of your total available credit
+ If you're 90 days late on payments on one account and your other credit accounts are in good standing
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else's account with good credit will no longer help your score

Default Lines: The New Math Of Credit Scores [WSJ]

There are some fun bits of trivia in the article—for instance, FICO has a "subterranean data warehouse outside its Minneapolis headquarters," and Hitt's own credit score is 770, which is a great score but far from perfect (we're sure some Consumerist readers are already scoffing).

To build the 2008 version, which will launch early next year, Hitt and her team of 25 analysts pulled the 2005 and 2007 credit reports of 5 million consumers to see how their credit profiles fared over time. Given this historical data, she can predict how characteristics such as your total number of credit cards (three is often ideal) or average account age (longer is better) affect your chance of defaulting on a loan in the future. Every one of the 30 or so possible characteristics derived from your report earns a certain number of points, but the calculations don't end there. Each characteristic counts for a bigger or smaller portion of your total score, depending on which of 12 borrower profiles you fit (kid with his first credit card, for example, or perennial deadbeat).

Equifax sells a score for $7.95 when bought in combo with your free credit report from annualcreditreport.com. At Equifax.com, they sell one for $15.95 and it comes with other info. There's also myFICO.com, where it's $15.95 for one bureau's score, $47.85 for all three.

Be careful to read all the small and fine print and make sure you're not also getting signed up for a monthly service.

A freeze means no one can access your credit report unless you "thaw" your report. This means no new credit cards, loans, or mortgages, either by you, or by a potential identity thief. You will need to freeze the report with each bureaus. Not surprisingly, after fighting with Congress for four years against allowing for consumer freezes, the bureaus have made it difficult, requiring the mailing of certified letters, utility bills, different kinds of personal information, and charging fees. Here's the step by step:

Red Tape Chronicles writes:

Equifax
General info
State-by-state information
To get a freeze, Equifax wants you to send a certified letter with seven specific elements to Equifax Security Freeze/P.O. Box 105788/ Atlanta, Georgia 30348. The elements are spelled out clearly on the general information page, but they are, basically — name, address, date of birth, SSN, utility bill for proof of address, payment and a police report if you are a victim.

Experian
General info and state-by state information
To get state-specific information, scroll to the bottom of the page and pick your state from the drop-down menu.
Before giving you the information you need, Experian will warn you that a security freeze may make your credit life very difficult. Take that with a grain of salt, and then pick your state. You'll send the request by certified or overnight mail to Experian/ P.O. Box 9554/ Allen, TX 75013. Again, the recipe is listed on the firm's Web site, but it will call for a name, SSN, date of birth, current and past addresses dating back two years, a copy of your driver's license, and one utility bill.

TransUnion
General info and state-by-state information
Send your freeze requests to Trans Union/Fraud Victim Assistance Department/ P.O. Box 6790/ Fullerton, CA 92834. A few state residents can call instead of write — check the link above. Trans Union wants the following on the letter: name, address, Social Security Number, a copy of your driver's license and payment.

Freezes will cost usually $10 per bureau, depending on your state. Also, if you want to take out a new line of credit, you'll have to pay to unfreeze your report, and then again to refreeze it. Credit report freezes are free for identity theft victims. For everyone else, it's a preventative measure, that, considering the possible monetary and psyhic and time cost of untangling identity theft, could be a wise investment.

Now, a way to stop ID theft [The Red Tape Chronicles]
(Photo: Getty)

Reprieve for the 'Piggybackers': Still No Credit-Score Crackdown [Washington Post]
PREVIOUSLY: FICO Removing "Authorized Users" From Calculations; Credit Piggybackers Scores Dropping
(Photo: Schnittke)

Dear Consumerist,

I am a Senior in college, great credit, never had to put deposits down for utilities and I have one line of credit. The credit line is a credit card which is currently at 3K limit and a low interest rate, of course rarely use the card, pay it off every month, only use it to show future creditors that I have had credit for a long time.

I recently received an offer to have the card upgraded to a 6K limit, I of course never intend to charge that much, however could having a 6K card with a 0 balance be bad at all for my credit and not good?

Thank You for a great website!

-Josh

Josh,

First of all, congratulations on being responsible with your credit. As far as your credit limit goes: Is is possible that a higher limit could hurt your credit score?

It's possible, but it isn't likely. The basic idea is that you want to have a good "credit ratio." That's the amount of available credit vs. utilized credit. That section of the score is just one section of a larger portion of your FICO called "Amounts Owed." Amounts Owed = 30% of your FICO.

Is it a big deal to add 3k to your ratio? Probably not. It might even help. Just don't run out and apply for 150,000 credit cards and rack up $400,000 in available credit. Moderation, my friend.

(Photo:meghannmarco)

Now, FICO is notoriously cagey about what goes into the credit score black box but they have revealed the different factors that go into a score and their proportional influence. Payment history only accounts for 35% of your credit score. The "burn" from the dispute represents a then smaller part of that 35%. How big a threat are they making really? "I'm sorry, sir, we're going to have to deny your mortgage. I can see here that you never returned Good Will Hunting."

Don't think it's without repercussions, though. Your score dropping to 620 from 659 could result in $163 more monthly for a 30 year mortgage. However, the small amounts that we usually hear about being haggled over are unlikely to result in such major score shifts. If you're not buying a house or a car or applying for a credit card anytime soon, you have even less to worry about.

Consider further that "dinging" your report, as it's called, hurts the retailer too. We found information indicating it could cost at least $25 for a business to push through a negative onto your credit report. And while it's a bit of a pain in the butt, it is possible to get negative items removed from your credit report.

Far be it from us to recommend payment delinquency, but oftentimes businesses using the, "I'm gonna RUIN your credit report" threat are just being bullies. A chuckle followed by a, "Is that all you got?" may be an appropriate response in these cases.

What's In Your Score [myFICO]

RELATED:
Delete Negative Items From Your Credit Report
Credit Reports: How Long Different Items Stay
Don't Pay For Your Credit Report
(Photo: Getty)

Meet the Continental Finance MasterCard. After all the fees have been collected, it has a credit limit of $53. From MMMM:

• Account setup fee: $99
  
• Program participation fee: $89
  
• Annual fee: $49
  
• Account maintenance fee: $120 (charged @ $10/month)
  
• Purchase APR: 19.92%
  
• Authorized user fee: $30 (great! seems like $53 credit is a bit too much for a single person to handle)
  
• Credit limit increase fee: $25 (and you don't even have to ask for it!)
  
• Internet payment fee: $4 for each authorized internet payment.

Damn. This card is shockingly awful. And to make matters worse: Golb points out that if you use this card to repair your credit history you're stuck with it because canceling the account will shorten your credit history and drop your score. What a headache.

The Worst Credit Card I Have Ever Seen [Money, Matter, and More Musings]

"Approximately 3.5 million inactive (24-48 months) Macy's accounts have been selected to "flip" to the Citibank Mastercard. That means the customer will be sent a Citibank Mastercard to replace their inactive Macy's card. "

The "flip," as they call it, was "opt-out"—which means that if you missed a recent letter from Macy's explaining that they were going to open a credit card for you, you can expect a Citibank Mastercard in the mail.

We hadn't heard of this questionable-sounding practice before, so we showed the memo to Elizabeth Warren, consumer law expert and Harvard professor. She hadn't heard of it either, but expressed concerns about what this action by Macy's might do to a customer's credit score.

We were concerned, too. It didn't seem possible for a store to simply decide to open an unrelated credit card account for customers who had inactive store cards. How was it happening?

Information Sharing

As far as we can tell, Macy's is taking advantage of an "information sharing" clause in their original store card agreement. The clause states that Macy's is allowed to share information with Citibank as an "affiliate" of Macy's. Opting-out of the information sharing agreement requires calling or writing Macy's. We suspect few card holders bothered.

Nowhere in the clause does it say that the term "information sharing" means that Citibank has the right to open new credit card accounts for inactive Macy's store card holders. So why are they doing it?

Professor Ronald Mann of Columbia University is an expert on electronic commerce and the credit card industry, so we asked what he thought of Macy's memo. Although Professor Mann had never heard of "flipping" either, he speculated that what was really going on was a "transfer of data" from Macy's to Citibank.

" By aggregating this information with other information CitiBank has about these people, CitiBank would enhance its ability to design products that would both be profitable for CitiBank and attractive for these people. I expect that CitiBank paid Macy's a substantial amount for the data," he told Consumerist in an email.

It does seems likely that, in this case, the term "information sharing" is being interpreted to mean that valuable but "inactive" Macy's customer's accounts can be sold or transferred to Citibank, and Citibank can choose to open an account for said customers providing they do not opt-out.

Credit Score Implications

While we do not have specific information about the methods Citibank is using when they "flip" the inactive Macy's accounts, we find it hard to believe that it will not affect credit scores.

Our best guess is that if you're an inactive Macy's card customer and you don't opt-out in time, Citibank will have to ping your credit to determine the appropriate rate and limit to give you, which would look like an application for new credit and would drop your score temporarily.

At that point, if Citibank decided to give you a different limit than your Macy's account had, your available/utilized credit ratio would change, which would affect your score either positively or negatively, depending on the individual. It's our understanding that store cards are weighted equally to credit cards by FICO for this part of the score.

Canceling the inactive Macy's account and replacing it with a new Citibank account would shorten credit history for some consumers, a change which would lower some scores.

The effect this new credit card will have on a credit score depends entirely on the individual. For some, it may help. Others will see a drop in their score that they did not know was coming. For those consumers who are mortgage or car loan shopping, the new card could pose trouble.

Privacy

We don't know exactly what steps Macy's has taken to ensure that it did not mail "opt-out" forms (and, eventually, credit cards) to old or outdated addresses. In addition, receiving an (apparently) unsolicited credit card in the mail is a "symptom" of ID theft and will likely alarm many consumers who disregarded Macy's original "opt-out" letter as "junk mail."

We expressed these concerns to Professor Warren, wondering if we might be making a mountain out of a mole hill. Turns out, she's worried too, and said that although "flipping" seemed merely "sleazy" at first, she now thought it "costly to consumers."

Consumerist called Macy's Credit Services and asked if the accounts were really being "flipped." Macy's confirmed, and stressed that consumers could "opt-out." We asked if the Citibank Mastercards offered any Macy's benefits or were branded by Macy's. Macy's said the cards were standard Citibank Mastercards with no ties to Macy's. They also confirmed that after 25 months in inactivity, Macy's store cards would be "flipped."

In addition, "flipped" customers can't cancel by calling Macy's. All cancellations must go through Citibank.

We have to wonder how Macy's and Citibank can justify sending "opt-out" notices for something as sensitive as a new credit card account. As Professor Warren said, "I think the appropriate move here is to send a letter saying, 'We're closing all inactive Macy accounts. If you would like a Citicard instead, check the box.' Why don't they do that?"

Good question.

We suspect Fair Issac will use this expansion of the FICO system to also rejigger the formulas for many of the credit sectors. Expect your score to rise or fall by a few points in September, and probably fall pretty drastically if you have poor or little credit history.

A few points might not sound like much but under the current system, a score of 620 to 659 could pay $163 more monthly for a 30 year mortgage, a difference of $58,680 over the life of the loan.

Little information is available about the new FICO system, or even the old one, because Fair Issac is a private company and doesn't want anyone stealing their methods. Instead, they're allowed to keep everything in black box and have a major influence on the US economy. Outright regulation may not be the answer, but how about turning that black box into a glass one?

Only one of the credit bureaus is set to be using FICO 08 come September, the company has set the other two will switch over mid-2008. No doubt they'll be guinea-piggying that bureau before switching over the others. Characteristically, the company declined to say which credit bureau it would be.

Your FICO credit score could change under new rules [News&Observer]
(Photo: Getty)

Previously, consumers with poor credit scores could get themselves added as an authorized user on the credit card account of someone with a good credit score and receive a credit score boost, a practice that, "...is clearly loan fraud," Craig Watts, the public affairs manager for Fair Isaac, which sells the FICO score, told the Washington Post.

Fair Issac says the change will come about as part of the updated FICO 08 score to debut in September, but an industry source says they're already seeing the credit scores of authorized users beginning to broadly drop.

Credit scores are used to decide whether people get loans. People inflating their scores, and Fair Issac's failure to deal with it, has lead to criticism of the company for contributing to the subprime mortgage meltdown.

However, John Ulzheimer, president of Credit.com, a consumer credit website, tells the Detroit Free Press,

...it will also hurt legitimate authorized users, mainly young adults and married women, who have used the strategy to build a solid credit history. These consumers could end up paying more for everything from car loans to credit cards.

Changes coming to credit scoring may hamper authorized users [St. Louis Post Dispatch]
Shortcut to good credit will end [Detroit Free Press]
(Photo: Getty)

Utilization basically boils down to this: If you've got a card with a $5,000 credit limit and you're carrying a $4,750 balance, you've got a 95 percent utilization rate. FICO's scoring system — which runs from 300 to about 850 — subtracts points for high ratios. The rationale is that people who are maxing out their cards are perceived as riskier and more likely to fall behind on payments.

On the other hand, say you're carrying a $500 balance on that same card — a 10 percent utilization rate. The FICO system rewards you with extra points because of your moderate and responsible use of available credit.

When a creditor withholds or neglects to report your limit, the FICO software cannot compute a utilization ratio. Typically, it either doesn't use that credit line to compute the score or substitutes your highest reported balance on the account for your actual limit.

A Boost for Credit Scores [Washington Post]
(Photo: garibaldi)

One interesting part of the interview delt with new "alternative" credit scores:

Something right around the corner and clearly here to stay are "alternative credit scores." These are scores, such as the FICO Expansion score, that lenders can use to help assess the risk of a consumer who has had no credit relationships. It could be a teenager applying for credit for the first time, a recent immigrant, a spouse whose partner is gone for whatever reason and has never had credit in his or her own name. Now lenders are beginning to use alternative credit scores in larger and larger numbers. So, for consumers who are just starting out managing credit, the day may soon arrive when instead of filling out long applications and expecting high interest rates and low credit limits, consumers may be treated with the same speed and convenience as the rest of the people who already have an established credit history and a good credit rating.

Credit Scores Demystified [Bankrate]

I've gotten two of these unwanted cards in the last 12 months after signing up with two different financial institutions for two different reasons. The first was a mortgage I signed, the second for a business checking account where I was the primary account user. I've worked hard all my life to maintain good credit, and I don't want these things to affect my excellent rating. What should I do now?

Beau writes:

Hi, Consumerist!

I'm writing to see if you've got any advice about how to deal with credit cards being sent without applying or requesting them. I've gotten two of these unwanted cards in the last 12 months after signing up with two different financial institutions for two different reasons. The first was a mortgage I signed, the second for a business checking account where I was the primary account user. I've worked hard all my life to maintain good credit, and I don't want these things to affect my excellent rating. What should I do now?

In August of last year, I bought a house and got my mortgage through First Horizon. I went the traditional route and got a mortgage through an agent in my area in person, rather than doing it online. But I did my homework and they matched what I could find on the Internet, so I was happy with it. When filling out the paperwork, I specifically asked my agent not to disclose my information to anyone that she wasn't legally obligated to. She assured me that it wouldn't happen and that they were very careful about that kind of thing.

Everything went smoothly I anticipated, but a couple of months later I received a new credit card from one of First Horizon's sister companies. I immediately called the customer service number and asked them to make it right by getting rid of my account and contacting the 3 credit services to make sure it didn't appear on my credit report. They said that they would make sure it happened and apologized. I also contacted my agent and her office to find out what had happened. They apologized several times and assured me that it must have been some kind of mistake at the main office because they don't apply for a credit card on behalf of the borrower unless they request it.

Fast forward to two weeks ago, when I requested my credit reports to make sure that everything was as it should be. I was able to view one online and the other two had to be mailed to me for some reason. The Experian and TransUnion reports were as they should be. On Thursday or Friday, I got the Equifax report and the First Horizon card was listed as "Cancelled at Customer's Request." I had a busy weekend planned, so I figured I'd start the dispute this week.

Today (Monday), before I even had a chance to dispute the First Horizon problem, I got another unwanted card in the mail! This time, it was from Washington Mutual Bank. About 6 months ago, I started a business and set up a business checking account for it. They had to have a primary user, so I gave them my name and address. But I never applied for nor requested a credit card. Actually, I asked that the ATM card NOT be a debit card for various reasons. Now, for no reason, they sent me a credit card.

So what do I do now? My first instinct is to cancel this one, put a lock on my credit reports, and report the incidents as fraud to the FTC or whichever body oversees these kinds of things. Then shoot off emails to anyone I can think of at the two companies who might listen. And if I am still angry about it, to sue in small claims court for the cost of credit protection services for the next 7 years until these things come off my credit. But that seems pretty extreme and I want to see if there is a better way to go about it. What's the word, Consumerist, what is the best thing to do here?

Good news, Beau. Since you've done business with these companies and are not receiving credit cards or credit card statements from random institutions, ID Theft is unlikely. This is extremely good news, because simply opening two credit cards shouldn't have much of an impact on your credit score, even if you're unable to get the entries removed from your score.

So, while this may be annoying, it shouldn't really affect your life. Here's what we would do. You've already done most of it.

1) Get your credit reports. You can use www.annualcreditreport.com or call 1-877-322-8228 to get one free report per year. If you've already used up your free report, you can request another one if you believe it may be inaccurate because of fraud.

2) Contact your lender with a formal complaint. You can do this in writing, or by email. Keep a copy of this complaint for your records.

3) If your lender doesn't respond in a way that makes you happy, you can file a complaint with the bank's regulatory agency. This may be the FTC, The Department of Thrift Supervision, The Comptroller of Currency...or a few more.

You'll need to figure out which agency regulates your lender by calling or using FDIC's Bank Find. For example, Washington Mutual's primary regulator is the Office of Thrift Supervision.

4) Write a formal complaint letter to the bank's regulatory agency. Follow the FTC's instructions for writing a complaint. This document also has the correct contact information for the various regulatory agencies. Keep a copy of this complaint for your records.

5) Dispute inaccuracies on your credit report. Follow the FTC's guidelines.

In your letter you mentioned suing WaMu in small claims court for the cost of credit monitoring and freezing your credit report. A freeze will prevent creditors from getting your credit score, or new employers from doing a background check on you. It also costs $10. You really don't need this. As far as suing your bank, that's really not necessary.

If you've kept your credit score as bright and shiny as you imply you have, a little new credit might not hurt you. In fact, it might even help your score, depending on your profile. So you really need not worry. You can always take your business elsewhere if WaMu has lost your confidence. Good luck. —MEGHANN MARCO

(Photo: Meghann Marco)

Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850,

Estruch paid $1,800 in December for three credit card spots, and by January, his FICO score jumped from 550 to 715. In mid-March, he closed on his four-bedroom beige stucco house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5 percent interest rate and required no down payment.

'Piggybacking' roils credit industry [Yahoo!] (Thanks, Kimberly and Jason!)
(Photo: the illustrious untitled 13)

Questions about FICO scores are always landing in our inbox, so if you're confused, this might be a good post to read. —MEGHANN MARCO

Proper Care and Feeding of Your Credit Score [Get Rich Slowly]