How to Destroy Your Credit Score Overnight
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I recently had an issue with my credit score dropping by a lot ... almost overnight. In less than 2 months time, two of my credit scores both dropped by 40 points!
Before I get too worried about this huge drop ... I wanted to point out a few things.
First, at this time in my life ... my credit score isn't a huge deal. I'm not in the market for a new mortgage or any new line of credit.
Second, even with the big drop, I still fall within the range of having what is considered excellent credit.
So all things considered, I won't stress about it too much.
But even knowing that my credit score is still fairly solid, I was shocked about such a huge drop.
Even crazier is the reason why it dropped so much in less than two months.
It wasn't from travel hacking different credit cards.
Just for some background, I've opened up 6 personal credit cards over the past 2+ years. If anything ... travel hacking these cards has actually helped to increase my score.
My drop in credit score wasn't from identity theft either or anything like that.
The drop was a result of a short-term bump (actually a big bump) in my credit utilization.
In this post I will share what credit utilization is and how a temporary increase made my credit score drop like a rock.
What is Credit Utilization?
Your credit utilization rate (or ratio) is the amount of revolving credit that you are using in relation to your available credit.
Expressed as a percentage, it is simply the total amount of money you currently owe on all your credit accounts divided by your combined credit limit on all your accounts.
For example, if you have 1 credit card with a limit of $10,000 and a second card with a $5,000 limit ... then your total credit limit is $15,000.
During a point in time, let's say you have a balance of $1,000 on card #1 and $500 balance on card #2. In this scenario, the total money you owe is $1,500.
So your credit utilization rate is 10% ($1,500 / $15,000).
At that point in time, you have used up 10% of your available credit.
So what does this utilization have to do with your credit score?
Why is Credit Utilization a Big Deal?
As I have highlighted further below, your utilization has a LOT to do with how high (or low) your credit score will be.
For example, it makes up 30% of your FICO® Score ... which was something that I knew before.
But for some reason it never really hit me how much 30% actually was in terms of calculating your credit score. That was until my utilization rate went up.
Let's take a look at my recent example.
Without getting too much in the details ... prior to the start of January, my utilization rate every month fluctuated between 1% to 2%.
What does this mean?
Well, let's say my available credit on all of my 6 personal travel rewards cards is $100,000.
A 1% utilization rate would mean that I owe a combined $1,000 on all of my cards. And a 2% utilization rate means that I owe $2,000 combined on my cards.
Note - My numbers are similar to these but not exact.
Then in January, we had several big expenses that came up and I wanted to leverage some of my travel rewards cards.
So by the middle of the month, I had pushed my utilization rate all the way up to 12%!
In our previous scenario, that would have meant we had used up $12,000 of our available $100,000 of combined credit!
The bottom line is that we had the cash to make the payments, but preferred to put all of our charges on several cards to hit minimum spend requirements and earn other travel rewards.
While unintentional ... this move really pushed my credit score down.
Next, let's discuss the two different ways I could see my credit scores ... all for FREE.
1 - FICO® Score - Discover
One of my longest held credit cards has been the Discover IT with no annual fee.
While I don't use this card as often as I used to, this is an account that I plan to keep open indefinitely to help with my length of credit (another lesser factor of your credit score).
This card has been opened for over 15+ years now!
Note - I recently added my oldest son (now 16) as an authorized user to this card as an experiment. I'm trying to help him build his credit, or rather just eventually get a credit score. I plan to write about this experience in the future.
One of the things I like about this Discover card is that they offer access to your Free FICO® Score.
How FICO® Scores are Calculated
The following percentage breakdown is how the FICO® Score is calculated.
As you can see ... the Amount Owed or Utilization makes up 30% of your score. This is the reason why my score dropped so much.
Why My FICO® Score Dropped
Between December (2019) and February (2020), my Discover FICO® Score dropped by 40 points!
Now ... my credit is still considered Exceptional (according to my Discover account) based on being in the 800 - 850 range still.
Yes ... I have great credit.
While I haven't been actively trying to improve my credit score ... I will say that opening up travel rewards cards over the past couple of years has actually helped push my credit scores higher. That along with having a long history from existing accounts like the Discover card and on-time payments.
Back to the drop in score ... the huge drop in 2 months time was a direct result of having a 12% utilization rate ... which was up from 1% back in December.
Note - I just want to mention that my wife and I pay off our credit card balances in full every month. Travel rewards wouldn't be worth the effort if we kept high interest credit card balances.
2 - VantageScore® - Chase
The other free way to view my credit score is through my Chase personal credit cards.
Chase provides cardholders with their VantageScore® ... which is similar to FICO® Score but calculated a little different.
According to the VantageScore® site - "JP Morgan Chase provides free VantageScore 3.0 credit scores powered by TransUnion®, refreshed weekly when you log into your account."
As expected, my VantageScore® also dropped by 40 points between December and February!
And once again ... it was the big increase from my utilization rate that caused the drop in score.
How Your VantageScore® is Calculated
According to VantageScore®, the following data points help make up your score -
So once again, we see a huge focus on available credit and utilization in making up your score.
Even though we don't have the percentage breakdown of how the VantageScore® is calculated, it is clear that total credit usage is important.
How to Quickly Raise Your Credit Score (after a drop)
It should be obvious by now, but for me ... the quickest way to drastically raise my credit score will be to lower my utilization rate.
How is this done?
Lowering my utilization rate is to simply pay off the balance on my cards ... which was always the intent.
Remember ... I only increased my usage on these personal cards to earn travel rewards benefits. We just happened to have a lot of large one-time expenses that came up all at the same time.
In my situation ... the drop in credit score was really just a timing issue.
How do I know that paying off my credit card balance will raise my score back up?
Well in February ... approximately $7,000 of my balance was paid off. This quickly dropped my utilization rate down to 5% ... down from 12% the month prior.
And in the most recent VantageScore® update ... my credit score jumped by 37 points!
I'm still not back up to the original 40 points I lost (still 3 behind) ... but given my utilization rate used to range between 1% and 2%, I can tell why.
As the remaining large credit card balances get paid off over the next couple of weeks, I expect to see my VantageScore® go up even more. And once updated ... I will most certainly see a big increase back to my FICO® Score.
So there you have it ... I had nothing really to worry about once I saw first hand how my credit score is calculated.
Have you ever taken the time to understand how your credit score is calculated? Has your score ever dropped by a lot suddenly or increased by a large amount in a short period of time?