Being Thrifty Hurt My Credit Score (and Could Hurt Yours)

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a selection of credit cards in a fan
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In the last year, my credit score dropped by more than 30 points. And somehow, it happened because I left my credit cards at home.

Most tales of ruined credit ratings are ones of excess and irresponsible spending -- spending up to your limit, making only the minimum payment, opening new accounts to handle all the excess spending, and so on. Before you know it, you're buried in debt, and your score is in the toilet.

But I hadn't done any of that. I'd always considered myself the model of responsible credit usage, paying my bills on time and using less than 10 percent of my available credit. So I was shocked when I logged into CreditKarma (which offers free credit scores and reports from TransUnion) and found that my score had fallen.

Unused Accounts Had Been Closed

It didn't take long to find the culprit. Two store credit cards had been closed in the last few months. It had been years since I'd used either, and the issuing banks apparently realized I wasn't planning on using the cards again anytime soon.

"[Card issuers] have models that predict who has any sort of chance of coming back," explains CreditKarma CEO Ken Lin. "You usually have at least a year, and if you're inactive one to three years, you run the risk of being deactivated."

For the issuing bank, it's a simple cost/benefit analysis. If you never use your card, there's no chance of the bank getting its primary revenue streams of swipe fees and interest on balances. And there are liabilities involved in keeping your account open: In addition to the cost of sending you new cards and statements, there's also the risk that your card will be lost or stolen, leaving the bank liable for fraudulent charges

"Credit card issuers are more focused and cognizant of the risk and revenue generated by their borrowers," explains John Ulzheimer, president of consumer education for CreditSesame.com. "The days of forgetting about you and hoping you use your card sometime down the road are gone. ... If your card collects dust for more than 12 months, you're almost forcing a card issuer to do something."

Utilization Is a Key Factor

Unfortunately for me, closing those two accounts had a serious negative effect on my credit score. As we've noted in the past, closing a credit card account is almost never a good idea. Much of your credit score is determined by your utilization -- the percentage of your total available credit you actually use in a given month. Close an account, and you suddenly have less credit available; unless you adjust your spending downward, your utilization goes up, and the bank considers you more of a credit risk.

It also didn't help that one of the accounts had been opened in 2009, making it one of the older credit accounts in my relatively young credit history. And since the age of your credit history and the average age of your credit accounts are key factors in determining your score, closing it was a double whammy.

Build a Strong Credit History

"People love to obsess about [credit] inquiries, but history is worth 50 percent more," notes Ulzheimer.

Given that, it's important to start establishing credit early. Lin recommends getting your first credit card as young as possible, and going with one you can see yourself using regularly for years to come -- ideally a general usage card with low or no annual fees. And even if you wind up adding better credit cards to your wallet, make sure you don't let the old standbys go unused for too long.

"If your card collects dust for more than 12 months, you're almost forcing a card issuer to do something," says Ulzheimer. "Buy a pair of socks."

Matt Brownell covers retail and personal finance for DailyFinance. You can follow him on Twitter at @Brownellorama.


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109 Comments

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Marian

I only have one credit card and that's all I need... I dont see how people with more than one ( and I see them all the time where I work, they pull out 5 or 6 cards) keep up with the payments... And they used them for minor things like a $1 candy bar...I use cash mostly... If I dont have the cash, then I didnt need it in the first place....

August 04 2014 at 10:56 AM Report abuse rate up rate down Reply
mesager42

I think scoring one's credit based on how much debit they can run up and keep affording to pay on it on a timely basis is a really bad way to determine someone's "credit score", because all it means is that they are trying to live beyond their means. Stuff could go south really fast if they lose their job.

August 04 2014 at 1:11 AM Report abuse rate up rate down Reply
alex.ford1992

Good credit is for suckers to get in debt. Pay cash or do with out. I can buy anything I need with cash.

August 04 2014 at 12:11 AM Report abuse rate up rate down Reply
frank1946

Fair Isaac is for suckers !

Retail Bankers at work.

August 04 2014 at 12:05 AM Report abuse rate up rate down Reply
cliftongop

I'm not buying any of this for a minute. I have one credit card that I use rarely (two or three times a year) for small international transactions of under $100. I closed a credit card account recently, and we are rapidly paying down the rest. We haven't had a car payment for over ten years, because we pay cash for used cars.

I don't need credit or a credit score, because I have MONEY. I pay cash for everything.

August 03 2014 at 11:17 PM Report abuse rate up rate down Reply
steves1709

How pathetic was the author's credit score if he/she cannot take a short term drop of 30 points????

August 03 2014 at 9:57 PM Report abuse rate up rate down Reply
abupaul

One more reason to conclude that the credit score system is a bit of a scam. If it were really about measuring someone's ability and reliability for paying back debt, no institution involved would encourage those whose reliability they're measuring to actually spend more on their credit cards, or to have more than one credit card no less. Credit card companies are actually behind the credit score industry, as they are behind the "get out of credit card debt" industry. They never act in the interests of the consumers, only in the interests of the credit card companies.

August 03 2014 at 9:52 PM Report abuse rate up rate down Reply
1 reply to abupaul's comment
Practical Nomad

Welcome to Corporate America. If you want fairness and consideration for Consumers as well as Corporations, then be smart and vote Democrat this November. Republican's focus will never be the middle class and the poor!

Live well people, and actually have savings again, take a vacation again, fulfill the American dream of Home Ownership, buy that new vehicle.

The power is in your hands. All you need do is vote out Republicans! It's so simple people, spread the word.

August 03 2014 at 10:44 PM Report abuse +1 rate up rate down Reply
butscherdoug

The best way to have a high credit score is to use it for everything. As long as you pay it off every month. I had a score over 800. You don't need to keep a balance.

August 03 2014 at 8:47 PM Report abuse +2 rate up rate down Reply
1 reply to butscherdoug's comment
Practical Nomad

Partially true. The largest factor is on time payments. Established length of the trades is secondary. With the APR's charged by most Credit Card companies, and the inability to deduct the interest, it's always smart to do what you're doing and pay the balance in full within 30 days.

August 03 2014 at 10:48 PM Report abuse +1 rate up rate down Reply
cctammy

Paying off an old collection that is reported on your credit report will actually lower your score. As the collection ages, it has less effect on your score. A newly reported collection could lower your score 10-plus points. After the collection ages a couple of years, it is probably only affecting your score by a couple of points. If you pay off the collection, the payoff activity is newly reported and has the same affect as a newly reported collection. That is why it is important -- prior to paying off the collection -- to get a letter from the company stating that all negative credit information reported to the three collection bureaus will be removed from your credit report following your payoff of the debt. If the companies don't follow up with the credit bureaus, you can send the letter you received from them to the 3 bureaus yourself. Also, your balance on your credit card debt should be below 33%. If you can't pay down the debt, then just get your limit increased. Lastly, a payment history helps raise a score. If you have a credit card you haven't used in a while, charge small amounts on it monthly and pay them off promptly. This will also improve your score. I was a prior mortgage broker and I helped many of my clients improve their scores so that they could get better interest rates.

August 03 2014 at 7:34 PM Report abuse rate up rate down Reply
basesport

This is vile and should be illegal. I am not myu credit card issuer's keeper - or guarantor of its' fiscal strength any more than it is of mine. This should be totally illegal. I would sue them because the lowering of the credit score has nothing to do with credit-worthiness and is slander of credit.

August 03 2014 at 7:32 PM Report abuse -1 rate up rate down Reply