Dear Penny: My Credit Score Is Down 38 Points. Is My $0 Balance to Blame?

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Dear Penny,

During the COVID-19 pandemic, I’ve re-evaluated my monthly budget to spend less, with a focus on keeping my credit card balance at zero each month.

Even with what I consider diligent money practices, my credit score has gone down 38 points since March. Although still considered in the good range, it’s now at 694.

I’ve been using my main credit card each month. Although I do have a second store credit card, it’s been more than a year since I’ve used it, so I don’t think it would affect my score now.

What is causing this decline and when might my score start improving again?

-J.

Dear J.,

When you see your credit score fluctuate by a few points, it’s no big deal. It’s like weighing yourself. No one sees the exact same number every time they step on the scale.

But a 38-point drop is significant. The lower score is a symptom of a larger problem. You need to diagnose the problem by examining your credit report from each of the three bureaus.

Usually, you can only get each official report for free once a year. But due to the pandemic, you can get free weekly credit reports from all three bureaus through April 2021 by going to AnnualCreditReport.com.

Other services provide credit reporting, but this is the official source of information since it’s run by the three credit bureaus. You won’t get your credit score here, but you will see all the data that’s used to compute that three-digit number.

From what you told me, I don’t think your credit score drop is related to the financial pandemonium unleashed by COVID, even though the timing makes it seem that way.

You have to be extra vigilant about your credit report right now if you were one of the millions of people affected by coronavirus who got hardship agreements from their creditors. Same goes for if you were one of the 9 million people whose federal student loan payments were automatically paused.

Under the CARES Act, all those payments should be listed as current unless the account was already delinquent. But mistakes will happen. Expanded access to credit reports helps people monitor for those errors.

But this obviously doesn’t apply in your case.

So the first thing I’d look for on your report is the status of that store credit card. Specifically, is it still open?

It’s easy to open a store card to get 15% off, pay it off and forget all about it. But if it’s been over a year since you’ve used it, there’s a good possibility it was canceled for inactivity.

Credit card companies are required to give you 45 days notice before changing certain terms, like your interest rate or minimum payment. But they don’t have to give you any notice whatsoever before closing the account due to inactivity.

This can hurt your credit score in two ways: It increases your credit utilization ratio, or the percentage of open credit you’re using. (Your utilization may not be zero even though you pay off your main card each month. You could still have a balance when your credit card company sends your account information to the bureaus every 30 days.)

Second, if it’s one of your older accounts, it reduces your credit age.

Fortunately, your credit score typically bounces back within a few months when an account closes that was in good standing.

But my theory about your store card is just guesswork. Only your credit reports can reveal what’s actually going on.

Other things to look for: accounts you don’t recognize, payments that you made on time but were reported as late, and inaccurate balances or credit limits.

Sometimes credit errors really are just errors, but they can also be a warning sign of identity theft.

If you do find incorrect information, dispute it right away with both the credit bureau and the creditor. Supporting documentation — like a bank statement that shows your payment was deducted from your account before the due date if it was inaccurately reported as late — will be helpful. The FTC website has sample dispute template letters you can use.

Credit bureaus are normally required to investigate disputes within 30 days, but during the COVID era, they have 45 days.

No matter why this 38-point drop occurred, know that a credit score is just a snapshot of how you’re handling debt at any given moment. It doesn’t grade your overall finances.

As long as your credit reports are accurate, don’t worry too much about your score for now.

You’re paying off your credit card every month. That’s one of the best financial habits you can adopt, regardless of what credit card algorithms are telling you.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to [email protected]

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