Q&A with Liz
Can taking advantage of low-rate offers affect our FICOs?
Dear Liz: We have good credit with FICO scores in the 780 to 800 range. For most of the last 20 years we have paid all of our credit card bills in full and on time, never incurring any interest charges. Recently, though, we've started taking advantage of "buy now, pay nothing for a year" credit card offers.
We currently have outstanding balances of over $45,000 on several cards, and one card has an outstanding balance of $26,000 on a limit of $29,000.
Every time we get one of these offers, we shift money from our checking or savings accounts into certificates of deposit that are scheduled to mature about a week before the zero-percent offer expires so that we can pay off the bill. Meanwhile, the money in the CDs earns 3% to 4% interest.
We wonder how all this affects our credit scores since we are not really in debt because we have short-term savings to more than pay off these bills. Does this not show up on our credit reports?
Answer: The scoring formula often can't tell the difference between someone who's playing a game of arbitrage (essentially what you're doing) and someone who's getting in over his or her head.
Your credit reports, from which your FICO scores are calculated, give no clue that you have plenty of savings to pay off this debt.
A FICO score is a three-digit number that lenders use to help gauge your creditworthiness. But it doesn't take into account your income or any other "ability to pay" information. The FICO score gets its name from Fair Isaac Corp. of Minneapolis, which developed it.
What the formula tracks is your payment history, the number and variety of your accounts and — most important for this discussion — the limits and balances of your accounts.
If you're close to the limit on any card, that's potentially bad for your score. So, too, is opening a lot of new accounts in a relatively short period of time, even if it's just to take advantage of a great interest rate offer.
It's hard to predict how playing the zero-percent game will affect your scores over time. Some people are able to do it for quite a while with no major negative effect, particularly if they are careful not to use more than 50% or so of any card's limit. Others find their scores drop over time.
Liz Pulliam Weston is the author of "Deal with Your Debt: How to Manage Your Bills and Pay Off What You Owe" and "Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number that Shapes Your Financial Future." This column may not be resold, reprinted, resyndicated or redistributed without written permission from its distributor, No More Red Inc.
