Credit Cards

3 valuable lessons I learned from destroying my credit

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Here are three key takeaways from my journey to great credit.

Key points

  • 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 good credit is a lifelong process.

I am a Certified Financial Planner® and my credit score is around 800, in the “excellent” credit range. It’s been a while since I’ve been turned down for any type of loan or credit card. But that wasn’t always the case.

About two decades ago, I made some mistakes that young adults make and they ended up destroying my credit. I went to college at a time when predatory credit card practices were still widely permissible, and before I knew it, I was head over heels in debt. At one point, my FICO® Score had dropped below 550, putting me in the bad credit category.

Without a doubt, the act of destroying my credit and the general lack of financial knowledge that led me to do it were huge motivating factors in my journey to becoming a financial professional. I was serious about learning how credit works and using it to my advantage, and I also wanted to help educate others to help prevent them from repeating my mistakes.

Good credit is an essential component of financial success

Consider this example. At the time of this writing, the average 30-year mortgage interest rate in the United States is around 5.3%. But what headline numbers like this don’t tell you is that this can vary dramatically based 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 borrowing $400,000 from a mortgage lender, this is the difference between the monthly principal and interest (P+I) payments of $2,087 and $2,346. Now, this may not seem like much of a difference at first, but over the life of a 30-year loan, this means that the borrower with a lower credit score would end up paying an additional $93,240 in interest. That’s money that could have been saved for retirement, invested, or used for another wealth-building purpose.

It’s not just a cheaper loan. Good credit makes it easier to rent an apartment and even get a job in many cases. In simple terms, 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 that’s fair or not, you may be surprised at how much damage a single late payment could do to your credit. According to FICO’s own data, a single late credit card payment can cause a borrower’s credit score to drop as much as 180 points. A borrower with excellent credit who maxes out their credit cards could see a drop of almost 130 points, even if they make their minimum payments on time.

The point is that even one piece of negative information in an excellent credit file can have a big impact. And things like late payments typically affect your credit score for seven years.

Truly good credit is a lifelong process

Finally, here is a lesson I learned on the way to rebuilding my credit. Even if your credit is completely screwed up (like mine once was), you may be able to get back into the realm of “good credit” faster than you think. With a few smart moves like getting a secured credit card, paying the bill on time, and negotiating settlement agreements with my old creditors, I was able to increase my score from about 550 to 640 in two years. This was enough to allow me to get a mortgage to buy a house and get an unsecured credit card, further helping me rebuild my credit.

While good credit can be achieved in a relatively short period of time, building good credit is a lifelong (and worthwhile) process. The average person with a FICO® Score greater than 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 course of action is to understand how the FICO® Score formula works and plan accordingly.

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