My Attempt to Fix My Terrible Credit

I can’t remember a time before I had a credit card, and I don’t know how I got one. I assume my bank offered it to me at some point in my misty teenaged past and I accepted it without really understanding what I was getting into. That’s how my problems began.

Since then, I’ve used my card to move across the country three times, buy a laptop I could otherwise never afford, and pay for nearly all my purchases during a month-long period after I had lost my debit card and was too lazy to order a new one. As a result, I’ve run up a debt of nearly $2,500, and have made monthly payments of about $100 ever since, even though it feels like my balance never gets any lower.

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Previously: How to Invest Money When You Don’t Have Any

A lot of my peers have avoided credit cards altogether, with a 2014 study suggesting that 63 percent of 18- to 29-year-olds don’t have one. You can chalk that up to millennial distrust for financial institutions and debt in general after the economic collapse of the last decade, but those little pieces of plastic do have their uses, my cautionary tale aside. Chief among them is building credit, which tells potential borrowers and landlords that you’re a reliable human adult.

“It’s going to be so much easier to get an apartment [when you have good credit], because you don’t have to make as big of a downpayment,” one finance expert told me. “Even setting up utilities. It gets you better insurance rates on health and car insurance, and when you get a house you’ll get better mortgage rates. But you also don’t pay interest rates, so your life really gets better.

“You can make money from your cards when you get into airline miles, too,” the credit guru hinted. “I do; I travel for free quite often.”

So it’s at least possible to get the credit card–industrial complex to work in your favor—but for young people who don’t understand any of this stuff, making that happen seems like an impossible dream.

Be that as it may, I’m trying to learn how the financial system works on a personal and institutional level, so I decided to try to figure out how to go from having a tithe on my income to paying down the principal of my credit card debt to scoring free gifts from my new credit-card-company friends.

Building Credit

Some basics: Your credit score is made up of five components, with the length of your credit history accounting for 15 percent (your payment history and how much you owe are the biggest factors, making up a combined 65 percent). So time is on your side if you’re young. The sooner you start building credit, the better your score will be in the long run—barring any catastrophic fuckups, of course. And unless you have a money-eating addiction or incredibly poor impulse control, there’s really no reason not to get a credit card.

Still, young people are skittish about this stuff. “Millennials tend to use debit cards, which is great for money management, because you can only spend what you have in your account,” explained Gerri Detweiler, the director of consumer affairs for Credit.com. “But that means they’re not building credit.”

One option for your first foray into credit is getting on your parents’ card as an authorized user—assuming they have not destroyed their own credit through compulsive gambling or lavish purchases. You can also get a secured credit card, which is basically like a pretend card that only allows you to spend whatever you’ve already put down on it as a deposit. If you want a real, honest-to-god credit card and have a credit score of zero, you’ll pretty much have to take whatever card someone is willing to give you—and that will probably have an interest rate of like 12 to 13 percent at least.

Higher interest rates mean that you pay more or the debt you accumulate by using a credit card. But if you clear the balance every month, you you can avoid paying interest at all—in other words, ignore my parents’ advice; you don’t need to pay interest to build credit.

After having a card for about six months, you can get another, and then another, each potentially with a higher limit. As long as you don’t miss payments on any of them, you’ll be on the way to a good score. (Credit scores are out of 800, pretty much anything above is great.) Since I already had a card, had never missed a payment, and was paying gobs of interest to Wells Fargo every month, I figured companies would be dying to give me another one.

But every time you apply for a card and don’t get it, it dings your credit score. This can be a nasty catch-22: You can’t build credit without applying for a card, but if you don’t have credit and apply for a card, it will be harder to get a card in the future.

So what was in my credit report? After years of accumulating debt through student loans and credit cards and dodging calls from collection agencies, I decided to take a deep breath and find out.

Getting and Reading Your Credit Report

If you google “free credit report,” results will abound. But there’s only one such site that is authorized by the federal government. On AnnualCreditReport.com, you can get free reports every 12 months from the three major reporting bureaus, or you can stagger them and check one every four months. (Other sites, like FreeCreditReport.com and CreditKarma.com, can provide summaries rather than complete reports.)

Surprisingly, my student loans seem to be in good shape. My minimum credit card payments are automatic, and when it comes to paying for my car, I’m always on time. But a credit card I forgot I ever signed up for seemed to be causing me trouble.

About a year ago, I decided to buy a watch to celebrate my status as an adult, which I figured was cemented by my ability to buy a watch. I got it for almost half-price because I opened up a Macy’s card in the process. What I didn’t realize is that the purchase went on the new card and not my debit.

I could see on my credit report that the bill festered for four months, but I still have no idea how it was even paid, considering I didn’t know it was charged. (I called my mom, who told me, in so many words, “The bill came to the house, and I just paid it, because I know you’re stupid.” I am struck by her generosity, and also by the fact that the thing I bought to make me feel “adult” is just an albatross of embarrassment that will forever serve to remind me that I am, in actuality, a child.)

Anyway, that blemish will stain my report for seven years. Had it been unpaid for longer, my credit score would have been further damaged. It’s a reminder to pay your debts when they’re due—lenders hardly ever report anything until a payment is 30 days late, but you should avoid taking chances, and having unpaid bills can feel like a piano hanging over your head.

If you go for a long time without taking care of, say, your car or house payments, your possessions could get repo’d.If you don’t pay your credit card debt, you won’t face repossession — unless you bought on something like rent-to-own furniture — but you can eventually be taken to court.

Free Stuff

The true mark of adulthood is not a watch but a credit card that has frequent flyer mile rewards. Applying for a credit card and getting denied hurts your credit score, Detweiler explained, so I would need to know if I was in the “fair” credit score range of 650-699 before even bothering to fill out an application for one of these babies.

To that end, I went over to CreditKarma.com, which gave it to me two versions of my report for free. (If you want the actual score that lenders use, you have to fork over about $20 at myFICO.com.) Although the only negative on my report was the Macy’s card thing, my overall credit health was… not good.

How could this be? My only other credit card was always paid on time, because it was automatic, and I hadn’t missed a payment in three years!

Apparently, there’s something called a credit utilization ratio, and when your card is nearly maxed out it damages your score. Mine is currently 91 percent.

“Unfortunately, a lot of millennials are carrying a balance that’s fairly high in comparison to the credit limit—about 46 percent,” Detweiler said. “Consumers who have best credit scores tend to use about 10 percent of their available credit. It’s important to be cognizant of your low limit starting out. Maybe fill up a tank of gas, go to the movies once, and that’s it. Use the card very sparingly.”

Too late. Way, way too late. It was time to call someone else to figure out how I could bail myself out of this mess.

Getting Out of Debt

Another thing I never realized is that if you make only the minimum payment on your credit card debt, it will take you more than 25 years to pay it off, because interest is a bitch. Your provider is required by law to explain on your statement how long it will take to pay off the debt while making the minimum payment, and also how much you have to pay each month in order to get rid of your debt in three years. You’re not legally required to read this information, but it would probably be a good idea.

One way to get out of the habit of paying the minimum is to get a personal loan to pay off the debt. Going into debt to pay off debt may seem counterintuitive, but these loans count as “installment plans,” and therefore don’t affect your credit score. Meanwhile, the loan will come with a repayment plan that will give you a mandatory path to getting rid of the debt within three, four, or five years as opposed to 30.

If you have a good enough credit score, you can also apply for what’s called a balance transfer card through your credit provider. Just call them up and ask if you qualify. If you do, you won’t have to pay interest for a certain amount of time, like 12 or 21 months, on the new card. That sounds great—but you need a really, really good credit score to get this, usually.

Yet another catch-22: If my credit score were good, I wouldn’t be worrying about this shit, but I needed a good credit score to qualify for anything that might reduce my debt and improve my credit utilization ratio.

Beverly Harzog, author of the books The Debt Escape Plan and Confessions of a Credit Junkie, became a credit expert after finding herself more than $20,000 in debt, getting sick of eating PB&J sandwiches for dinner, and figuring out a way to take back her life.

Harzog told me that she both qualified for a balance transfer card and got a raise before being able to get her credit straight. That doesn’t exactly help me in the here and now. But she did offer advice that extends to even the unluckiest among us—the most important thing is self-control.

“What I did was I went on a very strict budget,” she says. “I used to go to a health club, and I canceled that and started going to a gym. There are certain things I believe you need to be happy or feel good about yourself—and for me that was exercise—but having a good credit score was going to help me in so many areas.”

“Some people can handle credit cards and it’s perfectly fine, but I will say there are people who probably should not get credit cards,” Harzog told me. Probably not, indeed.

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