Three errors that could cause a 100-point score drop

Dear Credit Guy,
My credit score just dropped 94 points, and I’m not sure why. I’ve never paid a bill late and do not overutilize my accounts.

A few changes have taken place recently, though: I’ve gotten married and started a joint account with my wife, who has overutilized our joint credit card each month.

I’ve also started a business and opened a business credit card. I had to apply twice for the business card, as the first time there was a clerical error and the bank recommended starting the application over. Could these be responsible? – PTG

Dear PTG,
Although you have been responsible with your accounts, paying them on time and not overextending, you have seen that “a few recent changes” can have a profound effect on your credit score.

The factors that make up your credit score are:

• On-time payments
• Length of credit history (the age of your oldest account is important here)
• Credit used versus credit available
• New accounts
• Credit mix

Those two new accounts – the joint account you opened with your wife and the business account – count both as recent inquiries and as new accounts. Add to that the fact that you say your wife has been overusing the card on the joint account, and you can see how your credit score would drop significantly.

Impact of joint accounts on credit score
Let’s talk first about the joint account you have with your wife. When you got married and opened this account, your score was affected negatively. This is generally a fairly temporary effect. As pointed out above, “new accounts” is one of the triggers the credit scoring models monitor.

The fact that you say you do not overutilize, but she has been, reflects a bigger problem. Because this is a joint account, any action done by either party is going to affect each one’s credit score.

I have said in this column before that there is no such thing as a joint credit score and that each person’s credit is theirs alone, and this is true.

However, in the case of joint accounts, the credit scoring models have no way of knowing who is doing the “overutilizing” and will therefore penalize all parties on the account. Until the account is brought well under its credit limit, this will continue to keep your score down.

Business accounts and credit score
As for your business credit account, if you signed a personal guarantee in order to obtain the card, the same thing will probably be true as above. I say “probably” because a lot depends on the card you got. Some business credit cards do not report to consumer credit bureaus, only to commercial credit bureaus.

However, applying for the card most certainly resulted in a hard inquiry in your personal file. If the card does report to the consumer credit bureaus, you were also dinged for a new account. Again, any time an account is opened you will see a drop in your credit score; this is usually temporary but it definitely affects your score in the short term.

Effect of multiple applications
The fact that you had to apply twice probably hurt you as well. It may look in your file like you have two new accounts, when in fact you only have one. This should clear up fairly quickly, but you do need to keep an eye on the use of this card, especially in relation to the credit limit.

I should point out that if someone else guaranteed your business card, none of that will apply. Employees of a business may be added as an authorized user to an existing business account, and that card will not show up on the employee’s credit report. However, because you have seen such a drastic drop in your score, I am inclined to think that is not the case and that you were the one to open the account.

Raising score back up
The way back to your previous score will take some time and action on your part. A conversation with your wife about her use of the account is probably in order first.

• The lower you can keep your credit utilization, the better for your score. There is no hard and fast rule here as far as a percentage to stay under, but I would suggest below 25 percent for the purposes of your talk with your wife.
• Be sure to pay your bills on time, every time. This is the single most important thing you can do to raise your score. In fact, making multiple payments through the month can often kick-start that process.
• Keep an eye on your business account and be sure you are not overusing it as well. If possible, make multiple payments throughout the month to this account as well. If that is not possible, be certain to always pay the bill on time.

You will need to be patient. Although it seems your score dropped overnight, you will find that recovery will take longer.

Take care of your credit!

See related: Co-signer, joint account holder, guarantor: Know the difference, Keeping business credit off of your personal record