I’ve always been one to plan ahead and plan for the worst. So when a credit card company representative on my college campus told me it was important to start building my credit at age 18, I jumped on it. I got my first credit card and was VERY responsible with it. When I was told buying my first car in my name, versus a family member’s, was vital to building my credit even if the interest rate on the loan was higher, I did it. My credit score was pretty darn good for most of my adult life . . . most of it.
Killing My Credit
Then the recession of 2008 hit and I lost my job. I had been in a condo for 2 years in the central valley of Northern California which I had planned to turn over within 5 years of buying. My mortgage lender said not to worry, I should be able to build equity in time to sell and get out of the interest only – balloon payment loan I was in. My real estate agent reassured me that the value of the condo would go up so that at a very minimum I’d be able to refinance.
Well none of that was true. Real estate values tanked, I had just lost my job, and was left with one of two choices. I could use up my savings and 401K paying off a condo that would not be worth much for a very long time and that I had to somehow pay a $65K balloon payment on in 3 years, or I could count my losses and stop making payments. This was a real ethical dilemma for me.
I wanted to do whatever I could to not default on payments. I called the bank to try to negotiate a smaller payment, refinance, whatever . . . . they said “we can’t do anything until you miss 3 payments”. So basically, I had to ruin my credit – which I worked so hard to build – before I could do something to keep it from getting ruined. The way that added up in my head was ruined credit + ruined credit = ruined credit.
Then I read somewhere, your credit isn’t ruined as badly if you do a short sale . . . . so that’s what I did. I somehow found the worst real estate agent on the face of this planet to handle my short sale. In fact, I taught him a thing or two that I learned off the internet on short sales. I ended up doing most of the work with the bank and then finally it got approved. My $320K condo sold for $90K. I’d lost tons of time and money on a bad investment and guess what, my credit was shot anyway.
Surviving Bad Credit
Before the short sale entirely closed and my credit totally sank, I decided to buy a car. Yes, I bought a car with no job. Luckily I was engaged and my now husband could co-sign and hopefully co-pay if I didn’t find a job soon enough. I knew having a large debt that was faithfully paid would help my credit, or so I thought . . . . It’s been 5 years and my credit still stinks.
I can honestly say that as a single person, I could have totally lived with my bad credit. I found a job. I kept the same credit cards I already had and continued paying them off at the end of the month, faithfully. Renters have become a bit lenient regarding credit history. I could have gotten a pay as you go cell phone, etc. etc.
But I got married, so although I continued to pay my car and credit cards faithfully, my husband’s credit helped us do some nice things like improve the house and buy a vacation membership. With marriage, also comes joint debt. That didn’t become as apparent to me until I stopped working to stay home. Until then, I decided to focus on eliminating all our debt.
10 Lessons Learned
My biggest mistake in my crusade to eliminate debt was not doing my homework on what affects credit scores. In an attempt to reduce interest cost on loans by transferring debt onto 0% credit cards that I knew we’d be able to pay off before the promotional period, I ended up costing us more money and lowering my husband’s credit score. So without further ado, here are my top 10 lessons learned from my experience with bad credit scores:
1. Conduct your own research with regards to real estate and mortgage loans, don’t trust the “expertise” of a real estate agent or lender no matter how much trust you have in them.
2. Don’t take your spouse’s credit score for granted, actively seek advice on improving your own score even if it isn’t desperately needed.
3. Do not consolidate large loans on a few credit cards, it will lower your credit score. Moving around debt without reducing it significantly is bad.
4. Have a running list of every single thing you pay for in your household, including magazine subscriptions, because something as simple as an overdue magazine subscription can go to collections and ruin your credit.
5. If paying off a loan, call the day you are writing the check for the “payoff” amount. Ask what the daily interest is and add about 10 days of interest to your payoff amount payment to allow enough days for the check to arrive in the mail and be processed. A small amount of a few cents could turn into dollars and you may not realize you owe that money until it is reported as delinquent or sent to collections, thus affecting your credit.
6. Don’t be tempted to open department store credit cards for a 20% discount on a big shopping day. Lots of credit inquiries and unused credit cards affect your credit.
7. If shopping for a loan, do your inquiries within a short span of time to minimize the effect on your credit score.
8. If you like earning points on credit cards, spread your monthly expenses over several cards. It looks better credit-wise that you are using several cards and paying them in full each month than having a large balance on a single card month to month.
9. Set-up auto-pay wherever possible. It’ll save you from late payments, late fees, and extra interest.
10. Don’t stress about credit. If your credit score stinks, like mine, then do what you can to improve it for a rainy day but don’t stress. Don’t rely on your credit. Do what you can to pay things off with cash or at least on a monthly basis. If you want the safety of credit, research other methods of borrowing such as Bank On Yourself. If you want the free report, enter “RF55” as your code so any follow-up requested gets directed to my trusted friend.
Please comment if you found this helpful or have anything to add. I always like learning off of other people’s mistakes rather than making my own, if possible. For more information on improving your FICO score, click here.