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How I Fought Back from Credit Score Disaster

The six steps I used to add 140 points to my FICO score after a credit score disaster

It was Bob Hope that said, “A bank is a place that will lend you money if you can prove you don’t need it.” If you’ve ever faced a credit score disaster like I did, you know this for a fact.

I had always taken my credit score and low interest rates for granted. I got a credit card when I was 18 and got my first car loan at 20 while I was in the Marine Corps. The bank had no problem lending me a few thousand because they knew I couldn’t be fired from my job and would be in huge trouble if I defaulted on the debt.

By the time I was out of the Marine Corps in 2001, I had a 760 credit score and could get just about any loan I wanted. I bought my first rental property, fixed it up and refinanced it to buy another. The U.S. was just building up to the housing boom and I was the loan officer’s new best friend.

By the time 2007 rolled around, I had five rental properties as well as my own house. I wanted out of the real estate business and could see the market overheating so I decided to sell my rentals. I sold three fairly quickly but two just sat there for sale, empty and not collecting a dime of rent. I had saved up a pretty good nest egg so it wasn’t a problem but then things started getting tight.

I maxed out my credit card but it wasn’t enough, I missed a mortgage payment and then another. In just a couple of months, I watched my pristine credit score drop from nearly 800 to 620 FICO.

If I ever needed money before, I could just apply for a personal loan or refinance one of my properties. In real estate, your business lives and dies on access to credit. After destroying my credit, I was locked out of the loan game and there was nothing I could do.

I eventually sold the rest of my properties but the damage was done. The Fair Isaac Corporation (FICO) estimates that it takes up to seven years to recover your credit score after being 90-days late on a mortgage payment. I was 33 years old and knew that I would need to improve my credit score if I ever wanted to buy a house or get another loan at a rate I could afford…so I resolved to do it in four years.

How I Fought Back from Credit Score Disaster

I knew it wouldn’t be easy to increase my credit score or that it would happen overnight. After doing some research, I found six steps that I could use to boost my score. Some helped to increase my score after a few months while others took a little longer.

The first thing you need to do to increase your credit score is understand what goes into your score. The FICO score ranges from 300 to 850 and is determined by five factors.

Dealing with bad credit is no fun! You’re locked out of a whole world of financial leverage and loan officers aren’t even going to return your calls.

The biggest part of your credit score is your payment history, the total amount you owe and how long you’ve had credit. There’s not much you can do about your credit history other than make the decision to pay your bills on-time in the future. Your total amount owed is measured by your debt-to-available credit ratio which is just how much you owe against how much credit you have available. We’ll get to how to use this later.

The smallest two factors, new credit and types of credit, are the easiest to change to get a quick boost in your score.

Credit score factors

Credit Score Factors

A score above 660 is considered ‘prime’ credit and you generally won’t have a problem getting a loan though rates might be high. A score of 720 or higher is super-prime and you’ll really start to notice your rates dropping on credit cards and other loans. Unfortunately, I was stuck in the sub-prime group and had trouble getting any credit at all.

Going from Credit Score Disaster to Credit Hero in Six Steps

1) My first step was to see exactly how bad my credit was by getting a credit report from each of the three credit bureaus. Most people don’t know that you can actually have many different credit scores because each of the three credit agencies might have different information on their report. Other companies then use the info from one of your credit reports to calculate a FICO score which is used by a lender. It can be a little overwhelming but your score should be about the same from most sources.

Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
Telephone: 1_888_766_0008
Online: equifax.com

TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 2000
Chester, PA 19022
Telephone: 1_800_680_7289
Online: transunion.com

Experian National Consumer Assistance Center
Address: 475 Anton Blvd.
Costa Mesa, CA 92626
Telephone: 1_888_397_3742
Online: experian.com

You’ve got the right to a free credit report from each of the bureaus once a year. This is enough for most people but I signed up for a credit monitoring service because I wanted to track my score and access my reports more than once during the year. I like the myFICO credit monitoring service because it’s the actual consumer division of FICO. Besides having access to your credit reports and score, the website has a lot of great information about improving your score.

2) After you’ve got your credit reports, it’s time to check them over and find any mistakes. It may not seem likely but the Federal Trade Commission estimates that at least 5% of reports have an error whether it’s a missed payment or worse being reported on your score. Just one bad mark can drive your score lower by 50 points or more so it’s important to check your reports.

Unfortunately, none of my reports had any errors on them. There were plenty of bad marks but none of them were errors.

If you do find an error, you can dispute it with the credit bureau. Remember to do it with each of the three bureaus that have the error on your report. The credit bureau is legally required to investigate each claim with the creditor that reported the event. If the credit bureau doesn’t hear back from the creditor within 30 days, they have to remove the mistake from your report. If you’ve only got one or two bad marks on your report, try disputing them to see if you can get them removed…could be an instant bump in your score.

3) I kept my USAA credit card throughout the entire ordeal. I’m glad I had it because I’m not sure I could have gotten another card with my credit score. USAA usually offers some great rates on cards but my missed payments and a cruddy score meant I would have to pay a higher rate. I still had a little under $4,000 in credit card debt so needed to do something about it.

credit score disasterI was able to take out a personal loan for $6,500 to pay off my credit card and a few other bills. Personal loans for debt consolidation are one of the best tools you can use to boost your credit score. The loan goes on your credit report as a non-revolving loan compared to credit cards which get reported as revolving debt, which means they don’t have a payoff date or fixed payments.

The credit bureaus will lower your score if they see a lot of revolving debt on your report because it’s harder to plan for those shifting payments and you can get over your head quickly. Paying off your credit cards with a personal loan means you wipe out your revolving debt for better non-revolving debt.

I used another lender for my personal loan but now I recommend Avant Credit for loans. The company wasn’t around when I needed my loan though I wish they were. Avant doesn’t charge an origination fee on loans which is usually about 5% of the loan amount. Not only do you save that 5% but you can refinance your loan later when your credit score is higher to get a better rate. Avant also offers loans to borrowers with credit scores as low as 580 FICO, quite a bit lower than most peer lenders.

If you do have bad credit, personal loans can get expensive so it’s critical that you pay the loan off on time and even ahead of schedule if possible. This will really help to boost your credits score. Check out this article for the complete process on how to use bad credit peer loans to fix your credit.

4) After paying off my credit card, I did something that seems crazy but actually works to boost your credit score. I called USAA to have my credit limit increased from $5,000 to $10k!

No I wasn’t getting ready to go on a shopping spree. In fact, I had resolved to only use my credit card for necessities and to pay it off every month.

Getting your credit limit increased works on one of those credit score factors we hit on earlier, the debt-to-credit ratio. By having a higher limit, the credit bureaus see someone that has lots of credit available in case things get tight. Now I had $10k in available credit instead of just $5,000 and looked like a better risk.

I wouldn’t push this trick too far, maybe just get your limit increased on one card but not all your credit lines.

5) With some of the money from the personal loan, I called up a collection agency that had an old debt of mine past due. It wasn’t a big debt but the mark on my credit report was killing me. Most people don’t know this but you can actually call up collection agencies to negotiate and get bad marks taken off your credit report.

I told the collection company that I would pay off 75% of the debt if they wrote to the credit bureaus to take off the past-due collection. At first, the agent told me this wasn’t possible but I knew better. Collection agencies only want their money and will do just about anything to get it. I ended up agreeing to pay 85% of the debt and got a signed letter agreeing that they would have the late payment removed from my credit report to make sure they held up their end of the bargain.

Check your Rate on a Personal Loan up to $35,000

6) You know when they say, “Use it or Lose it!” Well, that’s true for improving your credit score as well. Payment history is a big part of your score so try to use your cards each month. Be careful and only spend as much as you can afford, keeping the cash separate to pay off your card at the end of the month.

I used my credit card only for grocery shopping each month. This way, I knew that I wasn’t overspending and would have the cash to pay it off when due. Of course, I also made regular payments on my personal loan and other debt to help build my payment history back up.

It took just over four years but I finally got back to my 760 FICO score in November 2014. It’s amazing how fast 140 points can disappear from your credit score and how long it takes to claw your way back. The interest rates offered on loans soared from a mortgage rate of 6.5% in 2006, which was good at the time, to…well there was no way I was getting a mortgage when my credit score crashed. I paid 27% on the first personal loan I received and that was still less than the annual rate on some of my credit card debt.

I’ve still got a while to go before I crack super-credit with a score above 800 but my loan rates have come down and I feel like I’m back in some secret club where opportunity is granted with access to money when you need it.

credit score disaster FICO

Steps to Keep your Credit Score Healthy

I used the first six steps to boost my credit score but there are a few more steps you’ll want to follow to keep your credit healthy once you’ve built it back up.

1) Your first step, even before tackling your credit score should be to create a budget you can keep. If you continuously overspend and can’t keep to your budget then you’re always going to be borrowing debt and at risk of ruining your credit again.

Does this sound like you? You sit down to look over your budget, no matter how scary it may be. You start with your income and then take out all your expenses. You’ve got just enough to cover all your bills (which is a nice surprise) but you don’t have anything left at the end of the month to save. Since you can cover your bills, you’re really not that motivated to do anything differently…and you never end up saving anything.

Keep going like this and one emergency is going to wipe you out and put you behind on your bills. Boom, credit ruined again!

Instead of living month-to-month, turn your budget upside down. Take some money out for savings and an emergency fund before your expenses. If you don’t have enough to cover your expenses, this forces you to see where you can cut your bills instead of forgoing savings.

2) Don’t close your credit accounts. Closing a lot of accounts suddenly can actually hurt your credit score. It’s ok to close accounts you don’t use or to do it to keep yourself from overspending, just try to close accounts at least six months before you need to apply for any big loans. This will give your credit score time to recover.

3) Set up payment reminders through email. We all get busy and forget to pay our bills from time to time. Make it easy on yourself and set up email or text reminders for when you need to pay bills. You could also enroll in automatic payments, which are automatically debited from your bank account. Making your credit payments on time is one of the biggest contributing factors to your credit score.

4) Know the difference between soft inquiries and hard inquiries. A soft inquiry is when you pull your credit report to look at it or when a lender does an initial verification. These soft checks don’t go on your credit report and won’t affect your score. Hard inquiries from lenders will affect your credit score because they stay on your report for up to a year. Too many of these hard checks on your credit look like you’re scrambling to get new loans.

I know peer loan investors that won’t even lend to borrowers if they have more than a couple of hard inquiries on their report. It’s best to not apply for any loans for six months before you go to apply for a new loan.

5) Use credit monitoring to catch identity thieves. A new case of identity theft happens every two seconds in the United States. Considering just one missed payment can ruin your score, catching identity thieves quick is hugely important.

I use myFICO to monitor my credit and identity. The service gives you access to your three reports every quarter and tracks 28 companies that calculate your credit score. It also continuously monitors your credit and sends email and text alerts when there’s a change. The new FICO Score Simulator will even show you potential changes to your score on different financial decisions like opening a new credit account or getting a limit increase.

Get Your Credit Scores & Reports from All 3 Credit Bureaus

Bonus Tip: It may not be a trick to increase your credit score but understanding the different ways to pay off debt can save you a lot of money and keep you motivated. Two of the most popular methods of paying down debt are the snowball and the avalanche.

Avalanching your debt means paying off the highest interest rates first. It starts by listing all your debts in order of the interest rate. You continue to make minimum payments on all but pay as much extra as you can afford to the first on the list. Once you pay the highest rate credit line off, you move on to the next on the list and pay it off. Avalanching is the most popular method because it will save you the most money by paying off the high-interest loans first. This was the method I used when building my credit score back up.

Snowballing your debt is another strategy and involves paying off the smallest accounts first. List all your credit lines from smallest to largest amount owed. Any extra money after minimum payments goes to paying off the smallest accounts. You may end up paying more in interest with this method, since you aren’t focusing on high-interest loans, but it feels really good to see those credit accounts drop off your list quickly and can motivate you to keep going.

Pay off Debt and Fix your Credit Score

Pay off Debt and Fix your Credit Score

I hope the information in this credit repair guide has been helpful. Do you have any tips or tricks to improve your credit score? Do you have your own story of fixing your credit score? I’m always looking for new ideas to share on the blog. Email me or leave a comment on one of the blog posts.

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Joseph Hogue, CFAAbout Joseph Hogue

An investment analyst by profession, I run two blogs (Crowd101 and PeerFinance101) in personal finance, peer lending and crowdfunding. I've been on both sides of the table as a lender and a borrower and am excited to be a part of the peer movement. With the power of the internet, people are helping other people manage debt and raise money in ways never before possible.

A veteran and Iowa-native, I now live in Colombia with my wife and son. Like so many people, I was once trapped into the money myth and what it means to be successful. After taking control of my finances and learning how to make money in a job I love, I found a level of financial freedom that just has to be shared.

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