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by ERIC ROSEN
July 23, 2020
by ERIC ROSEN
July 23, 2020
In order to entice customers to begin buying things and using their credit cards again, many issuers have revamped their cards' benefits. That still does not seem to have moved the needle much in terms of consumer spending, though, which dropped nearly 20% in March and April, and only bounced back slightly in May.
After all, if you can't leave the house, there's not really much you can find to spend money on. At least, that's been the case for me. And that has resulted in one very important silver lining to all the coronavirus-related bad news: Because I've been putting fewer purchases on my credit cards than usual, my personal credit score has actually gone up over the past few months.
Why has that happened? For one simple reason: My credit utilization has dropped.
Your credit score is probably the most important number related to your finances. It's what lenders check when you apply for credit cards, mortgages, and other types of loans, and it's calculated based on five main factors. The most weighted is payment history, or whether you make your monthly payments on time and in full, which I have continued to do.
The second major element that determines your credit score is amounts owed, or your credit utilization ratio. This is the amount of money you owe or spend on all your cards versus your overall line of credit. So the more purchases you make or the more debt you carry compared to your overall credit limit, the more it will pull your credit score down.
Given the current economic and financial climate, some banks have been lowering certain customers' credit limits, which has been a wild card in the equation. Even if you aren't carrying more debt than before or spending more than usual, this can lower your credit score by raising the amounts you owe compared to your line of credit.
If this happens to you and you have a responsible history of paying off your balances on time, call your financial institution and ask them to raise your credit limit back to its previous level. Doing so should boost your score back up, which could be important if you need to undergo a credit check anytime in the near future for a loan or another reason.
Luckily, my banks have not played around with my lines of credit, so I've got as much as before the crisis began. At the same time, I have been spending significantly less in the sectors where my main expenses usually fall, such as travel, dining out, and gas. Instead, I'm buying more groceries, but even those purchases have me spending far less than I typically would have before the coronavirus struck.
I would estimate that I'm putting less than half of my usual expenses on my credit cards these days (which has me rethinking my post-pandemic budget, too). I went into lockdown with excellent credit, and I don't charge anywhere near the limit on any of my cards, so I didn't anticipate a huge change to my score.
But even these relatively minor spending adjustments have raised my score by up to 10 points, depending on the credit bureau.
As a side note, I check my credit score regularly for free thanks to the ability to do so through several of my credit cards as well as an account with Credit Karma. That allows me to monitor month-to-month changes in my score and the factors that might be causing them.
It also means that I can see how my score has changed over time with all three of the main credit bureaus. While they tend to rate my credit within a few points of each other, and my score has remained steady for some time now, in the past two months, each has registered a distinct uptick of anywhere from six to 10 points.
While there's really not much for me to do at the moment, once I expect my spending to increase again, I'll consider applying for more rewards credit cards.
Doing so might lower my credit score in the short term by a few points per new card because opening new cards will diminish the average age of my accounts – another important factor in determining one's credit score. However, each new card will also raise my overall credit limit, positively impacting my credit utilization category, which should then help me raise my score back up relatively quickly.
Not only that, but assuming I can meet any minimum spending requirements, it will also give me the chance to earn sign-up bonuses and rake in rewards points or miles in anticipation of being able to travel again.
I'm not currently in the market for any other sorts of loans, such as a mortgage or a new car loan, but if I were, I would also be sure to apply for these while my score is at its current all-time high to secure the best interest rates.
I recommend keeping a close watch on your spending – sound financial advice at any time, but most especially now. By reining it in, you might be able to raise your credit score relatively quickly. That could be one of a handful of benefits to come out of this current crisis. Taking advantage of it might just be the bright spot you need to cope with the rest of the bad news these days.