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In this current economic climate, some of us are trying to cut back on spending where we can. But it can be a real punch-in-the-gut if you notice that your credit score has dropped while you’ve been trying to be extra conscious of where your money goes.
Doesn’t that only happen if you’re overspending or forget to pay your bills on time? Not necessarily – credit scores may dip when you’re spending so little that you’re neglecting to use a credit card completely, too.
Whether this has happened to you already, or you want to be prepared if it does, it’s worth knowing why your credit score could get dinged when you’re being careful with your money.
Let’s take a look at a few strategies to help prevent that from happening, as well as what you can do if it does.
According to Experian, at the end of 2019 Americans held, on average, just over three credit cards. If you’re someone who has multiple cards, you may have shelved a few and decided to use just one or two to try and cut back on spending.
While this might seem like a good idea, complete inactivity on a card can sometimes lead to a drop in your credit score.
If you’re not using one of your cards at all, when your next credit report is put together, that card might not have enough activity to be included, which could lead to a drop in your score.
First, make sure all of your accounts are kept active. While sticking to only one of your credit cards may help keep your spending in check, using all of them at least every few months or weeks is important for a healthy credit score because it will keep your cards active.
And you don’t have to rack up a lot of charges to keep a card active: you could pay one of your bills with the lesser-used card each month and set up auto-pay so you don’t miss the payment.
Or you could designate different cards for different expenses, for example, use one card for coffee runs and the other for groceries. This way you’re able to keep tabs on exactly where your money is going, and maintain active accounts.
The other option is simple: wait. If your score has only dropped a few points, it might not be the biggest deal. Being patient and ensuring you’re actively using your card and still paying all of your bills on time and in full could eventually lead to your score going back up again.
So if you don’t want to have any inactive accounts on your credit report, does closing an account make sense? Not so fast. Depending on what account you closed, this decision could also lead to a drop in your credit score.
One reason is due to credit utilization, or how much of your total credit you’re using.
Let’s say that your total available credit across all accounts is $20,000 and you typically spend around $6,000 each month on bills and expenses. If you shutter one of your credit cards with a $5,000 limit, now your total available credit is $15,000.
With the same $6,000-a-month expenses, your credit utilization would jump to 40% instead of the ideal 30% or less. Since your credit utilization accounts for 30% of your credit score, that larger ratio can lead to a drop in your score.
Closing an account might also ding your score if that account was your longest-running one. Credit history accounts for 15% of your credit score, and it starts with your first credit account.
Your credit score tends to be higher the longer you’ve been able to hold credit history, so long as that credit history is positive (i.e., one without late payments or maxed out credit cards). As soon as you close your oldest account, you’re shortening that credit history you’ve worked hard to establish.
Another thing to keep in mind: card issuers occasionally close accounts due to inactivity. They might not even tell you they’re doing it until it’s too late for you to take any steps to reverse the decision.
It’s worth knowing that even if your account is closed by the issuer, the knock on your credit score will still be the same as if you closed the account yourself.
Keep in mind that there are still valid reasons to close an account if it’s really going to help you keep your spending in check. If that’s the case, consider closing a more recent account and keeping your older account(s) open and active.
And if your account has already been closed, shift your focus to keeping your remaining accounts healthy and active.
If the closed account wasn’t your oldest one but had a high credit limit that helped keep your overall utilization low, you could ask your lender for a higher credit limit on one of your active accounts. Doing so could help bring your credit utilization back to 30% or less.
But something to keep in mind here: When you request a credit limit increase, the issuer may do hard pull on your credit report to verify information, which could lead to a temporary dip in your credit score.
It can also be tempting to want to close a card if it has high fees. If a high-fee card is also your longest-running account, call the issuer and see if they can downgrade your account to another no-fee (or lower fee) card. That way you’ll maintain your credit history without having to pay extra for a card you’re not using as much.
When times are tough, waiting to pay your bills or not paying them in full may seem like a not-so-bad idea, especially if you have a card with 0% APR.
In reality though, payment history is the most important factor when it comes to your credit score because it accounts for 35% of it. Even one late payment can drag your score down, and stays on your credit report for seven years.
No matter what your spending habits are or how they change with the economic climate, making your payments on time and in full is crucial. And yes, you’ll still want to pay at least the minimum on those 0% cards.
An important note, though: if you’ve been making payments on time and in full on a loan (think auto or student loans) and have paid it off completely, you might still see a dip in your credit score. Here’s why:
The different types of debt you have are known as your credit mix, and this accounts for 10% of your credit score. People with high credit scores typically carry a mix of credit cards, loans (like auto and student loans), mortgages, and other credit products. If the loan you just knocked out was the only debt of its kind, paying it off leads to less diversity in your credit report and may ding your score.
Learn more: Why Can Paying Off Debt Lower My Credit Score?
Even those of us with smart money habits – paying off a loan or spending less – can still see our credit scores drop occasionally. Just remember that if it’s a small drop and not due to something like consistent, late payments, your score will typically bounce back. The best thing you can do is stay the course and keep up those credit score-boosting strategies like keeping accounts active, particularly those with the longer histories. And if your credit score has dropped but it’s not because of any of the things we’ve talked about, it may not be related to spending less.
Learn more: Why Did My Credit Score Drop?
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.