Be Credit Smart: Beware of the ‘Larry Rule’
by Jason Dean
Under the rules of the National Basketball Association’s salary cap, teams can sign contracts with their existing players — as opposed to the players from other teams — without counting the full salary towards their team total. This is called the “Larry Bird Rule,” for Boston Celtics legend, Larry Bird. The NBA didn’t want to see Mr. Bird fly the coup for more money, so they allowed the Celtics to sign him for a salary that would put them over the salary cap; thus creating this new rule.
But did you know there’s a “Larry Rule” in personal finance, too? But the Larry it was named for never won a three-point contest or went one-on-one with Michael Jordan in a McDonalds commercial. The personal-finance Larry Rule was named for Larry Lindsey, not Larry Bird.
Unless you are a Capitol Hill policy wonk, you probably don’t know who Larry Lindsey is. Yes, he was once a chief economic adviser to George W. Bush, and before that, he was on the Board of Governors to the Federal Reserve — but that’s not why he’s famous. No, Mr. Lindsey is famous because, as a Fed Board governor, he was denied a credit card… from Toys ‘R Us!
Larry Lindsey was not exactly a high credit risk — he was one of seven people on the world’s most prestigious financial board, for goodness sake! He had a spotless credit history and an income of $168,000 per year. So why on Earth did Geoffrey the Giraffe deny him a credit card?
The answer: Larry Lindsey had set out to demonstrate a flaw in the FICO credit-scoring system. Every time a pushy retail clerk asked him to apply for a store credit card, he agreed, and up until that day in Toys ‘R Us, he had always been approved. But finally on that day, he was declined for having “too many recent inquiries.” You see, when you apply for lots of credit, the credit-scoring models think you must be desperate for credit. So when your department-store clerk says “it can’t hurt to apply,” she isn’t telling you the whole truth.
The good news is that inquiries disappear off your credit report after six months. The Larry Rule isn’t a life sentence, but it can be painful if you plan on applying for credit for something important — like a house or a car — and you get denied for having “too many recent inquiries.” So the next time you’re asked to apply, take a second to consider whether the 5% off your order is worth a temporary hit to your credit score. Maybe it is and maybe it isn’t — it’s up to you to decide, but the important thing is you’re informed.