3 Valuable Lessons I Learned While Destroying My Credit
Here are three key takeaways from my journey to great credit.
- Good credit is essential when it comes to borrowing, renting and sometimes even finding a job.
- A single late payment can ruin your credit almost instantly.
- Having great credit is a lifelong process.
I’m a Certified Financial Planner® and my credit score is around 800 – well into the realm of “great” credit. It’s been a while since I’ve been turned down for any type of loan or credit card. But this has not always been the case.
About two decades ago, I made mistakes that young adults make and ended up destroying my credit. I went to college at a time when predatory credit card practices were still widely permitted, and before I knew it, I was in debt. At one point, my FICO® score had fallen below 550, putting me well into the bad credit category.
Certainly, destroying my credit and the general lack of financial knowledge that drove me to do so were big motivators in my journey to becoming a finance professional. I began to seriously learn how credit works and use it to my advantage, and also wanted to help educate others to prevent them from repeating my mistakes.
Good credit is an essential part of financial success
Consider this example. As of this writing, the average 30-year mortgage interest rate in the United States is around 5.3%. But what numbers like this don’t tell you is that it can vary greatly depending on your credit score.
According to myFICO.com, the average 30-year mortgage rate for a borrower with a score of 800 is 4.75%. Towards the other end of the spectrum, the average rate paid by a borrower with a FICO® score of 650 is 5.80%.
When getting a $400,000 loan from a mortgage lender, this is the difference between the monthly principal and interest (P+I) payments of $2,087 and $2,346 . Now, that might not seem like a big difference at first, but over the life of a 30-year loan, that means the borrower with a lower credit score would end up paying $93,240 in extra interest. It is money that could have been saved for retirement, invested, or used for other wealth-creating purposes.
It’s not just about borrowing cheaper. Good credit makes it easier to rent an apartment and even get a job in many cases. Simply put, having strong credit gives you a huge advantage when it comes to building your financial life.
It only takes minutes to do years of damage
Whether it’s fair or not, you might be shocked at how much a single late payment could hurt your credit. According to FICO’s own data, just one late credit card payment can drop a borrower’s credit score by as much as 180 points. A borrower with excellent credit who maxes out their credit cards could see a drop of nearly 130 points, even if they make their minimum payments on time.
The fact is, even a single negative piece of information in an otherwise excellent credit report can have a major impact. And things like late payments typically impact your credit score for seven years.
Truly great credit is a lifelong process
Finally, here’s a lesson I learned on the road to rebuilding my credit. Even if your credit is completely ruined (as mine once was), you may be able to get back into the realm of “good credit” sooner than you think. With a few smart moves like getting a secure credit card, paying the bill on time, and negotiating repayment agreements with my past creditors, I was able to raise my score from around 550 to 640 in two years. It was enough to get me a mortgage to buy a house and get an unsecured credit card, which helped me restore my credit.
While Well credit could be accessible in a relatively short period of time, the construction awesome credit is a lifelong (and worthwhile) process. The average person with a FICO® score above 800 has an average account age of more than 10 years, and 85% of people in this category are 43 or older. Many people get there faster, and the best thing to do is to understand how the FICO® Score formula works and plan accordingly.
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