The following post is from Melissa Batai
Maintaining a high credit score can save you thousands of dollars over your lifetime. It can help you receive lower interest rates on your mortgage and your car loan. For example, on a $250,000 home loan, having a three percent interest rate on your mortgage versus a four percent interest rate can save you $50,000 in interest over the course of a 30-year loan! In addition, a high credit score can also net you lower car insurance premiums. However, if you’re a person who cares about your finances and your credit score, you may be surprised that some smart money moves can negatively affect your credit score.
Thanks to COVID, 2020 was an excellent year to refinance your mortgage. Even though refinancing can save you thousands of dollars over the life of your loan, you may be surprised to see that it can temporarily tank your credit score.
My husband and I had been in our house nearly six years when we refinanced in May, 2020. I loved the lower monthly payments after the refinance, but I was shocked to see what the refinance did to our credit score. Our credit score tumbled by over 20 points. After a few months, our credit score climbed again, but see the lowered score was shocking.
Transferring to a Zero Percent Credit Card
Transferring to a zero percent credit card can save you interest on your credit card payments and give you a bit of breathing room so you can pay off your debt faster. However, be advised that this may affect your credit score negatively for a few months.
My friend, Katrina, moved $12,000 over to a zero-interest credit card. She had the unfortunate luck of having the credit bureaus report the $12,000 on the zero-interest credit card before the amount had cleared from her original card. That made it look like she had charged $12,000 in new charges in one month. Her credit scored tumbled 61 points from a respectable 718 all the way down to 657! About six weeks later her score was back up to 720, but she was still bothered by the way her score dropped.
Avoiding Charging on Your Card
This last smart-money move can have the most long-lasting damage on your credit score. Many people have credit cards for emergencies but don’t use them that frequently. That is fine during a normal economy, but when bankers are jittery, as they are now, they tend to close cards that have been inactive for six months or longer.
When they close your card, your debt to credit ratio is automatically increased (if you have debt), which will cause your credit score to drop. In addition, if the closed card was one you had for a long time, your length of credit will drop, which also affects your credit score.
Unfortunately, recovering from either of these two incidents will take months.
You shouldn’t let a temporary drop in your credit score deter you from making smart money moves, but you should be aware that this will likely happen. In addition, try to use any credit cards you have open at least once a month so that you don’t unexpectedly find your account closed and your credit score seriously damaged.
My Questions for You
What other smart money moves have you found negatively affected your credit score? Have you had your line of credit cancelled because of inactivity?