I’m not going to lie. My credit score was embarrassing. Before moving to New York I had a 767 score. It was ridiculous, even though I had only two credit cards to my name with little to no balance. Finding a place to rent was easy with that score and I was seen as a low risk renter.
Fast forward 7 years and my score had plummeted down into the 500s. I was responsible for rent, bills and a life in New York with my wife. This place is expensive and I found out the hard way. The price of food was one of the main killers. We would spend upwards of $40 to $50 for takeout in just one night! I’m not talking about huge platters of food; I mean two normal meals, over $20 a piece. It became the new normal to spend that much each night and eventually we just became numb to that spending.
The expenses began piling up before I knew it and I could only afford to pay the minimum due month after month. It was a depressing cycle of endless debt and simply stuck in place for years. My dreams for the future were put on hold and I was stuck in this purgatory of stress and anxiety, always wondering if I can afford next month’s bills.
I had simply given up and just let that failing routine guide my life. It had become a natural sight to see my mountain of debt grow larger month over month. I was stuck and accepted it, because I had no means of escaping.
By relying on credit card companies’ new policies during the Pandemic I was able to catch up for the first time. I had started to make a dent in my debt and life was starting to look up.
It was at this time my wife and I looked over our finances and started planning for the future. What was next for our life? Buying a house was the next step we had planned and it would take proper budgeting to get there. We decided to rip off the band-aid and look at our credit scores. It was disheartening to see such a low score, but it was necessary and lit a fire under us to get it higher. Our target was to hit the 700s before we began looking at pre-approval.
So how did I do it? First, I had to analyze my credit score and see why it was so low. I used credit karma as a means of digging deeper into my debt and to come up with a plan. The main issues were my high credit utilization and a missed payment was sent to collections. It was an old gym membership I was unable to cancel and just let it charge me each month until my credit card expired and I forgot about it.
Outstanding Debt
So let’s start with total debt. Credit Professionals have stated keeping your debt utilization below 30% is the benchmark to aim for. Anything higher can hurt your chances of getting good interest rates when house shopping.
I unfortunately had ridiculously high credit utilization. At one point in my cycle of debt depression, I had reached 99% credit utilization. All or most of my cards were maxed out and beyond any help. It was at this point I had thrown in the towel. How could I ever pay off this insane amount of debt? I remember using a simulator to see how long it would take to pay off my one maxed out credit card with keeping up my low minimum payments. Apparently I would be debt free in only 48 years. Just in time to pick out my coffin.
Credit Utilization accounts for 30% of your entire credit score. It’s a big deal and needs to be handled immediately. In fact, after going hard on my debt repayment plan, I now went from 99% utilization to only 31%! That’s a big jump by just sticking to a budget and being aggressive with payoff.
In case you were wondering, I used a mix of both the Avalanche method and the Snowball Method! I started by paying off my largest credit card with the highest APR. It had been maxed out since longer than I could remember. That bumped my score up by 20 points. Now my wife and I are using the snowball method to take out all of our smaller credit cards. That jump start really had a huge impact on both our scores and our motivation to continue paying it down to 0.
Payment History
Accounting for 35% of your total credit score, your payment history is vitally important. One missed payment can set you back many points and set off a red flag for creditors. If they see you missed a payment, your trustworthiness to them went down significantly. How can they trust someone that can’t make their payments?
Luckily mistakes like this can be fixed. Oftentimes you can work out a payment plan with your credit card company and in good faith ask for the late payment be removed. Getting that flag removed from your credit report can significantly improve your score.
Many years ago I joined a gym. After about a year I found myself not going much at all and tried but cancel my membership. For unknown reasons you can’t cancel online and the front desk in person refused to do it, so I just said screw it and lived my life, as $20 were taken out of my credit card every month.
Fast forward several years later, my credit card expired and I got a new phone and number, so creditor’s phone calls never came. When we began our debt repayment journey, this red flag was such a slap in my face. $78 was sent to collections. For a measly $78, my credit score suffered. Once I made the payment to the collection agency, they agreed to take it off within the month. That quick payment jumped my score 20 points into the 600s. Nailed it.
How Long You Had Your Credit
Longevity of credit is a whole 15% of your score! Signing up for more credit cards can have a negative impact on your credit score. I’ve had my credit cards for several years, however I took one new one out to pay for an engagement ring. That card has since been paid off, but my length of time with credit went from an average of 8 years down to 5.
Though the impact of that was very minimal. The one that hurt me were the few Affirm payments I had paid off. If you don’t know what that is, it’s essentially a platform that acts as credit for you. You go through affirm to make a purchase then go ahead with a monthly payment plan. Apparently this counted as signing up for new credit and I took a few hits. Now I know!
Types of Credit & Recent Inquiries
I’ll combine these two. Types of credit include student loans, mortgages, credit cards and installment loans, which is what Affirm falls under. I’ve found student loans and installment loans have a smaller impact on your score than credit cards. Otherwise my heft student loans would drop my score down to 0! The types of credit you own account for 10% of your score.
Inquiries on your credit report can be broken down into hard and soft inquiries. Credit Karma and other services like that are considered soft and have no effect on your score. Thankfully, since I seem to check my score a few times a day.
Hard inquiries are more for when buying a car or house. When they say don’t make any big purchases like a car when trying to buy a house, they’re not kidding. Having a hard inquiry on your report can drop you down quite a few points temporarily. Lenders would see this when purchasing a house. There are horror stories of them pulling out after seeing that. So be careful! Again, this is 10% of your credit score.
My wife and I actually treat this almost like a game, trying to beat our old scores. For the first time our competitiveness had really started to pay off! I started at 580 credit score and have officially gone into the 700s. Taking care of a collection alert and diligently tackling my debt has seen a surge of over 100 points.
This is just the beginning. We are going to continue until our total debt hits $0. The initial goal was to hit 700 when beginning our house hunting adventure. Now that we’re there, working hard to get the best interest rates became our new goal.
