Dec 30, 2009

How to Botch Up, Then Peddle Back to Good Credit

As a young adult, I thought I had a firm grasp on being financially responsible. At the tender age of 18, I moved out of my parent’s house to live on my own. I couldn’t wait to become an adult with adult responsibilities. I had the basic understanding that I had to pay my bills on time, and I made sure that I was always employed. But I never really understood my credit score, or how the credit agencies calculated that elusive number, or even why it was important to build a good score. This misunderstanding led me to make some irresponsible decisions that took many years to correct. To be quite honest, those mistakes of yesteryear are only now beginning to fall off my credit report.

One of the most glaring things missing today from high school or college education is educating young adults on how to build good credit and why it is important. Had I been able to take a class on using and successfully managing credit, I might not have made so many mistakes.

So, I’ve decided to outline my steps showing how I completely wrecked my credit, then how I worked twice as hard to get it back. Hopefully this will be an insightful lesson on what not to do!

How to Botch Up a Credit Score

I can truly say that I was under the influence when I made many of my poor credit decisions. Of course, that influence was young love. The chemical dopamine does funny things to your brain! Here is just a short list of ridiculous things I did that negatively affected my credit.

I decided to quit my job and start a hot dog vending cart without a savings account to fall back on.

Bad idea! As exhilarating as it was the first few weeks to be corporate-job free, I soon realized that I couldn’t survive on hot dog sales alone.

I put all of my new found start-up business expenses on my credit card.

I quickly came to the conclusion that it takes many years to actually profit from a small business. Whoops!

While living off my credit cards unemployed, I didn’t pay my car payment.

Guess what happened? You got it! One morning I noticed my car wasn’t in its parking spot. Within seconds I knew what had happened: The repo man had slipped in quietly and took it back. Hoofing it for a few weeks is permanently etched in my brain!

I made a late payment to a very strict landlord.

Had I hired a tenant right’s lawyer, I might have won the case. (I did actually save all of my rent payments until the court date.) However, against my better judgment, I went it alone and got evicted. This one really hurt, and the judgment took 7 years to fall off my credit report. Ouch!

Let a student loan go into default.

This is one that is easy to get back on track, thankfully. However, during the time my loan was in default, the feds kept my tax refund.

Peddling Back to Good Credit

I am now at a point where I can look back and chuckle a little at the disastrous foibles I made with my credit and finances. But how did I get my credit back on track? After a few years of making horrendous mistakes, I realized that a good credit score was important for future decisions. First off, many employers view how responsible you are based on your credit score. The higher the score, the more responsible you appear to them. Secondly, there comes a time when you may want to purchase a new car because you can now afford the payments. A good score means a much better finance rate. And finally, most people can’t pay cash for a house. A high score will allow you to become eligible for a low interest rate home loan. Here is how I’ve been able to turn my finances and credit around.

I made a plan to get my credit card debt under control.

I worked on paying off the smaller balances, to keep me motivated, and then hacked away at the larger ones. I’ve paid off a total of $8,500. I’m not completely debt free yet, but this is a good start.

I draw up a monthly budget that is reasonable, and stick to it

I revise my budget every couple of months to see if there are places I can cut back and save.

When I receive a windfall, or money I wasn’t counting on, I use it to pay down debt.

Even small amounts I receive as gifts count in my book.

I save money towards building an emergency fund, even if it is as little as $20 a month.

This comes in handy if the need arises to replace a tire or pay a parking or speeding ticket.

Reduce eating out.

Eat at home more, cook for friends, and take your own lunch to work. I have been able to cut back the most on this category alone.

Minimize shopping.

I don’t purchase an item the first time I see it. I wait a day or so, then decide if I really need it. Out of sight, out of mind usually works.

Cut back on the frivolous things.

I cut back on Starbucks, movies, vacations, traveling, cable, and reduced my cell phone plan.

Had someone sat me down years ago and explained why it is so important to be financially responsible, I’m quite sure I would have made some different decisions. However I can genuinely appreciate the saying, "Hind sight is 20/20," much more today than I could have 15 years ago. But I guess that’s the point.