If you’ve worked hard to achieve and maintain a good credit rating, it can be overwhelming to see it go down. But “life comes, and sometimes the way you react is going to explode and affect your credit score,” says credit expert John Ulzheimer. People lose their jobs, cars break down and pipes leak. Credit can be your safety net.
Painful as it can be, there are times when taking action that hurts your score is prudent for your overall finances.
When you have an urgent expense
If you have a big, unexpected expense that exceeds your emergency savings, using your credit cards to cover it may be a decent option.
You may have temporary score damage due to a high balance on your card for a while. It’s usually best to keep balances below 30% of your credit limit, and of course paying in full each month is ideal. But the high balance damage should fade as new balances are reported to the credit bureaus.
Don’t blame yourself for not saving enough. Emergencies don’t necessarily mean when you’ve saved enough, nor do they happen one at a time. Cary Siegel, author of “Why Didn’t They Teach Me This in School? Strongly recommends budgeting and building up a sufficient emergency fund to be protected in the future.
When you’re struggling to cover essential expenses
Sometimes a crisis, such as loss of income, makes it impossible to cover living expenses. Second, sacrificing a credit score is the lesser of two evils, says Ulzheimer. If you have to choose between paying your credit card on time and keeping utilities on, protecting your family is more important.
If possible, try to make the minimum payment on your credit card before it’s 30 days late. Your credit card issuer will not be happy and you will likely have to pay late fees. But creditors can’t report you to the credit bureaus until your payment is past the 30-day due date.
If you don’t pay within this 30-day window, the creditor can report your overdue account. This negative mark on your credit report will seriously damage your score, and only time will heal the damage. It will stay on your credit report for about seven years, although the effect wears off over those years.
Siegel advises contacting the creditors and explaining what happened, when you’ll be back on your feet, and how you plan to pay them back. They may be willing to give you more time and you may be able to avoid damage due to late payment or negotiate a lower interest rate, he says. And asking can’t hurt.
When the money is on the way
Siegel, a father of five young adults, warns against over-reliance on credit. But he’s willing to make an exception when the revenue is looming but the bills are already there. A tax refund or payment for self-employment falls into this category.
If you know the money is coming, credit can be a bridge until it comes. Be ready for a score as long as you have a high credit card balance, then look for a bounce as you lower it.
When you start or invest in a business
Invest in a business This is another time when you can choose to use your credit, but keep the risks in mind. Siegel says there should be a clear, detailed business plan that is much more specific than a good idea.
A good or excellent credit score can mean you qualify for a 0% introductory rate on a credit card. Or, you may have a lot of room on your existing credit cards to temporarily show a higher balance than you normally do.
“This 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 it – it doesn’t work (like) I envisioned it,” says Tom Quinn, vice-president. president of FICO Scores. , a credit rating and data company. It can be tempting to go all-in, but don’t let a business idea threaten your overall financial health.
– By Bev O’Shea
This article was written by NerdWallet and was originally published by The Associated Press. About the Author: O’Shea writes on credit for NerdWallet. His work has appeared in The New York Times, Washington Post, MarketWatch, and elsewhere. Read more