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Do Your Credit Moves Send the Wrong Signal About You?

Credit scoring models may misread common moves like racking up credit card rewards or ditching an unused card. But there are ways to protect your score.
Aug. 27, 2019
Credit Score, Personal Finance
What Is Your Credit Saying About You?
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You are one in a million, but your credit score doesn’t really see you that way.

Credit scoring models aren’t tailored to understand you. They are designed to protect lenders by using millions of pieces of aggregated data to point to the most likely outcome for a particular consumer action. Credit scoring algorithms interpret some common actions as risky because in general, across many consumers, they have been shown to increase the likelihood of nonpayment.

Here are common scenarios that can hurt your score because of how scoring programs interpret them — and how to make sure your score says the right things about you.

Charging a big expense to get credit card rewards

You work hard on your score to qualify for a rewards card. Once you have it, you charge a big expense to collect a sign-up bonus or points. In the process, you use a big chunk of your credit limit.

How your score reacts and why: Your score drops because using a high portion of your credit limit is considered “risky” behavior, even if you pay off your balance every month. Scoring models assume the worst because they don’t know if this is a one-time occurrence or the first sign of your finances falling apart. How much of your credit limit you use — both on one card and across all your cards —  is a big factor affecting your score. Experts advise using less than 30% — the lower, the better.

How to send the right message: Make multiple payments in a billing cycle, says Dan Stous, a certified financial planner at Flagstone Financial Management in Lincoln, Nebraska.

Creditors report your payments to the credit bureaus once a month. Make sure your balance stays low by making payments on your card every week or so, Stous says. If you usually carry a balance, this has the added advantage of reducing how much interest you pay. (Carrying a balance does not help your score.)

Closing a card you no longer need or that has high fees

As your finances and goals change, you decide to close a credit card. Maybe you got the most out of its features and don’t want it anymore, or the annual fee isn’t worth it.

How your score reacts and why: Closing a credit account reduces your overall credit limit, automatically making your usage higher. It also lowers the average age of your accounts, which is a smaller factor in your credit score. Your score is likely to drop as a result.

How to send the right message: Call your issuer and ask if it has any free or low-fee cards, Stous says. “If they do, and if you want to switch to the free card, they can change the card product without closing the credit line. This maintains the history of the open credit line,” he says.

Missing a payment once because life got in the way

You move, change jobs, get married, lose a loved one. Paying your bill is the last thing on your mind. By the time you realize what happened, you’re hit with a late fee or a big drop in your score.

How your score reacts and why: This is a huge red flag because while it could be that you just forgot, it also could indicate you’re in financial trouble. Paying on time is the most important factor influencing your score. However, the effect on your score depends both on how late you are and your current score.

If your payment is less than 30 days late, your score won’t suffer because payments cannot be reported late to the credit bureaus until then. “You may have to pay a late fee, but a $40 late fee is better than a hit to your credit,” Stous says.

If your payment is 30 or more days late, your score can drop by as much as 100 points, especially if you have a high score. A missed payment goes on your credit reports and stays there for up to seven years, although the effect it has on your score lessens with time.

How to send the right message: Pay the bill as soon as you realize your mistake. Then call your creditor and ask if the late fee can be waived, especially if you’ve rarely missed a payment, Stous says. If you’re more than 30 days late, ask if the creditor will also stop reporting the missed payment. Again, if you have been a good customer, they may agree to it.

If they won’t, simply continue to practice good credit habits to minimize the effect of that one missed payment. Consider setting up automatic payments so it doesn’t happen again, or set a reminder for yourself a few days before your bill is due.

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