Using credit cards to pay bills and large expenses: At what point does it hurt your credit score?

This is the story of how a poorly-timed credit card purchase turned into a massive credit score drop. While it does have a (mostly) happy ending, there are some lessons to be learned.

Not long ago, a member of my family found themselves facing surgery for a broken arm. Now, we have medical insurance, but that insurance comes with a hefty deductible – one that meant we were still on the hook for a few thousand dollars in medical bills.

Thanks to our handy-dandy emergency fund, we had the cash to cover the cost. But who is walking into the surgery center with a suitcase full of cash? Nope, if nothing else, this medical drama would have the silver lining of credit card rewards.

Now, the card I chose to use was one that offered me the best rate. What I didn’t consider was the fact that this card had a lower limit than others I could have chosen. Why did this matter? Turns out that surgery bill was enough to push my utilization rate up over 50% – and my credit score didn’t like that one bit.

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The basics of credit utilization

Here, you might be wondering what a credit utilization ratio even is. Essentially, your credit utilization ratio is the percentage of your available credit you’re using on any given card (or all of your cards combined).

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For example, if your credit card has a limit of $5,000 and you have a balance of $1,000, your credit utilization ratio is: $1,000 / $5,000 = 0.2 = 20%.

Why is this important? Your FICO® credit score is based on five different factors, including:.

  • Payment history (35%).
  • Amounts owed (30%).
  • Length of credit history (15%).
  • Credit mix (10%).
  • New credit (10%).
  • That second factor, Amounts Owed, is where your utilization comes into play. Rather than just looking at how much money you owe in general, your credit score actually factors in how much of your available credit you’re using – i.E., Your utilization ratio.

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    Using a large portion of your available credit is seen as a red flag, as it could mean you’re spending more than you can repay. While you’ll have the most issues if your overall utilization is high across all of your accounts, even having a single card with a high utilization ratio can hurt your credit score. (This is one reason it’s a bad idea to max out a credit card.).

    How it impacted my credit score

    In general, it’s considered a good rule of thumb to keep your utilization ratio below 30%, with the ideal rate being below 10%. By going over 50%, I set off that little “Danger, Danger!” Robot from, well, every sci-fi movie ever.

    The result? My credit score dropped a whopping 25 points.

    While that seems like a big drop, it actually wasn’t as bad as it could have been. I had a couple important factors in my favor:.

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  • My overall utilization was still very low. I have a good amount of available credit across multiple credit cards, and this was the only card with a high balance. If I had multiple credit cards with high utilization, my score would have likely dropped much more.
  • My credit score was above 800 before the drop. Even losing 25 points, my credit score was still firmly in the “very good” range. If my score had been lower, the drop could have been more impactful.
  • I wasn’t applying for any new credit right away. Since I didn’t actually need to apply for any new credit products – or otherwise undergo a credit check for anything else – the drop to my score didn’t actually affect anything important.
  • If any of these factors had been different, the 25-point drop could have been significantly more painful.

    How I bounced back

    Your credit score is a rolling number, meaning it changes all the time – sometimes even daily. Part of that is because of when each lender sends your balance information to the credit bureaus. For example, most credit card issuers will send your latest balance information to the credit bureaus once a month, usually when your statement period ends.

    This timing means that, even if you pay off your credit card in full before your bill’s due date, you could have a high balance reported to the credit bureaus. However, you typically have a grace period between your statement closing date and your bill’s due date to pay your balance without being late or being charged interest.

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    And this is what happened to me. The medical bill hit my credit card right before the statement period ended. So, that’s the balance that was reported to the credit agencies – and was used to calculate my credit score during that time.

    Since we had the money in savings, I was able to pay off that credit card in full well before the due date, avoiding interest fees entirely. And as soon as my credit card issuer sent my updated balance to the credit bureau (which was several weeks later) my credit score completely rebounded.

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