Financial Past, Present & Future Series: Part 1 Past

Many of us have been there: late payments, overspending, maxed out credit cards, feeling like you will never increase your credit score or get your debt paid off in full. As someone who got caught up in credit card debt in my late teens, early 20’s, I can tell you that I was able to go from maxed out credit cards to zero credit card debt and an 800+ credit score, but it took some time and hard work on my part, to get there.

I was a full-time college student working part-time and my credit card debt was too much for me to handle. Even with only a part-time job, I made a decision that I was going to do whatever it took to pay off my debt and get my credit score up from the 600’s. A few years after I paid off my debt, I financed a car with a 705-credit score. By the time I purchased my first house 6 years later, my credit score was well into the 800’s.

I had to make a budget and stick to it (we will discuss budgets further in Part 2: Taking Control of Your Present Financial Footprint). I wish I could tell you how much debt I had at the time, but I have to be honest and admit that I do not remember the exact amount. What I do remember quite clearly, was how uncomfortable it felt knowing that I had multiple credit cards, with high balances that were not decreasing. My balances were not moving downward, because I could only afford to pay the minimum amount due each month. That is until I chose to start living by a budget, where I allocated a specific amount to tackle my debt.

Below are a few tips to help get you started to pay off your debt and increase your credit score at the same time, while also fixing other financial woes of your past:

1. Pull a current copy of your credit report.

Everyone is entitled to a free copy of their credit report once per year, from Equifax, TransUnion, and Experian. I recommend staggering the requests between the 3 credit agencies instead of pulling all 3 at the same time. This way, you can stay up to date throughout the year and identify any fraudulent activity sooner.

Click this link for your free credit reports: https://www.annualcreditreport.com/index.action

According to www.consumerfinance.gov, “You can get additional free reports if any of the following apply to you: You received a notice that you were denied credit, insurance, or employment or experienced another “adverse action” based on a credit report. You have a right to a free report from the credit reporting company identified in the notice.”

2. Dispute any errors on your credit report.

Once you have a full copy of your credit report, review every line and page, including each creditor to confirm if there is anything on your credit report that should not be there. You may be getting penalized with derogatory credit in error. Companies do make mistakes when reporting to the credit bureaus, so it is a good idea to check everything for accuracy.

If you do find an error or discrepancy, you should dispute it right away. You can dispute through TransUnion, Equifax or Experian by phone, mail or online. The best results usually come when you dispute by mail, because you can list all of the details of your dispute, without restrictions. The other options only allow for so many characters to state your case, making it less detailed, and can hurt your chances of winning the dispute.

3. Find out your FICO credit score.

When you receive your free copy of your credit report, it will not list your credit score. I receive a new credit score update every month for free through mint.com. Credit Karma https://www.creditkarma.com/signup?redirectUrl= and Credit Sesame https://www.creditsesame.com/, also offer free credit scores without requesting a credit card.

Once you know your credit score, you will know how much you need or want to increase it by. Plus, if you are in the market for a new car loan or any other financing need, most financial institutions can tell you their current interest rates, in case you want to rate shop before allowing a lender to pull your credit report.

What’s a good credit score? Remember when I had that 705-credit score to purchase a car? Well, I worked for a bank at the time and my employer wanted me to get a co-signer for their deal. I decided to go with a competitor, without a co-signer instead. I recommend having at least a 740 score for the best rates on any type of financing, but once you achieve that, nothing should stop you from moving into the 800’s.

Don’t get discouraged if your credit score is no where near 740. You can still become a homeowner, get approved for financing, etc., with much lower credit scores. Having a higher credit score decreases the amount you have to pay overall, if you finance something instead of paying cash. We all should try to save money if we can.

All 3 credit scores from TransUnion, Equifax, and Experian will likely be different. If you are purchasing a house, the lender will use the middle score.

4. Decide to tackle your existing debt from past purchases right now.

Many financial advisors suggest to pay off debt with the highest interest rate first, but I disagree. Oftentimes, those debts have the highest balances and it may seem like forever to get them paid off. I recommend paying off the debt with the lowest balance first. If you have a debt that is a couple hundred dollars, you will be able to pay it off much quicker, which will give you satisfaction and momentum to keep going, and pay the rest of your debt off from there.

Once you pick that first debt to payoff, determine a specific amount that you will pay on it every month above the required minimum amount due. Make sure that you pay that amount every month no matter what. For example, if $20 is due per month on a $500 debt, pay $60 per month (or more if you can) to pay it off in about 9 months, allowing for the accruing interest to accumulate each month as well. Once that debt is paid off, you move on to the next lowest debt you owe, and apply that $60 you were paying on the first debt to the next one, until it is paid off and so on.

Eliminating those smaller debts first will make you feel victorious and provide you with momentum to keep going. By the time you get to the larger debts, you will be able to apply a much larger payment per month, to get them paid off as well. Repeat this method until you have paid off everything.

Depending on the amount of debt you have and the amount you can budget to pay it down each month, it may take a year or a few years, but be patient and work the process. I’m telling you, if you stick to it—it works!!

5. Do not acquire any new debt.

Since you are paying off old debt, it is very important not to acquire any new debt, if at all possible. Instead of closing out accounts completely, you should either cut the cards up or take them out of your wallet and lock them up in a secure place. If you have had the credit line established for a while, you should leave it open because lenders like to see 12-24 months of good credit history from at least 3-4 different open trade lines, when decisioning new requests for credit.

I also think it is a good idea to have a least 1 major credit card for emergencies, but if you are a spender, you need to lock that emergency card up too, or give it to someone you trust for safe keeping. This will keep you from using it on those impulse purchases.

6. Set up automatic payments for all of your bills.

One of the most crucial things you need to bring your credit score up, is to always make your payments on time. I recommend using online bill pay through your financial institution, because it is much easier to cancel or make a change to a payment through your own bank, than if you set it up through the creditor. Creditors usually need significant advance notice to make changes, and sometimes they still pull the payment anyway.

You need to be consistent and persistent if you want to pay off your debt, so you do not want to make a habit of cancelling or changing your automatic payments. There are times where your paycheck may be short or an unexpected bill or emergency arises, and you need to make sure you don’t add to your debt by causing massive overdrafts in your bank account. In these cases, a change may be needed. Do not make this a habit, though.

7. Establish a new bank account if you are on ChexSystems.

According to Wikipedia.org. “a ChexSystems report examines data submitted by banks in the past five years. A report may describe banking irregularities such as check overdrafts, unsettled balances, depositing fraudulent checks, or suspicious account handling.”

If you are on ChexSystems, you may have an outstanding debt that you owe on an old checking or savings account that you overdrew and never paid back. Some banks will allow you to open a new checking account, if ChexSystems is updated to show you have paid your balance due. There are other financial institutions that offer checking accounts without check writing capabilities to help you re-establish a checking account, even if you have a recent unfavorable ChexSystems report. The account is usually restricted and you only receive a debit card to access your funds. After a year or so of not overdrawing or abusing your account, they usually convert it to a regular checking, allowing you access to write checks again. Call some local financial institutions in your area to see what they offer, if you cannot open a regular checking account.

8.Never max out your credit cards or lines of credit.

A large percentage of your credit score is calculated by your credit utilization ratio. It is recommended to keep your credit usage between 15-20%. For example, if you have a $1,000 available line of credit, do not keep a balance of more than $150-$200 on it at a time. The lower the balance the better. You can also request to raise your credit limit, but do not increase your spending to keep your ratio lower and help your credit score.

As a rule of thumb, your credit card debt should never exceed your checking and savings account balances. It is okay to charge something on your credit card to keep some money in the bank for easy cash access, but you should be able to pay all credit card balances off in full at any given time, or you really cannot afford to charge it.

9. Pay bills twice per month.

I use my credit card for everything, because I get cashback on all of my purchases, not just in certain categories. For this reason, I pay my credit card twice per month (or more) to keep the balance low. That way, once it’s reported to the credit agencies, the balance isn’t showing maxed out.

I have also paid my car loans twice per month. I divide the payment in half every pay day, so I do not have to make the full payment all at once. Always call your lender to see if they accept partial payments, because some do not and will reject a partial payment. My mortgage company does not allow partial payments, so I always pay more than the amount due, but I only pay it once per month, to avoid a partial payment rejection.

10. Apply for a secured credit card.

If you can’t get approved for a credit card, try for a secured credit card instead. Secured credit cards are offered by many financial institutions. For a $500 credit card, you may be required to put $500 or slightly more on deposit with the creditor, which they will hold as security while you utilize the credit card. Typically, after a year of established on time monthly payments and great history, you can apply for an unsecured card with ease. They will refund your initial deposit as well, as long as you don’t have an unpaid balance.

11. Freeze your credit report.

One way to keep yourself from opening too many new accounts, is by placing a freeze on your credit report to keep lenders and yourself from accessing it too easily. This works great if you tend to open new accounts at every store, because they are offering some promotion or discount when you open a new card with them. Make sure you contact TransUnion, Equifax, and Experian to place a freeze with all 3 agencies.

At the time of writing this, it is currently free to place the freeze and to temporarily or permanently lift it with all 3 agencies. Placing a freeze also helps to keep others from opening fraudulent accounts in your name.

Keep in mind, if you do need to apply for credit, the freeze may cause delays if you don’t temporarily lift the freeze prior to applying for new credit. Many lenders will pull one of the reports instead of all three, so you can contact them ahead of time to find out which report they use. Then you can get the freeze lifted for the period of time you think you’ll need to complete your new financing.

Let’s be realistic: most of our financial mistakes of the past do not have a quick fix. Just because you may have made some mistakes with your credit or acquired large debt, it doesn’t mean you have to stay there. Your credit score may not be in the 800’s right now, but that does not mean that you can’t get there. You may owe some debt, have trouble getting approved for new financing, etc., but you can fix it.

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