One of the most common goals we hear from our clients is, “I want to improve my credit score.” FICO credit scores range from 300-850 and the average score for consumers who seek advice from our counselors is 587. We’ve talked before about how to increase your credit score and explained that we provide free credit scores, but in this post we want to do something a bit different. One of our educators, (he’s actually our Media Relations Manager and helps spread financial tips and tricks to news outlets across the country), Thomas Nitzsche, is revealing his secrets to achieving a high credit score. In fact, he has been so successful that his credit score is just 9 points below a perfect 850! But it wasn’t always easy. Here, he talks about the lessons he learned along the way:
My experience with credit began with a rocky start. My parents never had credit cards and discouraged me from ever getting one, so I never learned how they really worked. I also grew up in the days of easy credit when the card issuers advertised heavily on college campuses and gave away freebies in exchange for a credit application. While I was 19 years old and only working a part-time job, my first credit card was platinum with a $10,000 limit! Needless to say, this high limit combined with poor choices as a young person resulted in some financial distress. I never defaulted or declared bankruptcy, but it took me years to overcome high levels of debt and reach a point where I was using credit optimally.
Lesson One: Wants vs. Needs
In my 20s I sometimes used my credit cards for things I wanted and couldn’t immediately pay for. My thought was that I would have the money by my next payday or the payday after that. But that way of thinking was rarely in line with reality. Over time, the balances increased to the point that I was just barely paying more than the minimum payment. Because of this, most of the payment was going toward interest and I found myself unable to pay down the debt. I was also beginning to damage my credit score because I was above the best debt-to-limit ratio (also known as credit utilization).
Lesson Two: Balance Transfers
Because I had decent credit and was in good standing with my creditors, I received many offers for balance transfers. These consolidation offers seemed appealing, given their “teaser rates” and convenient checks. I began a habit of moving the money from one creditor to the next, each time paying a balance transfer fee and never really paying down the debt. Because I was doing this regularly, my credit score took small hits for frequently opening new accounts and never building up a very long payment history to any one creditor.
Lesson Three: Lack of Savings
When I was laid off from a job in 2007, I found myself sorely unprepared for what was to come. The recession had arrived and jobs were hard to find. When I finally found a job, I was making much less than in my previous position. Because I didn’t have any emergency savings, I was forced to rely on my 401k retirement plan to remain current on my obligations. I ultimately depleted my 401k to pay off my credit card debt, but I still had student loans, a car payment and a mortgage. I was finally able to balance my budget and begin contributing to my retirement plan while aggressively paying down my student loan debt. I was also eligible for a home loan modification, which lessened the burden of my mortgage.
Lesson Four: Credit Card Rewards
My new job was that of a credit counselor at Clearpoint. In that role, I met with many clients who were reluctant to part with their credit cards due to the loyalty programs. I began to realize that many consumers fall into a pattern of spending and debt to receive points, but end up losing much more in interest. I also found that some consumers lose money due to point expiration and devaluation. It was at this time that I vowed to only use credit when it could be paid-in-full each month. I researched rewards programs that fit my spending patterns and began using them carefully. Since that time I have earned thousands of dollars in rewards points without paying any interest to my creditors. This was really the turning point for me.
Lesson Five: Debt Free
After paying off my credit cards, I felt such a burden off of me that I wanted to experience even greater financial freedom. I sold my car and bought a cheaper one that didn’t require a loan. I then turned to my student loans and began paying them down aggressively. Paying them off finally enabled me to pursue other goals such as increasing my savings, traveling and contributing to my niece’s college fund. In addition, my credit score jumped about 20 points!
How I increased my credit score
So far, I’ve been talking more about my background and some of the financial challenges I faced. Looking back, it’s amazing that I was able to go through those experiences and come out of them not just in a more stable financial situation, but with a near perfect credit score! My point is that no matter where you stand now, there is certainly room for improvement, and you can make a comeback bigger than you think.
Once I made a decision to turn things around, the key factors to my success were: never being late on payments, keeping the balances well below their limits, having a long history of established credit and having a diversified portfolio of revolving and installment lines of credit.