Over the last few years, I’ve boosted my Credit Score from a 435 to almost 750. In my early 20s, I made the worst possible financial decisions, and I paid for it for years before I decided to turn things around. I learned the hard way why a credit score is important, and how to fix it. So I wanted to share the mistakes I’ve made, so you can avoid them – or correct them if you’ve gotten into a similar situation. Here are the 7 Giant Credit Mistakes I’ve made.
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1. Not Paying Attention to My Credit Score.
I’m going to start with this, and I’m going to say it loud for the people in the back. PAY ATTENTION TO YOUR CREDIT.
I made a lot of financial mistakes that lead to an abysmal credit score. Not realizing how these mistakes were impacting my credit was probably the biggest one. I knew that I was in financial trouble, I knew that debt collectors were calling, and honestly I was scared to even look at my score. Ignoring my credit, and it made it easy to keep up my bad habits.
How You Can Avoid This:
Monitor your credit regularly! This will let you know of any problems you may have created. It will also make you aware of any fraudulent activity you might otherwise have missed.
How I Overcame It:
I downloaded a ton of free credit score apps. Credit Sesame is my favorite, I now check it daily. You can get your FREE credit score, monitoring and more at Credit Sesame – Sign up in 90 seconds. No Credit Card needed. The interface is easy to use and they offer great tips for improving your score, explain the factors impacting your current score, and breakdown the reasons for any changes to your report. They also let you know how likely you are to be approved for different credit cards and loans, so you don’t put a hit on your credit unnecessarily.
However, it’s not the only app I use. Credit Karma is great as well, and if you have a Capital One one card they have a great score simulator that will let you plug in variables, like paying down balances or missing a payment, that will give you an estimate of how your credit might be impacted. After using these apps, I raised my score immensely and relatively quickly because I knew exactly what I needed to change. These apps with definitely help you avoid, or correct giant credit mistakes.
2. Not Using Credit Cards Properly
I looked at credit as a means to buy things I could not otherwise afford. I got my first 2 credit cards in college. Signed up for them because they were giving out free things on campus to anyone who filled out an application. Actually, I think I got a free pizza for one of them. I had no income in college, I lived off my student loan excess and these credit cards meant the chance to splurge on myself. I’d just pay them off with my next loan disbursement. So I bought a laptop, some clothes, some ‘off-campus’ food, and landed myself in a couple of thousand dollars worth of debt. When my loan disbursement came around, I had other priorities and I didn’t pay.
This hurt me for two reasons. The obvious, that I had debt in collections on my credit report, and credit card companies who would not quit calling my phone. And the less obvious, that I had started a foundation of bad credit with no good credit to cushion any further financial mishaps.
How to Avoid this:
Learn that credit cards are not an excuse to live above your means. Use credit cards to purchase things you would normally buy – gas, groceries, online purchases. Then pay off your balance each and every month. This will help you avoid giant credit mistakes. Credit Cards are more secure than debit cards because you can dispute fraudulent charges more easily, and paying your balances will steadily increase your credit score. If you do have an inevitable large purchase (it happens), make sure you budget enough to make more than the minimum payment each month.
How I Overcame It:
I worked with both the collection agencies to get settlement amounts. Most debt collectors will allow you to pay a lesser amount than you owe if you can pay it in full. The most important thing that I did though, was to make sure that they agreed to drop the debt off of my credit report before I paid them. Both agencies agreed (this is pretty standard if you ask for it). I had the debt off my shoulders and my credit report.
3. Taking out a Large Loan before being ready for the commitment.
When I was 20 a condo that my grandparents owned when I was a child went up on the market. The mortgage payment was a bit of a stretch, but it seemed do-able, especially splitting it with my then-boyfriend. It was a sentimental buy, and I jumped without thinking. Things went downhill quickly. I split with my boyfriend and was left with a mortgage payment, condo dues, and the utilities that I absolutely couldn’t afford. I moved in roommates, but partying with them seemed more important than working and paying the bills. It was not a sustainable situation. Foreclosure papers headed my way, and I panicked. I moved everyone out, myself included, and let the bank take the condo back over. This credit mistake loomed over my credit report for years to come.
How to Avoid This:
Make sure you are educated and ready to take on any long-term loans. Car Payments, Mortgages, and Student Loans (which I’ll delve into deeper later) are all life-changing responsibilities. Do not take them lightly. Banks have gotten a little bit stricter about lending more than the borrower can afford, but that isn’t foolproof. Don’t assume you can make a payment just because you are ‘qualified’ by a financial institution to do so. Make sure you’re going to have a healthy chunk of money left over after all of your bills for savings, entertainment, and incidentals.
If you do get into a pending foreclosure situation, look for state and federal programs to help you keep your home as well. There are a lot of options for help if you do the leg work and apply for them.
How I Overcame It:
This was by far the hardest of my giant credit mistakes to overcome. Luckily turning the house back over to the bank led to them essentially letting me off the hook for the mortgage. It dropped my credit score to nearly negative, but they did not come after me for payments or garnish my wages. The foreclosure blemish on my credit took 7 years to fall off, but I worked on all other areas of my credit to improve my score. When it did finally fall off my score skyrocketed.
4. Not Having Enough Credit Accounts
Part of the reason the foreclosure hit me so hard was that I had basically good credit accounts. I have paid off my credit card debt and ensured it had dropped off my report. This left me with no credit, aside from a delinquent student loan (I’m getting there). So when my home was foreclosed on, it was everything. There was no way to prove to potential lines of credit that I was capable of making payments. At this point, I had 4 items that had run through my credit report, and they were all bad.
How to Avoid This:
Don’t be afraid to use credit, just make sure you use it wisely. Potential lenders like to see a good variety of accounts, that you can pay on multiple cards and loans without missing payments. As I mentioned earlier, use your credit cards to pay for everyday items, then pay them off at the end of each month. Using one card for gas, and one card for groceries will keep both credit cards active and in good standing if you pay them off on time. Having multiple credit accounts will help you recover more quickly and take a smaller hit from any giant credit mistakes you might encounter.
How I Overcame It:
I used those credit apps I told you about in the beginning and found a card that had the best approval odds for me. The interest rate was insanely high. If I’m being honest though, the sky-high interest rate was a really good incentive to never leave a balance on the card. After using it for a while and making on-time payments monthly, my credit score started increasing monthly too. Once I built up my score a bit more, I got an Amazon store card. The interest rate isn’t the greatest, but I still use it for all my prime purchases, and I get rewards points. Since I have a monthly subscription for FreeTime (2.99 a month), I use the card to pay for that. This keeps the card active even when I’m not shopping online for a long time, and its a tiny payment each month.
My credit score increased pretty significantly after this (the foreclosure dropped off my report around this time too) and I was able to get a great low-interest card from my credit union. I use this for most of my regular purchases and still pay off the balance monthly. These cards, all being in good standing, give me a cushion if you do make any giant credit mistakes (or even small ones). The longer the cards are open, the comfier the cushion as well.
5. Student Loans (The Horror!!)
It took me three attempts at school to get a degree. I know I’m not the only one. And even if you finished on the first go around, you’ve likely racked up some debt. My first attempt at college was at age 18 – straight out of high school, and ready to not actually do any course work. My grandparents left me a little money for college, which I spent on one glorious year at OK State (Go Pokes!). Turns out being stoned and playing World of Warcraft are not college classes though, so I failed mostly everything. You have to actually go to class to get grades I think. So I quit school and moved on to working full time.
Working full-time sucks. I have very few good things to say about work, it’s a four-letter word. Especially when you’re under-qualified. So after a few years of working jobs I hated, I’d had enough. At 21 I took out some student loans and headed over to community college. I did better this time, but I quit working to do so. This was the beginning of the end to the home I once owned. Once my financial situation started collapsing, I quit school again. This time with only about 2k in Student loans.
I proceeded to get another awful job. I didn’t pay my loans, and instead of looking for assistance I ignored them and accrued a ton of interest. My wages were garnished. My already sup-par pay deteriorated. I wanted to finally finish my degree, but I was being held back by my previous bad decisions. I couldn’t take out another student loan with one in collections.
How To Avoid This:
Stay in school! Or wait until you’re ready to be there. Not every path needs to have college directly after high school. Be aware of the costs of college, the types of loans you’re taking out, and the interest rates associated with them. If you can work while you go to school to keep costs down, do it. And always apply for grants and scholarships. You can also save on textbooks using Amazon or local second-hand book stores.
If you do get in over your head, there are a ton of programs for help with federal loans. They offer income-driven repayment plans, so you only have to pay what you can afford, there is deferment if you go back to finish school, and some loans can even be forgiven if you work for so long in your field. You have to apply for these programs though, and if you ignore the problem it will only grow. Loans that are too delinquent generally don’t qualify for assistance, so get a head start to avoid these types of giant credit mistakes.
If you have private loans, make sure you know what interest rates your paying. You should know that you can refinance them, just like you would a car or a mortgage, to get a better interest rate and lower payments. Credible.com is a site that will compare rates for you to help you find a better solution for your student loan debt.
How I Overcame It:
I waited until I got my tax return and paid off my damn loan. Luckily it was a small loan (in comparison to most). I went back to school and did it right the last go around. My Business degree is completed, and I’m so happy I did it. I did take out loans the last go around (and I’m still paying on them), but I did it the right way. After my grants and scholarships, I ended up with around 15k in student debt. However, instead of dragging down my credit, this time it’s helping. My interest rates are low, and I immediately set up an IDR, so my payments are reasonable. Every payment I make only helps my credit, and I don’t feel crushed by the debt. I also came out with a valuable asset, my degree.
The good news is, no matter how bad your situation, there is always light at the end of the tunnel. I was awful at managing my finances, but I’ve improved my credit score to a 748. This was done by taking some reasonably simple corrective actions. I hope this serves as a lesson to help you avoid the situations I experienced. For those of you already living in bad credit land, I hope you found some helpful tips to improve your situation. I overcame my giant credit mistakes, and so can you.
If you have any questions, or you can think of any tips I may have missed, please let me know in the comments. And if you’re looking for a way to save some extra money, check out how to increase your savings in 3 easy steps.