The Pitfalls of Conservatively Managing Your Credit Card Portfolio

I read recently that most families lack the necessary ready cash to pay even a modest, unexpected monthly expense. It’s been a while. Been there, done that.

When we were much younger, financing our lives through a portfolio of credit cards was the order of the day. Which card to use? How much credit remained on what card? It wasn’t the best program of personal finance, but it offered the least friction. What balances we owed was a matter of strict confidence between our credit card issuers and my wife and I, and of course, the postal worker who served as our two-way conduit of monthly statements and monthly payments.

At some point, our use of credit cards switched from financing the day-to-day realties of life to maximizing points in loyalty programs. Keeping a large portfolio of credit cards at the ready wasn’t a necessity any longer.

Take my jetBlue MasterCard as an example.

Toward the end of my career, I frequently flew between Las Vegas and NYC-JFK. Almost every weekend, in fact. Not only did those TrueBlue points prove useful, but the credit card nixed the baggage fees of which airlines have become so fond.

Then I retired. The weekend flights ended when I permanently relocated to Las Vegas and my trips to NYC ended. Still, I managed to avoid baggage fees on one vacation trip a year. Those savings offset the annual charge for having the card even though we seldom flew jetBlue. 

Last summer, while working with Wendy on her quest to assemble our Big Book of Death¹, I realized we had way too many credit cards and way too much potential, unused credit. Between American Express, two VISA, and three MasterCards, we had well over a hundred grand in available credit. We seldom used more than one-to-five percent of our outstanding credit. Generally, we repaid our card balances at the end of each month.

I cancelled two of our cards: One VISA card affiliated with Amazon, and a month later, my once loved jetBlue MasterCard. Today, we each have our own Apple Card (MasterCards), a joint Costco VISA card, and our long suffering, often dusty American Express card. We dropped almost fifty grand in available credit.

According to the prognosticators and pundits specializing in credit ratings (here and here), our scores might improve a bit, or would most likely remain unaffected, but were unlikely to decrease. They were right when we cancelled the Amazon VISA card. Our credit rating jumped about two or three points across the three dominant credit bureaus: Experian², Equifax, and TransUnion. HOWEVER, a little more than a month later, when I cancelled the jetBlue MasterCard, our credit rating on Experian plummeted 37 points! Our credit rating dropped from excellent to very good. This took place just as we applied for a mortgage to purchase a new home.

Talk about bad timing.

Good news: Our new, lower FICO score still reflected we were a very good credit risk. And each mortgage lender was a bit puzzled when Experian’s explanation for decreasing our score clearly fingered the jetBlue MasterCard as the cause. “Shouldn’t be the case,” they each said. But Experian said so in clear, unambiguous black and white.

I did a deep dive to find out why.

First, Fair Isaac Corporation, the progenitor of the many different FICO scores, isn’t about to have its many metrics gamed by giving away the details of its algorithms. There’s also the small problem that a (legal) devil might be found in one of the many details. No company wants to face allegations of lending discrimination in a court of law. Better to be vague.

Second, only Experian dinged us by 37 points. Equifax and TransUnion meted out a much lower penalty of three points. Clearly, Experian’s secret sauce contains a different ingredient in the mix of FICO scores.

Here’s what I’ve been able to determine:

ü  Potential lenders like to see future clients with five or more open lines of credit separate from things like auto and mortgage loans. With the demise of the jetBlue MasterCard, we fell one short. The closed accounts remain on our credit report for a minimum of seven years. Any future lender can see we have been an excellent credit risk over that period of time. Experian, however, places a greater emphasis on open lines of credit. 

ü  The jetBlue MasterCard was our oldest credit card. Our average open credit relationship dropped from ten years to five when we deep sixed the MasterCard. Acquiring two brand new Apple MasterCards didn’t help. Older, longer credit relationships reflect a premium in all credit rating algorithms. Think twice before killing your longest credit card issuer relationship. While we saved the $80/year membership fee, but what if a 37-point drop caused us to be denied a mortgage?

ü  Reducing our outstanding line of available credit by 37 percent might not have been viewed as a good thing. Some lenders view a drop in outstanding credit as a concern. [It didn’t matter that the credit card issuers for the closed accounts stated we had an excellent payment record.]

We recently paid off an outstanding mortgage. This summer we will retire an auto loan. We’ll own two assets—a second home and an almost new car—without any associated debt. That should be a positive, right?

Not necessarily.

We’ve been advised that repaying a car loan may result in a short-term decrease in our credit rating. What happens now that we’ve repaid a mortgage loan?

I guess we’ll find out soon enough.

¹Big Book of Death is the macabre name we’ve bestowed on a step-by-step manual for liquidating our joint estate once both of us are gone.

²In full disclosure, Experian was my client in the mid-1980’s when it was known as TRW Credit Data Services. I haven’t had any business relationship with Experian in over thirty years.

Copyright 2020, Howard D. Weiner