When It’s OK to Drop Your Good Credit Score (Analysis)

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By Bev O’Shea | NerdWallet

If you’ve worked hard to get and maintain a good credit score, it can be upsetting to see it plummet. But “life happens, and sometimes how you react is going to explode and affect your credit score,” says credit expert John Ulzheimer. People are losing their jobs, cars are breaking down and pipes are leaking. Credit can be your safety net.

As painful as it can be, there are times when taking actions that hurt your score are prudent for your overall finances.

When you have an urgent expense

If you have a big unexpected expense that exceeds your emergency savings, using your credit cards to cover it can be a decent option.

You may experience temporary score damage due to having a high balance on your card for a period of time. It’s generally best to keep balances below 30% of your credit limit, and of course, paying in full each month is ideal. But the damage from a high balance should fade as new, lower balances are reported to the credit bureaus.

Don’t beat yourself up for not saving enough. Emergencies don’t necessarily correspond to when you’ve saved enough, nor do they happen one at a time. Cary Siegel, author of ‘Why Didn’t They Teach Me This In School?’, strongly recommends budgeting and building up an emergency fund large enough to be protected in the future. .

When you struggle to cover essential expenses

Sometimes a crisis, such as a loss of income, makes it impossible to cover living expenses. Then, sacrificing a credit score is the lesser of two evils, says Ulzheimer. If you have to choose between paying your credit card on time and keeping utilities, protecting your family is more important.

If possible, try to make the minimum payment on your credit card before it’s 30 days overdue. Your credit card issuer won’t be happy and you’ll probably have to pay late fees. But creditors can’t report you to the credit bureaus until your payment is past the 30-day due date.

If you don’t pay within this 30-day window, the creditor may report your account as overdue. This negative mark on your credit report will seriously damage your score, and only time will undo the damage. It will stay on your credit report for about seven years, although the effect will wear off over those years.

Siegel advises contacting creditors and explaining what happened, when you’ll be back, and how you plan to pay them back. They may be willing to give you more time and you may be able to avoid damages from late payment or negotiate a lower interest rate, he says. And asking can’t hurt.

When the money is on the way

Siegel, a father of five young adults, warns against overreliance on credit. But he is willing to make an exception when the income is imminent but the bills are already there. A tax refund or payment for self-employment falls into this category.

If you know the money is coming, credit can be a bridge until it comes. Prepare for a score as long as you have a high credit card balance, then look for a rebound when you reduce it.

When creating or investing in a business

Investing in a business is another time you can choose to use your credit, but keep the risks in mind. Siegel says there should be a clear, detailed business plan that’s much more specific than a good idea.

A good or excellent credit score can mean you qualify for a 0% introductory rate on a credit card. Or, you may have plenty of room on your existing credit cards to temporarily handle a higher balance than you normally do.

“It could be a scenario that makes sense as long as you have a plan and the ability to know when it’s time to stop this – it’s not working (the way) I envisioned it,” says Tom Quinn, vice president of FICO Scores, a credit scoring and data company. It can be tempting to go all-in, but don’t let a business idea threaten your overall financial health.

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Bev O’Shea writes for NerdWallet. E-mail: boshea@nerdwallet.com. Twitter: @BeverlyOShea.

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