3 times it's OK to let your credit score take a hit
You hear a lot that you should do whatever possible to make sure your credit score doesn't drop. The higher the score, after all, the lower the interest rate you'll likely be charged on loans. If you have a low credit score and you want to borrow, you'll either have to pay more or you won't get a loan. Lenders, instead, will leave you alone.
And while it is smart to keep your credit score high (the highest is 850, and if you're anywhere in the high 600s into the 700s, you have what's generally considered a good to excellent credit score), all credit scores are going to occasionally fluctuate. A credit score isn't like a prehistoric insect frozen in amber. It will change, and sometimes that change will be in a direction you don't like. It's inevitable.
So keeping that in mind, recognize there will occasionally be times when it's OK, reasonable or even smart to make financial decisions that you know will negatively affect your credit score. Here are three scenarios in which your credit score is taking a hit for the greater good of your team.
Applying for multiple loans. It seems unfair that the mere act of applying for credit can make your credit score drop, but it will.
"Applying for new credit will typically add a hard inquiry to your credit report and lower your score by a few points," says Bethy Hardeman, a spokeswoman for CreditKarma.com.
What you want to avoid is applying for a lot of loans at once. "The problem many people encounter is by applying with loan brokers who might ask five or six places for a loan. That means five or six hits to your credit score. It's much better to be strategic and apply directly with one or two lenders or credit cards," says Marc Prosser, a business expert who runs FitSmallBusiness.com, which provides product and service reviews for small business owners.
But if you are strategic, it can be worth the roughing up your credit score receives, says Stephen Lesavich, a Kenosha, Wisconsin-based attorney and co-author of "The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards."
Lesavich says that a couple weeks ago, he bought a new Toyota Tacoma at a local dealership. "Since I wanted to finance part of the cost of the vehicle, the car salesman ran three credit checks because there were three financing options available," he says. He knew his credit score would drop but "to be provided with three different financing options at three different interest rates was worth it."
In those types of cases, you should go for it, Hardeman agrees. "If doing so can help you save money, a small drop in your score is fine in the long run," she says. "For example, getting a new balance transfer credit card could help you pay less interest, or refinancing your student loan could help you pay down your debt faster."
Hardeman adds that "hard inquiries have less of an impact on your score than other credit factors," like paying late or letting a debt go into collections. As long you make your payments on time and use your credit wisely, you should have little to worry about.
Starting a business. Now, it should be said that plenty of businesses fail. Just because you're starting a business isn't an excuse to open a bunch of credit cards and watch your credit score plummet and feel good about it. But sometimes you do what you have to do.
Kevin Crane is a retired U.S. special agent, who spent most of his 21 years of government service with the Department of Defense, where he investigated hundreds of financial issues. He and his wife, Phyllis, opened their child care facility, Kids Connection Learning Center in Sharon Hill, Pennsylvania, in 2008, when the recession was in full gear and business and personal loans from banks were hard to come by.
Crane and his wife believed in their business, and their ability to pay back any loan they took on. They also each had excellent credit scores of over 800. So they applied for new credit cards to help get the business off the ground, ultimately going into an eye-popping $100,000 in debt. Just as they figured would happen, their credit scores dropped, leaving them with scores in the low 700s, which is still fairly high.
"My investigative experience had disclosed that as long as we made regular payments, we would eventually lower our debt and improve our credit scores once again," Crane says.
And that's what happened. Three years later, their credit scores were back over 800, and their business is doing fine. But there are many tales out there of business owners who opened up a bunch of credit cards and ended up with a failing business and thousands of dollars in credit card debt. So if you're going to try this path, proceed cautiously.
Joining a debt management program. Sometimes a credit score is in free-fall because a person has too much debt. If that's your situation, you may be thinking that joining a credit counseling service, to help you manage your bills and debt, is in order. Until you learn more about them.
"One of the knocks against debt-management plans is that enrollment is likely to ding a consumer's credit score," says Kurt Fischer, a former credit counselor and author in British Columbia who has written a five-volume series called, "The Simple Guides to Debt, Credit, and Wealth."
Fischer says that if you're reluctant to join a credit-counseling service because you're worried about what it might do to your credit score, he counters that argument with this question: "What's your credit score likely to be in one, two or five years from now if you don't enroll in a [debt-management plan] and keep doing what you've been doing?"
In other words, if you're seriously behind on your credit card payments and other bills, you're probably going to eventually see your credit score hit bottom anyway. If you're at the point where you think you might need help, Fischer says that yes, you'll see your credit score drop, but in the long run, by aligning with a credit-counseling service and getting control of your finances now, you will help your score rise later.
In fact, it might help to think of improving your credit score as improving your home. Often when you're cleaning or remodeling a room, you're putting items in piles, dust is flying and you have trash cans overflowing with garbage. As with cleaning up a house (or a credit score) sometimes you first have to make a bit of a mess.
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