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Destroying My Credit for Fun and Profit

Making money with credit card arbitrage has hurt my credit. When I published my arbitrage calendar earlier this month, I noted that one of my introductory rates was expiring soon and that I had applied for a new 0% credit card to transfer the balance to. This transfer would help me to keep earning my expected $2,000 in free money over the course of the year. Two interesting things have happened since then.

First, American Express sent me a letter informing me that they were reducing my credit limit by $1,000. I thought this was very interesting but otherwise didn't care much because it would have no practical consequence for me.

Second, my application for the new 0% credit card was declined. They sent me a nice letter about it. I knew before opening it that my application was declined because I didn't feel a stiff chunk of plastic in the envelope. They were fairly terse about the situation:

Your total credit obligations, which include outstanding credit lines, are too high to meet our approval guidelines, when compared to your stated income.

It's a shame they couldn't write that as "we decided not to give you credit at 0% because we're pretty sure you'd use it."

So I plunked down $11.96 to check my FICO score (at myFICO.com with a 20% off coupon) and learned just how bad I look to creditors. I've only checked my FICO score three times; here's all the data I have: 754 in 11/2002, 762 in 05/2005, and now 676 in 05/2006.

When I checked my score last year I had already made the first small steps into credit card arbitrage because I was accumulating a balance on a card offering me 0% on purchases. But I hadn't done anything aggressive yet, and my revolving balances were only 19% of my credit limits. Today I learned that the average American's balance-to-limit ratio is 40% … and mine is 68%. I also learned that only 15% of Americans have credit card balances over $10,000. Mine are $45,000! According to my credit report I'm in financial distress. I wouldn't loan me money, either. :)

Perhaps if I was reading my blog I'd know that I wasn't a credit risk, but it would make me even less likely to loan me money because I'd be certain to lose money in the deal. (Pronouns confusing you yet?) Credit cards offer promotional interest rates to gain customers. They want to earn interest from carried balances and they want to earn transaction fees from merchants. A customer like me who is only using the credit for arbitrage is a total loss. We'll pay off the balance before paying any interest, and won't make any purchases because the purchase interest rate isn't 0%.

My FICO score of 676 puts me around the 35th percentile, with a predicted risk of missing a payment at 14%. There's no way I can qualify for a 0% balance transfer before my introductory rate expires at the end of this month. Regrettably, I'll have to pay off the balance on that card — about $14,000. (This is why we keep our funds liquid when we're playing the credit card arbitrage game, my friends.) The majority of my remaining balances will lose their introductory rates in October. This gives me a lot of time to think about a strategy for making a successful balance transfer instead of paying those balances off, too.

If you have any tips, you're welcome to drop me a line.

Tiny Island