My Awful Credit Score and How I Fixed It

(and you can too!)

Today, I can proudly say that my credit score stays above 800, which according to the Experian credit agency is considered, “Exceptional.”

Back in 1998, though, my credit score was so bad that my wife and I were denied even the highest interest rate mortgage. My awful credit score, about 415, was not a surprise:

• I was consistently late on my credit card payments;
• I had two credit cards — one with a $500 limit and another with a $750 limit;
• Both cards were over 50% charged; and
• We lived in the apartment I had rented for 8 years (a couple late payments there too).

I understood the basics of personal finance and also how credit cards function. However, obviously, I didn’t internalize good financial habits.

If I had, I would have understood that for a good credit score, I needed to keep 5 things in mind:

1. On-time Payment History
2. What was the ratio of available credit versus credit used
3. Length of time I had my oldest credit line (card)
4. Variety of credit types I had (e.g., credit card, loan, etc.)
5. Number of credit checks in the past couple years

Instead, it was as if I purposefully was trying to ruin my credit: 1) I was not paying my cards on time, 2) I was using more than 50% of my credit limit, 3) I only had cards that were very new to me, 4) I only had one type of credit, and 5) I had tried to apply for new credit cards and also a house loan in a short period of time (too many hard credit checks!)

No wonder why I disappointed my wife by not qualifying for a mortgage.

Now what to do, what to do…

I knew that I needed to do something, and the first thing would be a no-brainer: pay my bills on time. I put them on a calendar and made sure to mail them off early (yes, snail mail days).

But what next?

One night, I was staying up late watching an infomercial for Carlton Sheets’ set of CDs, “No Down Payment.” My wife was already asleep, and I had never bought anything from an infomercial before. However, something that was mentioned piqued my interest. Not because I wanted to become a real estate mogul, but because during the show, Mr. Sheets mentioned that one of the CDs covered how to fix your credit. I bought the set for $250, in 5 easy payments. But that’s not all. For that low, low price, it came with workbooks too!

The next morning, I told my wife what I had done, and, honestly, she thought I went nuts. Still, she didn’t make me cancel the order — the burden would be on me. When the CDs arrived, I started listening to all the CDs, not just the one relating to credit. I learned a lot about the real estate process, which came in handy later.

The information CDs could not replace a person’s face-to-face help, but it did provide several specific and practical steps I should take:

• Pay my bills on time (I had already started that);
• Pay my credit cards down (a bit harder now that I had a 5-month recurring charge because of the informercial);
• Open a secured loan and pay on it for at least 6 months, preferably 12 months;
• Open a store or gas station credit card.

How I Actually Fixed My Credit Score

First, I sat down and wrote out the plan and then I followed it.

For the first three months, I made sure to pay all my bills on time and focused on paying down my credit cards to below 25% of the credit limit. That meant that one credit card had to stay below a $125 balance and the other stay below $187.50.

Then, I went to my local bank. I made sure to go to a locally-owned, not an national bank. I asked them what I needed for a secured loan and what was the minimum amount I could borrow. The loan officer told me that I could take out a $1,000 secured loan, but I needed to put that same amount in a Certificate of Deposit account as collateral that could not be touched until the loan was paid off. Luckily, we did have $1,000 that we had saved up from wedding gifts.

So, I deposited $1,000 into a CD at that bank. Then, I took out a $1,000, 12-month loan. The moment they handed me the money, I opened a free checking account and deposited that money back in the bank. I was going to use the same loan money to pay back the loan. I would only have to come up with the interest.

After six months of loan payments, I asked the bank whether they had already sent an update to the credit agencies. The bank staff said they had. This started to make me feel like I was making progress.

Therefore, my next step was to go to a Exxon Gas station and apply for a credit card. At the time, their approval standard was much lower than Mastercard and Visa. I was approved for the card, and I started using it only to pay for gas each month. I made sure to pay it off in full each month too.

After another six months, I had now accomplished several things:

1. I had actually paid down my credit cards to below 20% of the credit limit (increasing my available credit)
2. I had a 1-year perfect payment history on all my bills
3. I had paid off the secured loan (showing responsibility for a variety of credit types)
4. I had also increased my credit available by opening the gas card

Results!

These four things over the course of one year, dramatically increased my credit score. It was now 650, an increase of over 200 points, and good enough for a mortgage pre-approval. By the time we actually found a house we liked and put a bid in, my score was above 670, which was considered, “Good.”

That was 20 years ago.

Today, you can do exactly what I did and much more. Now, you can also apply for peer-to-peer loans, and if you keep paying on them for over 6 months, they will send positive feedback to the credit agencies too. Places like Prosper and Lending Club are new options that didn’t exist at the time. Ally Bank and other online banks didn’t either. These are all options I would have seriously looked at if they had.

The key will for me was discipline and a bit of patience. It doesn’t take a lot of money to increase your credit score. You just need to know the basics of what to do. Basically, Information and Patience will get you where you want to be.

Last Thought

Remember when I said I had listened to all the of the informercial CDs? Well, it came in handy. During our house purchase, using Sheets’ advice, I was able to haggle and get the seller to cover $500 of what normally were buyer’s closing costs. After that, I put the “No Down Payment” CDs and Workbooks on Ebay and sold them for $112. I wasn’t going to be a real estate investor.

In all, I paid, $250 for the information and was able to fix my credit for $95 in interest on the secured loan. A total outlay of $345. Savings on closing costs and then the money from Ebay totaled $612.

So, I not only was able to get the information I needed to fix my credit and buy the house, but I made my wife happy and came out $267 ahead. Not bad for one night’s infomercial and a year’s worth of discipline.

If you enjoyed reading this article, check out Desiree Peralta, Ben Le Fort, and Rocco Pendola. They are writers who write about personal finance related articles, and I think you will get some value out of their work. also, it would be really nice if you could let me know if you enjoyed this article by clapping, following, commenting, or subscribing.

This article is for informational/educational purposes only. It should not be considered Financial or Legal Advice. Each person’s situation will be different and not all the information contained here may be accurate at the time of reading. Please consult a financial professional before making any major financial decisions.