Posted by William Charles on May 17, 2016
Questions & Answers

Published on May 17th, 2016 | by William Charles

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Ask A Banker, Your Questions Answered #2: MO Accounts, Gamers, Gift Cards, Loan Eligibility + More

Awhile ago we asked you if you had any questions you’d like answered, as @billclancy (Bio here) from Northpointe Bank, was happy to answer them. Northpointe are also currently offering a sign up bonus of $50 and a $50 donation to charity when you sign up to their rewards checking account with a 5% APY. Here are the questions you wanted answered, answered!

Questions & Answers

You can click the question header to be taken to the comment where the question was asked.

How Do Financial Instituations View ‘Gamers’?

Q: Thank you Bill & Will for doing this. What do we look like to Northpointe and other banks?

That is, I’m curious what’s the profit model/calculation for banks towards the MS (manufactured spending, miles and points) community. This is based on the assumption that Northpointe in this case reached out to the readers of this blog to provide some value (answers) in hoping to get its name out to them.

I mean, are we seen as a more or less profitable consumer group in this case, and why? Or is this just a way to reach out to another group of consumers that most banks probably don’t target directly?

A: I can only speak for Northpointe Bank. Is the MS community any different from a consumer consumption standpoint than others? Yes? Maybe? Probably? No? Frankly, I wanted to know so here we are… It’s a lot easier for a bank to throw $50k at a traditional, non-measurable ad campaign like TV, radio or billboards and then shy away from accountability for the ad spend if loans or new accounts do not increase because the advertising medium isn’t directly measurable. Online, digital campaigns like this are highly measurable. But it’s too soon to know how this shakes out. Maybe I’m back here pestering Will to run similar campaigns every 2-3 months…maybe this was a one-and-done offer. Time will tell (I estimate six months of account seasoning is needed to have enough useful data).

How Are Gift Cards Viewed?

Q: I’d like to know if/how banks see gift cards differently than debit cards (besides that most gift cards do not have a name on them). We all get a lot of push back and hesitation from stores when using a gift card with a PIN number as debit, but any card that doesn’t say “gift” on it seems to be no problem even without a name. When using an automated machine or any other process to where the store doesn’t see the card is a gift card, there is zero hesitation to take it as debit.

A: I’m not a big gift card user so this is new info to me. However, gift cards are a well-known, easy way to fraudsters to hide, store or transfer money obtained illegally. Now, such illegal use of gift cards is the exception, not the rule but it could be why the pushback. From my perspective, it’s different for a bank because we have an existing relationship and verified personally identifiable info at account opening (SSN, name, address, government issued ID, etc.) so any transactions with/to/from a gift card possess relatively less risk for a bank vs. a merchant.

How Do Open Credit Cards Affect Your Loan Eligiblity?

Q: I’d be really interested to hear more about the effect of having a lot of open credit cards on your credit report has on the mortgage process. Should a consumer stop applying for credit cards within two years of applying for a mortgage so that there are no hard inquires on their report? And to that point, would a consumer get a worse interest rate just because they had a lot of hard inquiries even if they had a 760+ FICO score? Or do the hard inquiries even matter since the open revolving credit accounts will still always show on the credit report?

And finally, is all of this moot because mortgage lenders typically just consider your FICO score and the other C’s (capacity and collateral) or do lenders usually look through and consider your entire credit report?

I believe Bill touched on the subject in his responses but if there could be any more elaboration that would be fantastic.

A: There are so many variables at play here so I’ll try to outline the general guidelines but please understand every situation and every lender is unique.

Your FICO score is the primary driver of the ‘credit’ consideration on a loan application. But not every 760 score is created equal – there are likely a hundred different credit profiles that could produce that same score. From a lender’s perspective, lots of credit inquiries may indicate mounting debt – is the applicant in a situation where they are unable to afford their current debt load based on the primary sources of income and is relying on credit cards to keep afloat? That’s cause for concern to the lender if they’re considering granting a home loan in the amount of $100k, $300k, $600k….A similar situation applies to a large number of zero balance credit cards. Credit could look good today but what’s the budget situation if all those cards become maxed out due to health issues or job loss – and how does that impact the borrower’s ability to repay the home loan? Per Marc msj’s reply in the comments section, be prepared (and proactive even) in explaining this and it should just be a hurdle in the process rather than a roadblock.

Mortgages & Open Accounts

Q: Let’s say I have excellent credit profile, 0 inquiries over the past two years, and a 800+ credit score. Considering other factors sunk, how would an excessive amount of open credit card accounts (10, 15, 20+) be viewed by a bank when applying for a mortgage?

A: Two things here – first, congrats on the pristine credit profile. Second, this scenario is worse than if you always had those credit cards opened. Seems counterintuitive, right? The picture you paint is one of escalating debit – the applicant had something occur and can no longer afford their bills so they’ve turned to revolving debt to handle the situation (Divorce? Medical? Drugs? Gambling Losses?). At least if the applicant had a track record of such a high number of cards it would prove they could handle the situation/payments. This will sound conservative but anything above 2-3 cards opened in a 12 month period will raise red flags and could potentially disqualify you from the best rates and terms (note: this will vary somewhat by lender).

Lying On Applications & CD Rates

Q: What are the ramifications if you are caught lying on a financial application? For example if you write that you own a business but you don’t in order to get a business card.

Do you think CD rates will ever make a comeback? Several years ago you could easily get a rate of 4% and sometimes even higher.

A: Lie on a financial application? Why would you even put yourself in this position? The outcomes could range from nothing up to lawsuits, fines or imprisonment depending on the depth and breadth of the situation. It’s simply not a good idea…nothing more to say on this one.

CD Rates will continue to remain low for quite some time (years, not months). A return to 4% rates? Probably but who knows when that will happen. I’m not a financial advisor but there are solid alternatives available in the 4-10% return range for “minimal risk.” [Don’t have a financial advisor? Let me know – I have an advisor to recommend]

Money Orders & Money Order Accounts

Q: I understand what Bill is alluding to regarding money order deposits: it’s unprofitable for the bank due to the compliance risk. There is little to no revenue generated for the bank, as most of these deposits are withdrawn (to pay back the credit card) very quickly, eliminating any opportunity for the bank to profit from float. The bank must perform due diligence to ensure it isn’t ML activity, which may include reviewing documentation as Nick suggested, but performing such a review costs money. Unless the bank has a reason to keep the customer (for example, if the relationship as a whole, which may include deposit balances, loans, investments, insurance, etc. as Bill said, is profitable), it makes more sense to sever the relationship.

My question for Bill is, what if we made the relationship profitable for the bank? Rather than expecting everything for free, what if we were willing to pay for these deposits, hopefully enough to cover the cost of AML compliance and some profit for the bank? One reference point is the “analyzed checking” accounts BoA and WF offer for businesses. Using WF’s (https://www.wellsfargo.com/biz/checking/analyzed) as a reference point, they charge $0.20 “per deposited item” and $1.00 “per deposit posted” (unclear if both are assessed for a check/MO deposit).

I for one would seriously consider such an offering if I knew the bank would be more cooperative with my activities. Like Nick, I understand the bank’s position and don’t mind explaining what I’m doing and providing documentation to prove it. Paying the bank for the service seems like a way to turn this into a relationship we’re both satisfied with.

A: This is a very thorough and well-stated analysis of the situation. I like your proposed idea. That said, bankers are risk-averse by nature. Most banks are run by accounting folks, typically CPAs. CPAs tend to not be risk-takers. These activities pose risk and high uncertainty – simply not a fit for your typical bank.

However, I like the idea so give me some time to do additional analysis and see about creating a new product specifically for this purpose. No guarantees here – but let’s see where this goes over the next few months.

ChexSystems Explained

Q: I would be interested in any info the banker has around ChexSystems Inquiries and their impact on new account opening.

A: This varies by financial institution. I’ll speak in general terms, followed by my specific experiences.

As a general rule, this is most often a minor factor in the overall picture for evaluating new customer applications. All else equal, fewer inquiries are better. A lot of recent inquiries or cluster of inquiries in a short period of time raises red flags – is there an ID Theft situation? Was there a fraud situation? What was the purpose of the multiple inquiries (not typical consumer behavior). Bottom line – it may raise questions but I’ve never seen or heard of a checking account application being denied solely for a high number of ChexSystems inquiries.

BillPay Requirements

Q: Why do lots of financial institutions include a bill payment requirement for bonuses/rewards checking? Is this profitable for the bank, or is it more about ensuring that this account becomes their primary account?

A: Good question because it uncovers some of the absurdity in the banking industry (although I’m sure this exists in any industry…). Numerous studies have shown that bank customers that use Bill Pay are more profitable for the bank. So, if we can get more customers using Bill Pay then we’ll have more profitable customers, right? NO! The causal relationship between these factors is misunderstood. Profitable customers use Bill Pay more because they are general more active and have more relationships…it’s not that Bill Pay makes them more profitable. It’s a big leap to believe the causality flows in both directions.
Other FIs do this for ‘breakage’ reasons – the more hoops there are to jump through the fewer people that qualify, resulting in less overall promotional expense to the bank.

Payment Networks & Exchange Rates

Q: How do different payment networks (e.g Visa, MasterCard, American Express, Discover) determine the foreign exchange rate that they use?

A: I’m not familiar and therefore unable to speak to this topic. [Editor Note: You can read more about foreign exchange rates, in this post]

Structuring

Q: Can you discuss the concept of structuring? is it legal to try to avoid depositing 10k+ in to a single bank account but rather split it up either among bank account or using it to pay off multiple credit cards so you don’t have to go through the “hassle” of it being reported and dealing with it etc? is this legal or does it fall under structuring which i asked before but would like to get a better legal standing on what fall s under it?

A: Hassle? Seems like a lot more hassle to have to track your deposit amounts across multiple banks and make multiple trips to different banks to complete those deposits, no? The rules are set-up in a way that if anyone at any of the involved FIs get wind of what you are doing; this is not going to end well for you. My recommendation is to not structure or try to skirt the rules up to what you think is or isn’t allowed. The downside far outweighs any perceived upside.

5% APY Longevity 

Q: Is the 5% rate temporary? If so, when will it decrease? Or is its longevity dependent on the stock market in any way? Thank you.

Bit your tongue, Josh! There are no plans to decrease the 5.00% APY on our Ultimate Checking Account, and it’s not a promotional rate. The rate has been in place since the product debuted in December 2014 and if anything, it will increase as economic conditions improve and deposit rates increase. We’ve had those conversations internally already even though it’s likely 12-24 months before we see any material rate increases. The rate is not tied to the stock market. Sure, 5.00% APY is ‘above-market’ but there is a cap of $5,000 on which it is paid – this product fits well into my bank’s operating model so no changes are expected anytime soon.

ACH Fees

Q: Why do some banks (including Northpointe) charge a $3 fee for an ACH push to an external account? I was surprised to see that Northpointe charges a fee for this because in general only the larger banks charge fees for ACH transfers.

A: For us, it’s simple – we want you to make deposits (funds for the bank to lend) and use your debit card (revenue to the bank). Sending money out of Northpointe isn’t on the list of desired customer behaviors. But, we understand that need may arise and we provide options for it – write a check, send a bill payment, withdrawal cash or send an ACH. Only the last option comes with a fee. We’re already providing 5.00% interest, ATM refunds and a free, no minimum balance account. Everything can’t be free.

Bonus Chasing

Q: Hey Bill, thanks for volunteering your time to do this series! I have a more general question for you.

Since you’re partnered with Doctor of Credit (and thank you for that, by the way!), I’m sure you’re aware that some people (including myself) visit sites like these, in order to find ways to make a little “free money” on the side off of these bank/CC sign-up bonuses.

My question is, do financial institutions know that people like me exist, and do they care? My fear is that these generous sign-up bonuses and rewards will slowly start dying out over time, due to people like me “gaming the system” and causing a loss for the FIs. In your opinion, do you think there’s a chance this would happen? Otherwise, how do FIs make money on these sorts of bonuses and rewards accounts?

Thanks again for your time! And P.S. I signed up for a Northpointe account after seeing the link here, but I *PROMISE* that I’m keeping it open and using it as a real checking account. Banks like yours need all the support they can get, in my opinion.

A: Valid concern and it’s something that is happening right now in front of us. You’ve likely seen or read about even on this site – another community bank recently scaled back their new account bonus to just residents of particular states in their branch footprint. Another larger FI I’ve seen featured as a best bonus recently added more hoops and lowered their bonus offers to account for the expense associated with ‘inactive promo accounts.’ I’m not sure this will bring the end to new account bonuses but it will shape the landscape, likely with more restrictions, more requirements and lower payouts – all negatives for the consumer.

At the same time, if FIs want to get into this game they choose the rules that dictate their offer and shouldn’t be unhappy with the results. At the same time, anyone ‘gaming the system’ shouldn’t complain when offers are scaled back or the hurdles get higher.

Got A Question?

If you have a question, please ask in this linked post: Got A Question For A Banker? Ask As Part Of Our ‘Ask A Banker’ Series. If we are lucky then Bill might agree to do another answer series. By keeping questions in post we can also keep this post for the discussion of the questions asked & answered for this round.

Final Thoughts

Big thanks again to Bill Clancy for being so candid in his answers and also Northpointe bank for allowing him to take the time to answer these questions. As mentioned previously Northpointe are currently offering $50 + $50 donation on their 5% APY account, so check that out if you don’t already have an account with them.

Please discuss whatever question/answer you found most interesting/insightful in the comments.

 

 



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Billy
Billy

Great read. Thanks for this feature!

Ben
Ben

Do you think Northpointe likes this Charitable donation bonus model more? I’m assuming they get to “write this off” tax-wise, so to speak. My knowledge of that sort of thing is pretty limited. And not complaining at all…personally think it was pretty cool of them. Unfortunately I already took them up on the $100 bonus awhile ago. Thanks Bill!

avi
avi

Im pretty sure they would be able to write it off no matter what, either as an interests expense or as a marketing/ account acquisition expense.

From my understanding DOC is basically redirecting their referral bonus to charity.

R
R

RE: How Do Open Credit Cards Affect Your Loan Eligiblity?

“A similar situation applies to a large number of zero balance credit cards. Credit could look good today but what’s the budget situation if all those cards become maxed out due to health issues or job loss – and how does that impact the borrower’s ability to repay the home loan?”

I am on market for a house and a first time buyer. I have a lot of open credit cards which are not used and i don’t want to close them as it will impact my average age of credit history.

Does it make sense to lower the credit limit on open credit cards which are not used much?

Or we need to show a solid bank balance or emergency fund to back this condition?

John
John

Hello R. You write:

“I have a lot of open credit cards which are not used and i don’t want to close them as it will impact my average age of credit history.”

This is a common belief but it is in fact not true. Closing one, two or many open credit cards will not affect your AAoA (Average Age of Accounts). This is because closed accounts are figured into the AAoA calculation just as much as open ones and furthermore they continue to age at the same write even after being closed. Ten years from now a closed card will fall off your reports, but that is a long time from now, way later than this home purchase you are contemplating.

On the other hand, you are likely to get no benefit from closing credit cards or lowering their credit limits. I realize I am here gently suggesting that Bill Clancy is mistaken, but that’s what I think is the case. I’d love to see a deeper discussion of this, and am certainly open to revising my own opinion. Here is what seems to me a sound piece on the common but mistaken belief that underwriters want you to have low credit limits:

http://www.creditcards.com/credit-card-news/myth-too-much-available-credit-hurts-mortgage-chances-1586.php

Even if Bill is right that his particular bank wants you to have a low total credit limit, it sounds from this piece that this was a common practice back in the day but is now longer one for a large number of lenders. Since you should be shopping for the best offer amongst competing lenders, I think closing lots of accounts or lowering their CLs would be a dangerous action at this point.

The best approach for you would be to have one credit card reporting a small balance and all the others showing $0. That will drive your FICO score as high as it can currently go (given your profile). If you have no open installment loans, there’s a very cheap way to get one added which would help you too. And of course, stop applying for new accounts.

Che
Che

Not a question, but more of a comment:
A monthly fee MO account structure instead of pay-per-item. The consumer would have to agree to provide documentation with each deposit.

John
John

Re the section called “Mortgages and Open Accounts”…

The question was this:

Q: Let’s say I have excellent credit profile, 0 inquiries over the past two years, and a 800+ credit score. Considering other factors sunk, how would an excessive amount of open credit card accounts (10, 15, 20+) be viewed by a bank when applying for a mortgage?

Bill Clancy’s response seemed based on the idea that the person has recently opened a number of credit cards. He writes “anything above 2-3 cards opened in a 12 month period will raise red flags” and emphasizes that the applicant does not have “a track record of such a high number of cards [that proves] they could handle the situation/payments” and is therefore at higher risk than someone who does have such a track record.

But in the scenario Bill is being asked about, the applicant HASN’T applied for or opened a card for at least two years and HAS shown a track record of handling such a high number of cards without difficulty. (He has such a great track record that his FICO scores are above 800.)

The question, as I am reading it, is getting at something very simple. If your credit profile is otherwise perfect (no accounts opened for a long time, perfect history of managing the ones you do have, 800+ FICO scores, etc.) is the bare fact alone of an applicant having a huge number of credit cards a problem for a prospective mortgage lender?

Cheapblackdad
Cheapblackdad

I think the key is 12 mos, <3. Worked for me when I closed late last year. We had 2 new accounts in 12 mos and had no questions and for the best rate available.

Cheapblackdad
Cheapblackdad

This guy is great. Totally going to be opening an account with them. And no funny business. This guy gets it. Provide good value, and expect it in return. I can handle that. Very thoughtful responses. I think Johns point is a good one, so may want to do a second run at the mortgage question. I like that he’s willing to look into the MO stuff.

Carlos
Carlos

Got declined by BOA for a mortgage because they wanted me to close all 60 plus of my credit cards and I refused.
They even wanted me to close my oldest credit lines that I have had for 20 plus years.
I have a 800 plus credit score and everyone knows what would happen if I did that.
Went to a mortgage company got approved for a $400,000 mortgage with no card closing requirements.
Banks suck dont use them.

Gary
Gary

I’ve heard from a couple of people, that I (and many others) consider among the bigger credit experts in the world, as well as from multiple mortgage brokers, that if a bank tells you that they’ll only approve you if you close your cards, run the other way.

Carlos
Carlos

Agreed Gary your so correct.
I worked very hard for my credit profile and I wouldve gladly closed half of my cards but not my 20 year old cards.

Shane
Shane

I have no debt, and noticed on my credit reports that the no installment loans is an issue for me. Above it is stated there is a cheap way to get one added. What is the suggestion?

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