Sudden Credit Score Drop: Reality Check

You’ve worked hard. It took you roughly a year and a half to raise your credit score by 180 points. You only have two negative items left on your credit report, but the rest of your accounts are positive. You make sure to pay your bills on time every month, even if it is the minimum payment amount. Then, your heart skips a beat, your stomach turns, and you become nauseous. You receive a notice from your credit monitoring service alerting you to the fact that your new credit card has been posted to your credit report and your score has decreased by 160 points.

Unfortunately, that’s a true story. It is my true story. None of my credit cards were maxed out. All my payments have been made on time. So, what happened? Well, to make note of the good news first, my score should go back up quickly. However, having one credit card that is still in collections hurts me because, although all my open credit is in good standing, I don’t have very much available credit since my limits are low. I had decided to go ahead and accept an offer for a credit card that doesn’t have the greatest interest rates and already has the annual fee billed to it for its first transaction. So, it didn’t take much for my utilization (how much of my credit I use) to move past 30%. My utilization sits at 31%. My payments have not been reported to the credit bureaus yet, nor has the recent increase that one of my credit accounts gave me for good payment behavior. When all that stuff is reported, I’m not sure if my score will go back to where it was, but it should significantly increase from what it dropped to. Here’s what I’ve learned because of this happening:

Stop checking Credit Karma/Credit Wise/etc. every week

At least, stop checking the scores every week. These services are great for keeping up with what’s on your report, but your score doesn’t update weekly. The scores these services provide are estimated. Your official scores are updated monthly. I have been in the habit of checking my scores every week and this experience has reminded me that I shouldn’t do that or else I’ll obsess over it. Ten of my twelve accounts are in good standing. Of the two that are not, one of them will soon fall off my credit. So, keep that in mind when you see your Credit Karma/Credit Sesame/etc. scores.

Be conscious of when your payments post and when they report to the credit bureaus

Timing is everything. In the financial groups I participate in on social media, I have seen several people make comments about keeping a calendar of some sort so that they’ll know when their payments post, this way they can strategically make their payments and use their credit. I have consistently made my payments on time, but my most recent credit card is what has given me trouble. Since it already came with a balance on it from the annual fee and I made a small purchase right in the middle of the reporting period, after I paid my bills but before they were reported, it made my utilization look terrible. I haven’t figured out the exact formula just yet, but, in short, don’t use any credit until after all the payments have been reported and make new payments before your most recent charges are reported.

Credit is very important

I know that some financial gurus live by the theory and advise that you eliminate as much of your credit as possible, try to pay for as much as you can with cash, and save up as much cash as you can. I believe it is Dave Ramsey who says something like a credit score is a how-much-I-love-debt score. I respect Mr. Ramsey and all the others who preach that. They certainly know more about finances than I do, which is why I started this blog to document my financial journey. However, I disagree with that sentiment. I’m certainly striving to have a substantial amount of cash on hand, but credit can afford me opportunities, as well. If I suddenly need a car but have no cash available, what do I do? (I went through that a few years ago, which is how I landed in a lot of the financial trouble I just came out of) That depends on whether I have access to any other transportation and the job I have. At that time, I could have called upon my family to give me a ride when I needed to until I saved up enough cash. If my credit had been A-1, I could have also gone to any car dealership, not just the “Guaranteed Credit” car lots that I ended up buying from, and I could have driven off the lot in a newer car with lower interest and payments and I would have paid closer to what car was actually worth instead of overpaying. I can also qualify for better apartments and, when I am ready to purchase a house, I’ll have an easier time applying for home loans. Cash is definitely king, but credit holds a lot of power, too. I believe that there needs to be a healthy balance between the two.

I recently read an article about Jay-Z and Beyoncé and why they chose to take out a mortgage on their homes instead of paying cash since together they have a net worth of more than $1B. It didn’t make sense to me initially, but after I read the article it made perfect sense. The interest they would pay on their mortgage would be less than the interest that they earn if they only put down a portion of the home’s total cost and invested the balance while continuing to make payments on the house. Of course, the average person can’t make money moves like that, but the fact that they were able to do that is because they have both cash and good credit. Balance.

Never get comfortable and always be ready

Whenever I get ready to swipe one of my cards or type in the number on a store website, I think about the fact that eventually, I must pay this back. I keep in mind how long it’ll probably take me to pay it back.

I had a lot of pride in my credit score. I still have a lot of pride in the progress I made, despite this temporary dip. It hurt my soul to think of how time and effort it took for me to finally get a fair/good score only for it to drop in less than a month due to one card that I thought would have helped more than it hurt. I have no intentions of opening any other accounts anytime soon, except for an auto loan later this year. However, it is always devastating and eye-opening when you see all your hard work seemingly ruined, even for a short period of time. Like I said earlier, I know my score will go back up, but it still sucks. However, my end goal is to be financially fit and to build wealth. In the long run, it’ll all be worth it. But this reminded me that everything you work for can be lost in an instant, no matter how secure you may think you are. It may be your fault, or it may be someone else’s, but it can happen. Stay conscious and balanced.

© LeTara Moore, All Rights Reserved