Credit Score Went Down

By | June 28, 2017

So, I checked my credit score today and realized that my score went down. I used Credit Karma to check my score. Credit Karma allows you to check TransUnion and Equifax. My score with TransUnion went down by 34 points. Equifax went down 27 points. The reason for the significant drop in both scores are the same. That is, my credit card balance has increased.

Credit Card Utilization

I have a $3000 limit on one of my credit cards. The current balance as of today’s date is $2,364.82. I’m not sure if that includes the $45 I spent yesterday on food and drinks. Clearly, May and June have not been kind. My self discipline simply went out the window. One thing led to another and before you know it, I had over $2300 in credit card debt.

It all started when I returned a rental car to Enterprise. They noticed scratches on the side of the passenger door that wasn’t there when I rented the vehicle. I didn’t have their insurance and it turns out that my insurance company didn’t cover the damage either. The reason being is that I had a non-owner’s insurance policy, but collision damage to a rental vehicle somehow wasn’t covered.  The total damage with fees, etc, was about $700.

Thankfully, I rented the vehicle with my credit card, and so I’m filing a claim with my credit card company for them to reimburse me the cost. I should know their decision by tomorrow, but, for now, that $700 is on my card.

In addition to the damage on the vehicle, I had a known yearly expense that costs me nearly $600 annually. My work reimburses me half of that expense, but I won’t be able to receive the $300 from my job until late July. So, that $600 is also on the credit card.

The remaining $1000 or so though is from my undisciplined spending. This includes overspending on a vacation and spending way too much on food and drinks. So, as Dave Ramsey calls it, it’s a bunch of stupid debt. I was being stupid and I admit it.

It’s VERY hard to remain disciplined ALL the time. Once I started using the credit card, it felt good, and so I just kept using it. Thankfully, at most, I can only use $3000. Even though I have other credit cards, I almost forget that I do, because I don’t touch those. For what it’s worth, the interest rate on the credit card that I have been using is 6.24%. But, my goal is to payoff the card as soon as possible and get back on track to being debt free.

Credit Score Restoration Plan

Well, since my credit score declined by using my credit card, I figure paying off the credit card balance should fix the problem. I want to pay the balance off as soon as possible, but without tampering with my current savings and investment plan. That point cannot be stressed enough and it’s the backbone of how I handle my finances. Let me explain.

Maintain Current Levels of Saving and Investing

Right now, I am maxing out my Roth 401k at work and my Roth IRA. For the Roth IRA, I contribute about $459 per month.  I am also contributing $790 per month to fund my dividend portfolio. Conventional wisdom suggests that I should, for example, use that $790, and also perhaps my $459, to pay down on my credit card debt. Then, once the credit card is paid off, restart investing. In fact, that is what Dave Ramsey teaches in his baby steps. Well, they say personal finance is personal, and that’s true for me too. I don’t care if it’s conventional wisdom, but that approach doesn’t work for me.

It’s very important that I maintain my current levels of savings and investing. Doing so helps me affirm and strengthen what I believe to be is a very good habit. I don’t want to break a good habit. Moreover, I consider those contributions as mandatory expenses. They are just as important as my mortgage and other expenses. In doing so, I am following David Bach’s advice when he teaches that you should pay yourself first.

By the way, this also applies to my student loan balance. The $2000 a month that I intend on making towards my student loan, starting in August, still applies. I’m not planning on paying less per month towards my student loan. For more information, visit my post on I’m Getting A Divorce.

So, any money used to pay down my credit card balance will have to come from funds above and beyond my current levels of saving and investing (and paying down other debt). I note for the record, however, that if my current standard of living can no longer afford to keep up with my current levels of saving and investing, then I will first look to reduce the contribution to my dividend portfolio before I reduce the contribution to my retirement accounts.

Pay off Credit Card with 20k Bonus

My primary plan is to pay off the credit card with the 20k bonus I will receive from work. Truthfully, I think I was more willing to use the credit card because I knew that this windfall would eventually be used to bring it back down to zero. While I don’t know when exactly I will be receiving the bonus, the current status is that it’s at the highest levels at my job. So, I fully expect to have the cash in hand in July.

If for some reason there is a delay in getting those funds, then I hope to make significant reductions in the credit card balance from the various reimbursements discussed above. Also, because of my current transition that is taking place at my job, there’s a decent chance that my overall living expenses will be significantly reduced and my overall income may be slightly increased. The combination of both will allow me to devote extra payments towards my credit card balance. But, I’ll know for sure what my income and expenses are in August.

Conclusion

It’s been said that when you find yourself in a hole, stop digging. The same applies for getting out of debt. The first step in getting out of debt is to stop getting more debt. It’s a lesson that I should take to heart. The increased utilization of my credit card resulted in the dramatic decline of my credit scores. My credit rating went from excellent to good with TransUnion, sitting at 737. My credit score with Equifax is sitting at 756. While Equifax is still rated as excellent, 750 is the cutoff and 756 is a little too close for comfort to that line.

I’m not going to suggest that you should never use a credit card. Under the right circumstances, credit cards can be a useful tool. Just be careful how you use credit cards. Remember, at the end of the day, you’re still going to be responsible for paying all that borrowed money back. Also, the increased use of your credit cards have the potential to reduce your credit score.

Let me know what you think. Do you have a credit card? How do you decide when you use your credit card?

15 thoughts on “Credit Score Went Down

  1. Passivecanadianincome

    Wow nice a 20k bonus is huge! While I’m all for a 0 balance credit card. I agree with paying yourself first. Basically no matter what. That sucks about the rental hopefully your credit card covers it!
    Passivecanadianincome recently posted…6 Months OnlineMy Profile

    Reply
    1. Dividend Portfolio Post author

      Yea, I hope they cover it as well, but we will see. I called to inquire on the status today and they still hadn’t made a decision. They told me to check back in two days, but I’m going to try again tomorrow.

      Reply
  2. catfishwizard

    You admit that paying off the student loans and “sticking to your investment plan” are emotionally important decisions for you.

    Be careful. Emotions are what get us in trouble as investors.

    Personal finance is definitely personal, but there are some things that are pretty black and white…one of those is the fact that 6.2% is not only greater than 3.5% (the current yield on your portfolio), but eliminating the 6.2% interest on your debt is a sure bet, while who knows what might happen to the portfolio.

    You’re obviously making enough to cover the credit card and still hit your savings and investment goals for the year. This is just a cash flow problem.

    You really should pay off the credit card immediately.

    Reply
    1. Dividend Portfolio Post author

      Appreciate the advice and the concern CFW. I definitely agree that getting rid of 6% debt is the functional equivalent of getting a 6% return and paying off the credit card, at that interest rate, beats the yield I’m getting in my portfolio. And, if my credit card balance was higher, say around $10-20k, I definitely would focus my attention on paying off the credit card. But, the reality is that the credit card balance will be brought back down to $0 within a month or two. Thus, the difference in interest rate between the credit card and the portfolio will have a negligible impact on my overall finances.

      I don’t disagree that emotions gets investors into trouble often, and my decision to maintain my current level of savings and investing may entirely be an emotional decision. But, I also understand my personality very well. And, for what it’s worth, I place more value in maintaining my current levels of saving and investing than diverting those resources to eliminate the credit card debt. Illogical? Perhaps. I freely admit that I may not be making the best mathematical decision. But I feel (ahhh, there’s my emotions going again) that I am making the best decision for me.

      Thanks for stopping by CFW. Don’t be a stranger, and you’re welcome here anytime.

      Reply
  3. Pellrider

    It is good to have a bonus in the near future to pay off your credit card debt. I recently got a letter from my credit card company saying, if I am late to pay the balance by a day or two, my interest rate on the balance will go up. So, I made a plan not to forget about it each month. Congrats on the chance of getting a nice bonus.

    Reply
    1. Dividend Portfolio Post author

      Appreciate it. Actually, what i do is have the minimum automatically drafted every month. Now, I usually don’t have a balance and when I do, I usually pay it off. If I do have a balance, I usually manually pay more than the minimum. But, in case I forget one month or something, at least the minimum balance will get paid. That way, I don’t run into any situation like that. Thanks for stopping by.

      Reply
    1. Dividend Portfolio Post author

      Not really. It’s actually unnecessary in my situation. Although I am using about 66% of the credit available to me on one credit card, my overall credit utilization is 6% with TransUnion and 5% with Equifax. Also, even if that weren’t the case, I doubt I would increase my credit limit for the sole purpose of increasing my credit score. Maybe if I was trying to buy another house or car or something. But, a higher credit limit is just more temptation to use borrowed money. I think I’ll pass.

      I freely admit that under certain circumstances, increasing one’s credit limit might make sense. I just don’t think it does for me.

      Reply
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  5. singledadmoney

    DivPort, discipline is a hard subject for me too concerning credit cards and paying off debt and I learned (the hard way) that following someone elses’ advice was the only way that helped me stop using my credit cards. It truly is liberating to CUT THEM UP and close the accounts and use your emergency fund to keep on track. I use my emergency fund often for big things that pop up like summer school for one of the kids, major car repair, etc., and I pay it back up ASAP. It is my own personal line of credit with exactly zero interest.

    When your bonus hits and you pay it off, I urge you to cut all your credit cards up and close the accounts and use your own emergency fund (separate savings account) as your backup funding source and let me know how it feels.

    Keep up the great work with your monthly investment numbers – I would love to be spending that much each month on investments.
    singledadmoney recently posted…Purchase #5 – (O) Realty Income CorpMy Profile

    Reply
    1. Dividend Portfolio Post author

      Appreciate the suggestion SDM but cutting up my credit cards is not going to happen anytime soon. It’s not because I’m beholden to the credit cards, but I do think they have their uses. For example, just today, the opportunity came to head out of town to see my mom. So, I decided to rent a car for the 10-hour drive. Even though I could have used my debit card, the credit card offers me protections that I became all too familiar with about a month ago when I had returned a car with damage on it, but without adequate insurance. In fact, I’m still going through that process now. I thought my insurance covered the damage, but they didn’t. Thankfully, the credit card’s collision damage program is stepping in.

      Perhaps, I could have gotten the benefit by having adequate insurance, or taking the rental car’s damage protection waiver. But, my point is, that credit cards have their uses. I know Dave Ramsey teaches to cut up the credit cards. And, I’m sure one day I will be doing so. But, my life is a bit chaotic right now, and knowing that I have credit available to me to handle anything unforeseen that might come up brings me peace of mind. I suppose the solution is to have a big enough emergency fund that does the same thing, but the problem isn’t the credit cards, it’s simply how they are used. Sure, cutting up the credit cards removes the temptation to borrow money, but I fundamentally think it treats the symptom and not the disease. Having a budget, and sticking to that budget works. I just have to follow my own advice, and maybe even yours one day (when I’m ready).

      Really appreciate the suggestion though.

      Don’t worry about not being able to spend that much on your investments. Do what you can. Every little bit helps. Right now, I’m playing catch up and I fear it’s not enough.

      Reply
  6. Stockles

    So, I feel that I´m pretty good with credit cards. Every year the credit card companies pays me about $100 – 150 for using their card. I have never paid anything to them, but they pay me. I think the main difference between people who get paid and people who pay is that they now what they are using. I also like to spend money (sometimes), but my secret trick is that every month I transfer a set amount of money to my creditcard. So, in practice, I never touch the “debt” part of my credit card, I only get the 1 – 5 % cash back, but never uses anyone else´s money. I think that is the key for a healthy way of using credit cards. I never spend money that I don´t have.
    Stockles recently posted…How To Travel The World On A BudgetMy Profile

    Reply
    1. Dividend Portfolio Post author

      Excellent point Stockles and I agree that’s a great way to use the credit cards. They are just a tool. It’s up to us to decide how to use them.

      Reply
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