How a single car payment dropped my credit score by double digits
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Understanding everything that goes into your credit score isn't an easy proposition. Sure, there are only five factors that the credit bureaus consider in these calculations — payment history, amounts owed, length of credit history, new credit and credit mix. However, the confusion surrounding the practical, real-life applications of these factors is widespread.
And this past week, despite years of writing about and understanding credit, a single decision resulted in a double-digit drop in my VantageScore.
Here's what happened — along with some practical considerations for you to avoid the same fate.
My wife's new car
My wife leases a new car every few years, and her current lease was up on July 31, 2020. As a result, she started sfhopping for a new offer this summer. After some exploration, she decided to stick with her current brand and went with the newer version of her existing Lexus.
Wanting to minimize her time in the dealership due to the ongoing coronavirus pandemic, she communicated extensively via email and over the phone with the sales agent, and she was thrilled to discover that she could put the entire down payment ($5,000) on a credit card — with no fee. Since we combine our Chase Ultimate Rewards points in a single account to ensure they can all be transferred to partners, she swiped her Chase Freedom Unlimited to earn 1.5% back (effectively 1.5x Ultimate Rewards points).
All told, this purchase would leave us 7,500 points richer — worth $150 based on TPG's most recent valuations.
However, this decision would have ramifications beyond the rewards we earned.
A few weeks after the payment, I received an email from my credit-monitoring service, letting me know that my credit score recently changed. As someone who is fiercely protective of my credit report, I (naturally) wanted to check out what had happened. After logging into my account, I was surprised to see the following:
- My TransUnion score had dropped 17 points.
- My Equifax score had dropped 14 points.
I found this strange at first. I hadn't missed any payments, nor had I recently applied for a new credit card. In fact, it had been several months since I added the American Express® Gold Card to my wallet — notably without a welcome offer.
Upon further digging, however, I came across the culprit. Both of those bureaus had received information from Chase showing a much higher balance on my wife's Freedom Unlimited card. And because I am an authorized user, it appeared on my credit report as well.
This all relates to the "amounts owed" on your credit accounts — frequently called credit utilization — which looks at how much of your available credit you're using at a given time. This is the second most-important factor in your credit score, making up 30% (behind only payment history at 35%). It's also the one that could be most affected when you close or cancel a credit card.
Here's what's interesting: The general recommendation is to keep your utilization under 30%, and at the time of the score drop, I was at a total of just 2% across all of my cards.
Unfortunately, the major credit bureaus consider both your total utilization and specific utilization on individual cards when computing your score — and in a single month, my wife's card (on which she has a $35,000 credit limit) went from 1% to nearly 15%:
Without the car payment, her statement balance would've been a paltry $248.59. After all, we're still spending a large chunk of time at home and haven't incurred a ton of expenses. But that single, $5,000 transaction was enough to lower my VantageScore by more than a dozen points.
What this means for you
At the end of the day, my TransUnion and Equifax scores are still over 800, so this shouldn't have any long-term effects on my overall credit report. Nevertheless, there are some important lessons to take away from my experience.
It's not always just about the points
Here at The Points Guy, we love our points and miles. Yet sometimes, the pursuit of rewards can blind us to other factors that should be considered when making a purchase, including the following:
- Will this purchase impact my credit score?
- Does the card I'm using provide adequate purchase protections if the unexpected happens?
- Will the card provide an extended warranty?
- Is there an Amex Offer or Chase Offer that would be even more valuable?
The earning rate on the purchase is still important, but it's not the only thing to keep in mind.
Remember the impact to (and from) authorized users
There are many reasons to have authorized users on your credit cards. I love that my brother and sister can utilize the array of perks on my Platinum Card® from American Express (part of my Christmas present to them each year). It's great that my wife can swipe my Amex Gold at restaurants and grocery stores to earn bonus points on those purchases. And I enjoy the fact that my five-year-old daughter is already building credit history as an authorized user on my Freedom Unlimited.
That said, it's not all smooth sailing.
As the primary cardholder, you're responsible for any purchases they charge to the account, and being added as an authorized user can count as a brand-new account when an issuer is considering your eligibility for a new card (especially applicable for Chase's 5/24 rule). And your transactions can also impact their score — which is exactly what happened to me as an authorized user on my wife's account.
Consider paying off a large purchase immediately
If you have a large purchase to make on a credit card — one that will immediately push your utilization on said card over 10% — consider paying it off immediately (if you have the cash to do so, of course). If you do this before your card's statement closes, it's highly likely that your higher balance won't ever be reported to the credit bureaus, keeping your utilization much lower and maintaining your high score.
In hindsight, that's exactly what my wife should've done, and I'm annoyed at myself for not even thinking about it. Knowing that her lease was coming to an end, she had been putting aside money for a down payment for several months. In fact, she was planning to simply write a check when the time came — but was pleasantly surprised to find that she could use a card to rack up additional Chase Ultimate Rewards points.
However, we should've realized that paying it off immediately, ahead of her Aug. 21 statement closing date, would've been the prudent move. This would've kept her utilization on the card under 1% and would've prevented the resulting drop in my credit score.
As noted above, this mistake represents a very minor blip on my credit report, and it shouldn't be long before my score climbs back up. And even with the drop, a VantageScore of 800+ is considered "Excellent" and likely won't interfere with any future applications for credit.
Nevertheless, this was an important learning experience for me. While large purchases can be a great way to boost your rewards by swiping the right credit card, there are important considerations that might lead you in a different direction.
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