Very recently a combination of factors lined up to make refinancing our mortgage a smart financial decision for us. A year-end bonus and our house appreciating meant it was time to look into dropping Private Mortgage Insurance (PMI), as discussed here, plus interest rates are about half a percent lower than when we got the mortgage in the first place, so locking in a lower rate for the next 20+ years could save us tens of thousands over the course of the loan. Unfortunately, we had each signed up for a bunch of credit cards in the past several months and conventional churning wisdom recommends holding off for at least 6 months before applying for a major loan! Should we keep paying PMI and higher interest rates to let our credit reports cool down, simply try to remove PMI from our current loan, or throw caution to the wind and apply for the refinance anyway? As the only risk of applying for the refinance is a hard credit pull, we decided to go for it despite each having 3 new credit cards between us in the past 60 days and a bunch more further back. I’ll break down what impact the new accounts had on our credit scores (more than we expected!), how that impacted our rates, and why we’re going ahead with the refinance anyway below.
Credit Score Tracking
When I first started looking into rewards credit cards and big signup bonuses a year and a half ago, tracking and maintaining our credit scores was at the front of my mind. The holy credit score was the ticket into big adult purchases like homes and cars after all, as well as a key factor in determining your ability to get more credit cards. Starting out, I used a few free tools to start tracking my credit score and began meticulously recording my score over time to see what kind of impact all of these new credit cards would have. Much to my delight, regardless of how many cards I got the scores seemed to continue going up. It would drop 5-10 points every so often when I got a couple new credit cards, but would be even higher than it started a couple months later when I applied for the next. Overall the trend was heavily favoring an upward trajectory.
Fast forward to a week or so ago when we started looking at refinancing our mortgage and we’d have to actually use our credit scores for something other than new credit cards for once. A combination of year-end bonuses, rising property values, and lower interest rates made this an ideal month for us to refinance. Not only would we be able to get rid of PMI once and for all, but would also be able to lock in a lower interest rate and cut potentially hundreds of dollars off of our monthly payment. Talk about a win-win. While browsing for rates, I plugged in a FICO score estimate of 740+ (which was the highest category) based on our monthly FICO score updates from Discover and Amex and found the company with the lowest rate and closing cost combination that worked for us. Much to our surprise, when they made the hard pulls on our credit to lock in the rate, our credit score was much lower than anticipated! What happened?
FICO vs. FICO vs. FAKO
There are a lot of different ways to retrieve your “credit score” from various places such as banks, credit cards, and free online websites but unfortunately they only give one score out of many different possible algorithms that generate them. You’ve probably heard FICO vs. FAKO used to describe an “actual” FICO score (like the free one offered by Discover) versus estimated FAKO scores offered by websites like Credit Karma, but did you know that “FICO” itself doesn’t actually connect to a specific scoring algorithm? Instead, it really just encapsulates the overall brand of credit scores generated by the Fair Issac Corporation.
One FICO score may give you a value 100+ points off of a different FICO score simply due to the way they are calculated, even though both are legitimate “FICO” scores using the exact same credit information. This is particularly true when comparing scores used for different purposes. For example, there are more specialized credit scores specifically for auto loans or mortgages and they each favor certain credit factors more heavily than others such as those used for credit cards. Overall, there’s really no way to know for sure what your credit score will be for any particular lender which is why I strongly suggest you never pay anyone for a “credit score”. It won’t be any more accurate than the free estimate websites you find online such as Credit Karma and Quizzle.
The myFICO website has more information on the different types of FICO scores and why they exist: FICO® Score versions
As it turns out, the “FAKO” scores that I’ve seen many people write off were actually more accurate for Becky and I than the “FICO” scores provided by Discover and Amex as far as refinancing a mortgage is concerned.
What I Expected My Score To Be
NOTE: I’m displaying my credit scores below, but for all intents and purposes you can look at them as both Becky and I’s. Our credit profiles are almost identical and aside from a few points up and down on various reports, all of the conclusions apply to both of us.
As I mentioned above, I do a fairly good job of tracking my credit score whenever it’s provided to me. Discover, Barclay, and Amex each provide a monthly (usually…) FICO score update, or more specifically, they provide a FICO Score 8 based on TransUnion and Experian data respectively. Based on these numbers, it definitely looked like we should qualify for the best possible interest rates:
Based on the two FICO 8 scores provided by Discover and Amex (based on TransUnion and Experian data) my credit score should fall somewhere in the 740 range. On the other hand, the various credit score estimate sites all pegged me a little bit lower with their VantageScore 3.0 model. Here’s an explanation on VantageScore from Quizzle’s website:
The VantageScore credit score was launched as a joint effort by the three major credit reporting companies (Equifax, Experian and TransUnion). Today, the VantageScore credit score is used by thousands of lenders, including the nation’s largest banks, in their credit card, auto lending and mortgage businesses.
According to Credit Karma (and Mint and Quizzle), my actual score was in the high 600s instead of the mid-700s. Kind of a big difference, but up until this point I always put more weight on the FICO score over the FAKO VantageScore so I thought I’d be good to go for the refinance.
What My Score Actually Was (For the Purpose of Refinancing That Is)
During the rate shopping process where they simply asked for a credit score estimate to quote a rate, I always put 740+ but was told anything above 720 should get the same rates. Once we settled on a provider and actually applied for the refinance, I was surprised to find out that my score was actually closer to the Credit Karma FAKO scores above!
The actual scores pulled were the following and I did get a copy of the reports during the process:
- Equifax: 705 (FICO Classic V5 scoring model)
- TransUnion: 680 (FICO Classic V4 scoring model)
- Experian: 698 (FICO V2 scoring model)
Overall, they each came in a little lower than expected, and I definitely learned not to discount the “FAKO” VantageScore when trying to determine what a real pull of my credit might end up like.
Comparing to Pre-Churning Credit Scores
Getting my credit pulled for the refinance gives me a good opportunity to see what’s really happened to my credit since starting the rewards credit card game about 18 months ago. We got the initial mortgage about 21 months ago and still have the credit reports from that hard pull for comparison. At that time, we each had a single credit card from a small credit union and it was only open for about a year or so at that time. Other than that, our credit reports were basically empty. The scores pulled back then should be a good comparison to the ones pulled recently due to them both being for a mortgage-based loan, but unfortunately they didn’t list what scoring model they used:
- Equifax: 726
- TransUnion: 704
- Experian: 741
There you have it folks, the real impact of opening up 23 new credit cards in the past couple years has been about a ~30 point average drop across each credit bureau! Definitely a larger impact than I thought, but certainly not detrimental in any way. As time goes on, my score will eventually bounce up to the 800 range if I take it easy on credit card applications because recent inquiries will go down and average age of accounts will slowly get bigger and bigger. Even if I do keep signing up for cards as the same rate, the AAoA will get bigger as well, but just not as fast.
Impact On The Refinance Rate
The scores themselves aren’t exactly meaningful as what really matters is how the bank considers them and how their terms change based on the score. In our case, we were bumped from the top-tier interest rate to the next level down which resulted in a 0.125% increase in the rate on the loan. Closing costs and everything else remained exactly the same, so it’s really easy to calculate exactly what the impact was to our finances.
- Increase in Interest Rate: 0.125%
- Increase in Monthly Payment: $23
- Annual Difference: $276
- Difference Over Lifetime of the Loan (30 years): $8,280
Once we had the option to officially lock in the rate, there was a couple things to consider. First, simply removing the PMI would start to immediately save us ~$150 per month alone. Second, the lower interest rate compared to our initial loan (even with the extra 0.125%) saves us another $200/month on our payments. Third, there was no guarantee the interest rates would remain the same or go down by the time we settled down the new credit cards and waited for our scores to fully recover. Plus, waiting introduces somewhat of a guessing game into when we should apply again. Would 3 months be enough? What about 6? Should we wait a full year? Or more?
Anyway, the immediate savings of ~$350 per month was more than enough reason to go through with the refinance and we will make up the closing costs with those savings in less than a year. We locked it in and are going through the closing process right now, I’m optimistic everything will finish out smoothly.
Absolutely! Even if given the option of going back and laying off credit card applications for the past 6 months to a year, I probably still would have done the exact same thing even knowing it would cost me an extra $23/month on the new loan. Keep in mind, while the $8,280 in extra interest payments seems a little scary, it’s spaced out over 30 years and only actually applies if we take the full 30 years to pay it off! The chances of us being in this house 10 years from now are pretty slim, although it’s always possible we’ll keep it as a rental property when we move on. Regardless, we might just continue to make the same payments we are now and let that extra ~$350 per month go towards the principal to speed up paying it off and save us a bit in interest.
To add a little context to why I think signing up for all of those cards was worth it, over the past 18 months or so Becky and I have opened up 37 new credit cards and received ~1.4 million miles/points, numerous free hotel nights, and a couple thousand dollars in cash (about half of which was offset by annual fees) just from signup bonuses! I hate to put values on points, but a conservative estimate would put the total value over $20,000! We will have to slow down eventually (or at least adjust our strategy), but at the moment we seem to be able to accumulate over $1,000 per month towards travel thanks to the credit cards we sign up for.
Previously, it was hard to put a “price” on exactly what this credit card behavior was costing us long term, but for now that price appears to be about $23 per month going forward. Still worth it.
What About You?
Credit scores are a fickle beast and it’s hard to say exactly what the impact of you doing something similar to us would have on your credit. We started from a very short and limited credit history, so anyone more established at the start would probably be better off. If you’re already in the 800’s, I can’t imagine any number of credit cards that would knock you back down to the 600’s (as long as you pay them all on time and in full!). Aside from that, simply going at a slower pace than us would probably reduce the impact on your credit score.
Let’s also not forget that credit score isn’t the only factor that goes into your ability to get big loans. Income, assets, and outstanding debts are all major considerations by the banks issuing the loans outside of the credit scores discussed above.
All I can provide is my own experience, but hopefully you learned something. The biggest takeaway for me was probably that “FICO” vs “FAKO” probably isn’t that important and you should consider both when trying to piece together what your effective credit might be.
If you’re interested what credit factors went into all of my scores above, here’s a good view from Credit Karma:
Did I scare anybody into slowing down their credit card churning, or did all of this anecdotal evidence convince you to go harder? The decision is ultimately yours, but I’ve convinced myself that it’s not time to start walking away from that sweet sweet travel anytime soon. Cheers!