AYF 51 | Holiday Fundability Killers

 

It is the holiday season, and many of us are going to be spending a little extra on gifts and other activities. Just as our pockets become vulnerable at this time of the year, our fundability may suffer, too. For this episode, Merrill Chandler shares the five fundability killers of the holidays. He goes in-depth into the rabbit hole you may find yourself in as you go out to shop and swipe your credit cards. Listen to what Merrill has to say and avoid these deadly practices that can harm your fundability.

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Five Fundability Killers Of The Holidays

We’re going to be talking about holiday fundability killers. I’m going to talk about the five fundability killers that happen especially on the holidays. If you’re jumping ahead because it’s the holidays, we’re going to talk about five things that most of us don’t know that the holidays open up a space inside of us. We want to take care of our families. We want to take care of our loved ones. All of a sudden, we want to fly and go visit our family member or visit our loved ones for the holidays. Sometimes we are unaware of the effects that our spontaneous decisions, our extra purchases to our long-term fundability. That’s what we’re going to talk about.

The Credit Card Offer When Shopping

First and foremost, let’s talk about number one. The number one harmful activity that you can do during the holidays is when you go out shopping, most retail stores, mall stores or even online stores may offer you a credit card. If you fill out that application, they’ll give you 10%, 15%, 20% off. Normally, I like to say it’s how to ruin your credit profile and save 10% on your next purchase. These are the details. When you go to Target, Kohl’s, Buckle, The Limited, whoever is asking you to fill out an application in order to get that discount. They do not know that they’re doing this, but you need to know that they are literally giving you the tools to ruin your fundability.

Here are the three ways in which it harms your profile. Number one, when you fill out that application, they’re going to do an inquiry. It’s a hard inquiry and it’s going to count 3 to 15 points as a hit against your credit profile. If you’re in the high 700, 800, it may only cost you three points or so. If you’re in the 600s, high 600s, mid 600s, it may cost you fifteen points against your score. While the score is not the most important fundability metric used by FICO and the lenders, it’s still going to cause a drop in your score. If you pop through a funding tier, you’re going to lose unnecessary points. The number one way is that it’s going to give you an inquiry.

Number two, the second way that getting a new credit card is going to hurt you is it is a tier-four junk card. It is the lowest possible value card, any retail outlet, any merchant, any mall store card is not a tier 100% value card. It’s junk cards. If you get accepted, you’re going to add a junk card to your credit profile. The question is if you’re spending $60,000 at Target or at Kohl’s, then let’s talk. It’s worth $6,000 to take that hit, but if you’re going to be saving $20, $30, $50 or $100, it’s not worth the long-term damage it’s going to do to your credit profile.

First, you get the inquiry. Second, you get a junk card if you get approved. The worst thing that is going to happen to you is if you get approved, you’re going to lower the average age of your credit profile. Let’s make it simple. Let’s say you have one credit card and it’s 100 months old. It’s eight years or plus. If you get a brand-new Target card, Kohl’s card, Victoria’s Secret card or Home Depot card, you’ll have a zero month. You have one credit card at 100 months and you’ve got a new credit card at zero months, so your average age goes from 100 to 50.

The interesting thing is there are tiers of aging. The tiers are 2, 3, 6, 11, 25 years. Every one of those thresholds you get more aging points and more heft with your credit cards. After utilization, age is the next most important thing for your credit profile and the value of that account to your profile. Here’s the thing, you’re getting inquiries whether or not you get approved. You’re going to take that hit. You’re going to get a junk card if you are approved and if you are approved, you’re to get a zero-month on your average age that’s going to lower the overall value of your revolving account portfolio.

You have a zero month of a junk card that is not worth it. Here’s the interesting thing. We’ve talked about in previous episodes about the 24-month look back period. If you’re tooling around and you haven’t added new cards and you’re aging your profile, that’s what that average age means. You’re aging your profile and you take a hit on that average age that triggers red flags in FICO and lending algorithms. You’re looking for credit, but you’re looking for what are called consumer finance accounts. You need to go see my other episodes where we talk about the value of your revolving account profile. You need to go read that because a tier-four 40% junk card is straight up harmful. FICO designates it as harmful to your profile by calling it a consumer finance account. It’s not a national bank card, it’s not a hefty tier-one, tier-two high value account. All of that is the number one debt-dealing things you can do in the holidays because we want to save money, but please play the long game. If we’re playing the funding game, then play the long game and take the $20 or $30 hit to preserve the value of your revolving account portfolio.

AYF 51 | Holiday Fundability Killers

Holiday Fundability Killers: You need to put traffic on every open credit card in your revolving accounts portfolio.

 

Raising A Limit

Let’s talk about number two. Number two is during the holidays, there is a tendency where we may want to raise a limit so that we can buy more or do more things for the holidays. In that essence, there are two problems with raising a limit, especially if you have not raised your limit until the holidays. That 24-month look back period is going to spike when it comes to raising a limit if you have not had a regular practice of raising limits. If you’ve had a regular practice of raising limits, it will hurt far less. If you haven’t done anything for a year or two and all of a sudden you say, “Let me get a limit increase,” that’s going to spike and that’s going to be a warning to the AUS, the Automatic Underwriting Systems.

Even if they approve you, you might be in their risk category because you’ve not shown a regular behavior of raising limits over time. The second thing that comes with that spike of raising limits is you might be pushing past thresholds of too much available credit. For my students and clients, we discussed there’s a specific amount of total available credit specific to you and your profile. That’s different for everybody because everybody has different revenues, income and different portfolios of accounts.

All of this is based specific to your situation. You have to remember this is vital because if you push that limit especially if you do this with 1, 2 or 3 cards, if you raise those limits, you may be pushing past the comfort zone a lender has of available credit. Remember, available credit is you can go out and charge up all of those cards and kill your relationship because they’re going to throw you into risk department or they may freeze your card. They may lower your balances. We’ve even had students and clients where they have closed the account because of this aggressive behavior.

Charging Credit Cards Past Comfort Zone Level

Our second fundability-killing behavior in the holidays is to raise limits, especially on multiple cards. If you go outside of that available credit spectrum for your profile, you’re going to take a hit. I’m trying to protect you. The third fundability-killing activity is not just limits. Whether you raise the limit or you don’t raise the limit, it’s charging your credit cards past comfort zone levels into the risk department levels of your profile. Let’s say you’ve been carrying a 50% balance on average for 3, 6, 12, 24 months, whatever it is. If you go from 50% to 75%, the automatic underwriting systems are going to look at you with either suspicion or puts you in the risk department to monitor your accounts.

If you’ve been at the 10%, 20% or 0% and you go into 50%, those are huge alarm bells for automatic underwriting systems. You’ve got to be deliberate in the type of traffic. We’ve talked in previous episodes about what the max traffic is. Let’s define our terms again if you haven’t been bingeing these episodes, let’s make sure that you know what we’re talking about. Number one, traffic is the amount you charge on your account presumably to pay it to zero on the due. Traffic is how much you charge. Your balance and utilization are used simultaneously. Utilization is the amount of your limit you’ve used. Your balance or your utilization is the amount that is reported to the bureaus when your account is reported.

Let’s say you’ve charged up 30% of your limit but you pay it down to zero. You think you’re doing peachy. While you’re in your billing cycle, if you’re reporting date is in the middle of your billing cycle while you’re charging it up, it may report 20%, 25% or 30% to the bureaus. That’s utilization. Utilization is how much gets reported in the month. Our objective is to have a near-zero utilization and a zero on the due date. Go to my bootcamp if you need to figure this out for your particular situation, but you need to put traffic on every open credit card in your revolving accounts portfolio.

During the holidays, we have a tendency to charge more. We’re trying to take care of our families. We’re trying to take care of our loved ones. We’re flying here and traveling there or we’re going on special trips for the holidays. No harm, no foul, but if you’re going to do it, you want to make sure that you do not put on your credit card to carry over if you’re going to take two or three months or more to pay these off. Make sure on each credit card you do not charge more than 38%. It is somewhat the safety zone of what automatic underwriting systems look at before you go into the risk department. They’re saying, “We’re willing to let you carry 38% if you’re going to carry that balance over month after month and pay it down slowly.”

Age is the next most important thing for your credit profile and the value of that account to your profile. Click To Tweet

That means you need to split your Christmas holiday, your Hanukkah or your Kwanzaa activities. You need to split those up between credit cards so that not even one of them exceeds 38% if you’re going to carry those balances. If you’re going to pay them off, make sure it’s not more than 38% in traffic and make sure you pay it down to near zero before the reporting date and then to zero and pay it off so you’re not charged any interest. I know I’m talking tech. Go back into our previous, look at the names of the episode. We’re talking about the revolving accounts and how to become fundable in the way you use your credit cards. That’s number three.

Number one is ruining your credit and saving 10% on your next purchase. Number two is raising limits past your too much available credit thresholds. Number three is running up balances and not spreading those balances because we want to make sure your balances do not exceed, your traffic doesn’t exceed, and if you’re going to carry them, your balances do not exceed that 38%. Split them up. Some people say, “Is that average across my entire revolving account portfolio between all my credit cards?” We don’t want any single credit card to be more than 38%. You can charge all of them up to 38%. When I say you can, I’m saying if you have to, but do not exceed on any single credit card more than 38%.

Zero Interest Offers

Number four is a big one because in the holidays, many of the automobiles and truck manufacturers are on high alert. They’re trying to get rid of the previous season. They’re giving mad discounts on the late models and the new models. It’s a great buying season for automobiles. Here’s the problem. Many of you are going to be looking at 0% interest because we think that saving money on interest is our chief and number one concern. In my bootcamp and in previous episodes, we talk about how this is an illusion. It’s a myth. There is one thing we need to be aware of. If you’re thinking, “I’m going to get this automobile. I have an approved credit. My credit is over 720, I want to qualify for the zero interest.”

Notice that the zero-interest offers are always made by the finance arms of the manufacturer. If you buy a Toyota, you’re going to get an interest free from Toyota Motor Credit, GM, Ford Motor Credit. Everybody is trying to not collect interest and they’re offering you what you think is a good deal. What’s happening is every one of those institutions are graded at a tier-four finance company institution. While you believe you are saving money on interest, on your credit profile, you’re getting a finance company. It’s like the consumer finance accounts on the revolving. This is an installment auto loan finance company. In all my recollection, there has never been a 0% offer where they didn’t also offer a rebate instead of a zero.

They give you a choice, get $720 off the price or 0% interest. You guys recognize that. It’s one or the other. Interestingly enough, if you’re at 720 and you qualify for the zero interest, 720 is A-paper for an auto loan. That’s what the interest costs would be in that rebate. It’s the same amount of money. One is being taken off the price of the car. The other is being taken off in interest. The beautiful thing is if you take the price off the car, you’re saving money on the value of the car. You can go to your tier-one, tier-two or tier-three credit union and get financing there at a paper because you wouldn’t qualify for zero interest unless you had A-paper.

You can go get an A-paper loan from your tier-one tier or tier-three lender and save the same amount of money because that interest charge, you will make up in the savings you did on that automobile. It’s just a shell game, to quote Scott Carson. You’re going to pay the money one way or the other. The higher price of the car that you’re buying that was zero interest or a lower price because you’re going to pay interest to a financial institution. It’s going to cost you the same whichever you do. Your fundability model dictates that you save the money, go get a tier-one, tier-two, tier-three lender and finance your car there. Pay the interest and have a higher value instrument, an installment loan on your credit profile. That’s number four.

Let’s recap. Number one is don’t take ask for discounts by filling out an application. Stop it. Don’t do it unless you’re spending $60,000 at Kohls. Number two, raising limits especially multiple cards. Raising the limits all at once triggers red flags. Number three, raising balances past the 38%. Be careful of that. Number four, thinking that zero interest is awesome and getting a tier-four loan on your automobile instead of taking the reduced rebate price and then going and getting a tier-one, tier-two or even tier-three loan. Even a credit union loan is better than that Ford Motor finance or Toyota finance. The reason why they give zero interest is it’s all the same company. They want you to buy the car and that’s a sexy sell, no interest. Because we’re all sensitized to not paying interest is a cool thing, just like we’re all sensitized that credit score is the thing that matters in our credit profile and our fundability. Neither one of those are true.

AYF 51 | Holiday Fundability Killers

Holiday Fundability Killers: The optimization model says your fundability model dictates that you save the money, get a tier one lender, then tier two and tier three, and finance your car there.

 

Putting The Money Down

Number five is if you’re going to go buy that car, many of us are tempted to put money down on the car to lower the rate of interest. That does not support your fundability in the long-term. It doesn’t send great messages to your current lender who carries that auto loan. Much less future lenders who are looking at your profile for professional borrower status or professional borrower capabilities. I teach my students, clients and you, what we want to do is we want to purchase the automobile. You can put something down if you wish, but save the money that you’re putting down. Go purchase the vehicle, finance the vehicle at 100% and take the down money and make it as your first payment. If you do that, you’re going to end up at somewhere between 85% and 95% utilization on the first month of your loan.

For loans, that’s killer. There’s a step-down process. We call it the term rate. Every payment you make, you’re stepping down the utilization equals the number of payments you’ve made. What happens if you put more money as a payment ahead and you lower that utilization? That makes your lender jump with joy. You’re not spending any more money. There’s no more money or less. You’re not spending more money one way or the other. To use your down as the first payment is spectacular. People ask me all the time, “Can I make it on the second or third payment?” Absolutely. As long as your payments are happening more, the balance is going down faster than the term month by month, you’re going to be ahead of the game.

Those are the key things. People say, “Instead of putting $5,000 down on a $20,000 car, my payment is lower by having $15,000 purchase, right?” Yes. What you do is before you engage the lender, ask them if they re-amortize loans. What that means is, let’s say you buy it at $20,000 but you make the first payment of $5,000. You’re now at a threshold of $15,000. Your balance is $15,000. Many lenders will say, “Since it’s $15,000, let’s re-amortize the loan.” You don’t want to go get a new loan because they’ll close one out at month two or three and that doesn’t help you. We want to keep our loans for 24 months as you’ve learned in previous episodes.

The bottom line is we want to re-amortize the loan by making new longer payments at that new $15,000 amount. Those are the five ways that you can make choices that will hurt your fundability. Any of these can happen anytime during the year. It is amazing to watch how many of my students and clients do these things in the holidays because we want to spoil our children, our siblings, our families. We want to take care of our boyfriend or girlfriend. We want to hook our spouses up. We use the holidays many times as an opportunity to show everybody how much we love them. The first thing I want to say is do that every year, every day, all year long. Show them that you love them all year long.

We got this thing about the holidays, about ending the year with as much abundance as prosperity as we can or looking like it. Make sure that you take care because December 26th we’re either going to have too high limits. We’re going to have a new junk card on our profile. We’re going to have too high balances. We’re going to have spent too much. We’re going to have a new junk auto loan on our profile or we’re not going to have optimized the way we bought our card. December 26th comes like December 25th does. I want you at starting of the new year killing it.

I want you to have the best Christmas ever by following these tips and then you start out the new year, no harm, no foul, and you are moving forward through the next year. Have an amazing holiday season. I hope that what I’ve shared with you can create both hope and an opportunity to make great decisions so that we don’t have that post-holiday financial depression. I hope you have a spectacular holiday season. God speed. God bless. We will talk to you later.

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