Is it Ever Ok to Let Your FICO® Score Drop?
Maintaining a higher FICO® Score is generally good advice. However, if you're struggling financially, it may be ok to let your FICO® Score drop temporarily.
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We all know the benefits of a good FICO® Score. It's easier to get approved for credit cards and loans, you qualify for more attractive deals, and you can enjoy lower interest rates. Under normal circumstances, maintaining your FICO® Score is important. However, when you're struggling financially—due to job loss, illness, or divorce, for example—it may be ok to shift some focus away from maintaining your score.
Currently, millions of Americans are experiencing financial challenges stemming from the coronavirus pandemic. Workplace closures, increased childcare costs, and covering medical expenses has made it hard to stay afloat for many. While you may not want to let your FICO® Score slip, if you're struggling financially focusing on your basic needs is more important.
You've just lost your job.
Job loss is one of the most stressful life events. Emergency savings and unemployment help tremendously, but the money may only stretch so far. Even after adjusting your budget and reducing your expenses, you may find yourself relying on credit cards more, increasing your balances to make ends meet.
The necessities should come first. That includes your rent or mortgage, food, utilities, insurance, and transportation costs.
As you prioritize bills, missing a credit card or loan payment may be inevitable. It is important to contact your credit card issuer before your due date to discuss your situation and payment options. Many offer hardship options, but you have to call to take advantage of the benefits.
You have major medical expenses.
If you've had a car accident, major surgery, or life-threatening illness, medical bills can add up. Even with health insurance, you may have to rely on credit cards or loans to cover out of pocket expenses.
While you're giving your full attention to your medical care—or that of a loved one—medical bills may slip through the cracks. Some of your FICO® Scores may be impacted if unpaid medical bill collections land on your credit report. Don't feel guilty about focusing on your health. You can work to address your medical bills as your health improves.
Your emergency fund is empty.
After you've exhausted your emergency fund, you may have to use your credit cards for unexpected expenses. If your balance and revolving utilization climbs higher, your FICO® Score may drop—a big part of your score is based on how your balances compare to their credit limit.
The good news is that your FICO® Score is dynamic and can change as the underlying credit report changes. As you make your payments on time and reduce your balances, your score will generally increase overtime.
You're upside down on your mortgage—and you can't turn it around.
Sometimes owning a home turns out to be a financial burden instead of an asset, particularly when you're underwater (i.e., you owe more than your house is worth). Contact your mortgage loan servicer to explain your situation and gain insight into programs they may have to help you.
A Lower Credit Score Isn't Forever
Fortunately, a drop in your FICO® Score doesn't have to be permanent. As your finances recover, you'll be in a better position to catch up on bills and pay down high balances which can help your score will improve over time.
LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.