In the last year, my credit score dropped by more than 30 points. And somehow, it happened because I left my credit cards at home.
Most tales of ruined credit ratings are ones of excess and irresponsible spending -- spending up to your limit, making only the minimum payment, opening new accounts to handle all the excess spending, and so on. Before you know it, you're buried in debt, and your score is in the toilet.
But I hadn't done any of that. I'd always considered myself the model of responsible credit usage, paying my bills on time and using less than 10 percent of my available credit. So I was shocked when I logged into CreditKarma (which offers free credit scores and reports from TransUnion) and found that my score had fallen.
Unused Accounts Had Been Closed
It didn't take long to find the culprit. Two store credit cards had been closed in the last few months. It had been years since I'd used either, and the issuing banks apparently realized I wasn't planning on using the cards again anytime soon.
"[Card issuers] have models that predict who has any sort of chance of coming back," explains CreditKarma CEO Ken Lin. "You usually have at least a year, and if you're inactive one to three years, you run the risk of being deactivated."
For the issuing bank, it's a simple cost/benefit analysis. If you never use your card, there's no chance of the bank getting its primary revenue streams of swipe fees and interest on balances. And there are liabilities involved in keeping your account open: In addition to the cost of sending you new cards and statements, there's also the risk that your card will be lost or stolen, leaving the bank liable for fraudulent charges
"Credit card issuers are more focused and cognizant of the risk and revenue generated by their borrowers," explains John Ulzheimer, president of consumer education for CreditSesame.com. "The days of forgetting about you and hoping you use your card sometime down the road are gone. ... If your card collects dust for more than 12 months, you're almost forcing a card issuer to do something."
Utilization Is a Key Factor
Unfortunately for me, closing those two accounts had a serious negative effect on my credit score. As we've noted in the past, closing a credit card account is almost never a good idea. Much of your credit score is determined by your utilization -- the percentage of your total available credit you actually use in a given month. Close an account, and you suddenly have less credit available; unless you adjust your spending downward, your utilization goes up, and the bank considers you more of a credit risk.
It also didn't help that one of the accounts had been opened in 2009, making it one of the older credit accounts in my relatively young credit history. And since the age of your credit history and the average age of your credit accounts are key factors in determining your score, closing it was a double whammy.
Build a Strong Credit History
"People love to obsess about [credit] inquiries, but history is worth 50 percent more," notes Ulzheimer.
Given that, it's important to start establishing credit early. Lin recommends getting your first credit card as young as possible, and going with one you can see yourself using regularly for years to come -- ideally a general usage card with low or no annual fees. And even if you wind up adding better credit cards to your wallet, make sure you don't let the old standbys go unused for too long.
"If your card collects dust for more than 12 months, you're almost forcing a card issuer to do something," says Ulzheimer. "Buy a pair of socks."
Matt Brownell covers retail and personal finance for DailyFinance. You can follow him on Twitter at @Brownellorama.
6 Little Changes You Can Make to Save Big Bucks
Being Thrifty Hurt My Credit Score (and Could Hurt Yours)
Most of us spend a ton of time researching our options when we first sign up for a plan or policy, then forget all about it and make monthly payments like a robot. But this can cost you.
If you've been on the same cell phone plan for a while, or you haven't looked at the terms of your insurance policies (home, life, auto) since you got them, it's time to do a review. Your circumstances may have changed, and new plans or deductions may have come out since you first signed up. Call up customer service (or your agent) and have them walk you through your options if you're having trouble comparing things on your own.
One of the biggest budget sucks is our own forgetfulness. We miss payments and incur late fees because we've misplaced our statement or didn't manage to get our mail out in time. We fail to save as much as we'd like because we just never remember to do it.
The easiest way to save yourself some money (and hassle and stress) is to set it and forget it. Sign up for auto-pay so your monthly bills are automatically deducted from your checking account. Have a certain amount automatically transferred each month from your checking to your savings account. Remove the human error factor, and your budget will be better for it.
We charge so much nowadays -- whether on credit cards or debit cards -- that it's easy to spend a lot of money without really registering it. When you have a set amount of bills in your wallet, however, it's extremely easy to see how much you've spent so far this month and how much is left.
Take those budget categories of yours -- groceries, entertainment, etc. -- and turn them into real, physical envelopes. At the beginning of each month, put that month's allotment of cash into each envelope. When you're running low, you'll know you need to be careful with your purchases. When you're out, you're done spending on that category till next month.
If you're prone to impulse purchases, imposing a waiting period on yourself is an easy way to break the cycle.
For large purchases, a 30-day waiting list is best. Write down the item that's calling to you, then wait 30 days before allowing yourself to buy it. You may realize in that time that you don't need it after all. Or you may forget why it called to you in the first place.
For smaller impulse buys, like that fancy new product you spotted in the grocery aisle, follow a 10-second rule. Before the item can go into your cart, spend 10 full seconds asking yourself if you really need it and how you will use it. Simply analyzing why you're getting something can disrupt the siren call of a product.
It's all too easy to blow $5, $10, even $20 on something, whether it's an extra meal out or a coffee on the run. In the grand scheme of things, it "doesn't seem like much" to us. But if you start thinking of your money in terms of the time it took you to earn that money, suddenly you find yourself evaluating your spending choices a little closer.
Figure out what you make per hour if you're salaried (if you're hourly, this will be easy). Let's say you make $15 per hour. For every $15 you spend, you'll have to spend another hour of your time at work to pay for that item. A coffee a day for a week can cost you an hour or two. And bigger items, like that flat screen TV you're eyeing? You get the drift. Framing purchases in light of time spent can help you make sure something is worth it.
In the end, a budget is simply a means of making sure your money is working for you. It allows you to see how much you're brining in and allocate it towards the things that are most important to you. If you can hold those bigger goals in mind, everyday budgeting becomes easier.
If you're wondering whether or not to buy something, ask yourself if that money would be better spent towards your big goal. Put a visual reminder in your wallet to keep you on task-like a photo of a sandy beach if you're trying to save up money for a trip. Viewing your budget in terms of what it will allow you accomplish-not the things it won't allow you to buy, can revolutionize your spending.