If you've worked hard to achieve and maintain a good credit score, it can be upsetting to see it drop. But “life happens, and sometimes how you react is going to blow back and affect your credit score,” says US-based credit expert John Ulzheimer. People lose jobs, cars break down and pipes leak. Credit may be your safety net.
Painful as it may be, there are times when taking actions that hurt your score are prudent for your overall finances.
When you have an emergency expense
If you have a big, unexpected expense that exceeds your emergency savings, using your credit cards to cover it can be a decent option.
You may have some temporary score damage from having a high balance on your card for a while. It's generally best to keep balances below 30 per cent of your credit limit, and of course, paying in full every month is ideal. But the damage from a high balance should fade as new, lower balances are reported to credit bureaus.
Don't beat yourself up for not having saved enough. Emergencies don't necessarily match up with when you've saved enough, nor do they come one at a time. Cary Siegel, the author of ‘Why Didn't They Teach Me This in School?’, strongly recommends developing a budget and building an ample emergency fund so you're protected in the future.
When you're struggling to cover essential expenses
Sometimes a crisis, such as income loss, makes it impossible to cover living expenses. Then, sacrificing a credit score is the lesser of two evils, Ulzheimer says. If you have to choose between paying your credit card on time and keeping the utilities on, keeping your family safe is more important.
If possible, try to make the minimum payment on your credit card before it's 30 days overdue. Your credit card issuer won't be happy and you'll probably have to pay a late fee. But creditors can't report you to the credit bureaus until your payment is 30 days past the due date.
If you don't pay in that 30-day window, the creditor can report your account delinquent. That negative mark on your credit report will badly damage your score, and only time will undo the damage. It will stay on your credit report for up to seven years, although the effect fades over those years.
Siegel advises getting in touch with creditors and explaining what happened, when you will be back on your feet and how you plan to repay them. They may be willing to give you more time, and you may be able to prevent damage from a potential late payment or negotiate a lower interest rate, he says. And asking can't hurt.
When money is on the way
Siegel, the father of five young adults, cautions against an over-reliance on credit. But he's willing to make an exception for when income is imminent but bills are already here. A payment for freelance work falls into this category.
If you know money is coming, credit can be a bridge until it arrives. Be prepared for a score ding as long as you are running a high credit card balance, then look for a rebound as you get it back down.
When starting or investing in a business
Investing in a business is another time you may choose to use your credit, but keep the risks in mind. Siegel says that there should be a clear, detailed business plan that's much more specific than a great idea.
A good or excellent credit score might mean you qualify for an introductory 0 per cent rate on a credit card. Or, you may have plenty of room on your existing credit cards to temporarily run a higher balance than you do normally.
“That could be a scenario that makes sense as long as you have a plan and the ability to know when it's time to stop this - this isn't working (as) I envisioned it,” says Tom Quinn , vice president of FICO Scores, a US-based credit scoring and data company. It can be tempting to go all-in, but don't let a business idea threaten your overall financial health.