My original idea for this post was to find a few people with perfect 850 credit scores and interview them. I’m really curious to see what a “perfect” credit profile looks like!
But, while I was out searching for these folks, I stumbled across a whole range of people with really interesting backstories.
Here’s a note I received from a guy called Keith…
“I don’t have 850…but I do have 820-830 and 10 years ago it was 570. I made it my obsession to improve my credit…which I did.”
Credit Score Ranges
Just for context, here are the ranges of credit scores all people fall into:
300-579: Poor (16% of people)
580-669: Fair (17% of people)
670-739: Good (21% of people)
740-799: Very good (25% of people)
800-850: Excellent (21% of people)
So Keith basically went from a “poor” —> “excellent” score. Talk about turning your financial life around!
I think a lot can be learned from people who have drastically improved their credit like this. It’s much harder to *fix* bad credit than it is to *maintain* already good credit. So today we’re going to dig deeper into Keith’s journey, and we’ll save the perfect profile interviews for another time!
This Guy Raised His Credit Score to Excellent From Poor
Here are some questions and conversations with Keith!
Joel: Dude, what an amazing transformation. I gotta hear more about your story! How did this all happen?
Keith: 12 years ago, as the great recession was getting underway, I had terrible financial habits. Bad habits in my 20s led to too much debt and no savings. I ended up with a credit score of 570 (that’s bad). I ended up losing my job and was forced to address my issues. I worked very hard to turn around my financial position. I started self-education on finances and credit scores and how they work. I am now a self proclaimed credit expert and I have maintained a 800+ credit score for several years (817 last time I checked). It took a lot of work, but it was worth it.
Joel: Sorry to bring up a sore subject, but how did your credit get so low in the first place? What got you in trouble?
Keith: I had excessive debt through my 20s – credit cards, car loans, boat loans, snowmobile loans. Even when I had the money, I wasn’t always the best at paying my payments on time, but most of it was fine when my income outpaced my debt. However, that ended in 2009 as the financial crisis took hold and I lost my job in the mortgage industry. By the end of 2009, my monthly spending was much higher than my monthly income…and that just isn’t sustainable. ☹ So, I started missing payments, mainly credit card payments – which just compounds the issue as you get hit with the $35 late payment fees. This is when my score was ~570.
It’s a terrible feeling when creditors call you. I now joke and say I have creditor PTSD because to this day if a random number shows up on my phone it can still take me right back to a time when it would bring me anxiety to see that.
Joel: Daaang, sorry to hear this. I can see how it doesn’t feel like a problem when you’ve got enough income to make payments… But when the income stops, that’s when the house of cards collapses! How’d you turn it around from there?
Keith: Debt is a massive weight and I was actually considering bankruptcy at the time. Around the end of 2009, I was talking with a customer at the bank I worked at. He was 22 years old and had himself in a great financial position. He recommended that I read Dave Ramsey’s book and the next time I saw him he gave me a copy of “Total Money Makeover.” That is basically how it all started.
Once I read Dave Ramsey’s book, I had to read more. It eventually led me into the world financial blogs and of course FIRE blogs. Instead of bankruptcy, I made the decision to get myself out of the hole that I had put myself in.
Joel: I love that you decided to take ownership of the problem. I think many people try to hide from debt, and feel alone when they hit rock bottom. But, the truth is there are a ton of people around to help (like your customer) and free resources available to help make positive changes. So, what were your next moves?
Keith: I understood credit reports because of my job as a loan officer in a bank. I knew how they calculate the score…payment history (35%), balance vs credit line (30%), credit history (15%), etc… It was frustrating that I knew exactly what caused bad credit, and I even consulted customers on how to improve their credit, while the entire time having my own bad credit and debt issues!
Once I made the decision to fix it, the first thing I did was cut up all my credit cards and set a goal to never miss another payment. That’s the most important piece of advice I can give — once you decide to fix your credit you have to make certain that you are always paying your bills on time.
What Determines Your FICO Credit Score?
Quick side note: Here’s a more detailed breakdown of how your FICO credit score gets calculated:
- Payment history (35%): Making payments on time is the single most important factor when repairing credit. Lenders want to make sure you’re making payments on time, every time.
- Balance owed vs. credit line (30%): Lenders look at your total available credit, and compare it to the amount you owe. For example: someone who owes $5,000 out of an available $10,000 credit line, this would show a 50% credit utilization. If another person owed $5,000 out of an available $20,000 credit line, this would be a 25% utilization. The lower the percentage you utilize of your available credit, the more positive your credit score will be.
- Length of credit history (15%): Lenders want to know how long your good habits have lasted. Keeping old credit lines open can increase your credit score.
- Credit mix (10%): You will appear more credible to a money lender if you can prove you can handle multiple types of credit. Home loans, car loans, credit cards, etc. **This does NOT mean you should go out and get a car loan just to show a good mix of credit.**
- New credit lines/queries (10%): Building credit requires patience and a long-term outlook. Applying for too many loans all at once can harm your credit score.
How to Improve Your Credit Score
OK, back to Keith’s story…
Joel: What other major steps did you first take? How did they help?
Keith: For the first time in my adult life I created a budget and worked to understand exactly where my money was going – it was a total game changer. This goes hand-in-hand with my advice to make sure you pay your bills on time, using a monthly budget makes paying the bills much more manageable. Looking back, it seems insane that I was 29 years old before I created a budget!
Cut up all the credit cards. My wife and I cut up nine credit cards in January of 2010 which at the time carried a balance of almost $17,000 with minimum payments of $565. If you have bad credit, you most likely have credit card debt… cut them up!
Using a monthly budget as our guide, we reduced our spending, and reduced debt. After I understood how I was spending my money, I worked to stop all excess spending. Then I started to focus on reducing my debt. I did this by selling everything that had a loan on it. By the end of 2010 (it took some time) I sold my truck, my two snowmobiles, and my boat. At the time, this accounted for about $18,000 in debt with a monthly bill of $610.
**Keith’s basic budget and expense tracking template is available to download here (Excel version) if you want to check it out!
Joel: This is great advice for others in heavy debt with bad credit. What other tips can you share to help someone who might be in the same spot as you were 10 years ago?
Keith: It can feel extremely depressing, frustrating, and humiliating to deal with financial issues. But you can fix this. Three steps you have to take right now:
- Again, if you have bad credit, there is a good chance that you are missing your required payments. The most important thing to do is create a monthly budget and understand exactly where your money is going. Most of the time, the main problem is debt — so make a solid plan to eliminate it. Pay your bills and kill the debt.
- Get a copy of your credit report and study it. How many debts do you have? Which ones are current? Are any in collections? Pay off your highest interest loans first (prioritize making ALL payments on time).
- Join a financial group, get help, and educate yourself. You are not alone and things will improve if you commit to making better choices.
Joel: What does your credit profile look like today? How many lines open, $ credit limits, is it a mix of types of credit?
Keith: We now have a very small credit profile. My wife and I have three accounts…we closed everything else.
We have a mortgage.
We have one credit card that we are both on – a Southwest card that has a $22,000 limit. We went a long time (probably seven years) without using a credit card. We now use this one card on a monthly basis with the goal of collecting frequent flyer miles and it gets paid in full every billing period and never has a balance.
My student loans from going back to school in 2010.
At the time of the financial crisis I was a loan officer in a bank – like I said…I didn’t make a lot of good decisions in my 20s. In 2010 I returned to school and finished my engineering degree. I graduated and have worked as a mechanical engineer since 2011. This would be the other big piece of advic: work to increase your income, easier said than done…but it is worth it in the end.
I didn’t really mention FIRE…and now that we are 10 years into this financial journey FIRE is on the list, but it really took til year 4 or 5 to really start thinking about that. We continue to live by our monthly budget (still to this day) and 2020 was the first year we maxed out both my 401(k) and my wife’s IRA. She is currently a stay at home mom to our three small children…so we are doing this all on one income. If we stay on track, FIRE will be within reach in 8-10 yrs.
(Tourist selfie of wife and I at a WI state park (we live in WI and we camp a lot) but I thought it was fitting because our main source of family entertainment is camping – which is very budget-friendly. Unlike the old days of bars, restaurants and vacations we couldn’t afford. 😀)
Wow. From debt and bad credit to financially stable in 10 years… And then reaching financial independence in another 10 years.
I hope Keith’s story has inspired any of you out there with bad credit, heavy debt, or if you’ve recently lost your income. The covid pandemic has crushed many people’s financial situation, but Keith and his wife are living proof that rebuilding an excellent credit profile is absolutely possible!
Keith also has been slowly working on a side hustle the past 6 years… He recently launched a patented product designed to help ice fisherman store gear! Pretty cool, check it out here –> www.tipuptower.com. Could be a good Christmas present for your ice-fishing friends? ❄️ ⛸ 🎣 🐟
Joel is a 35 y/o Aussie living in Los Angeles and the guy behind 5amjoel.com. He loves waking up early, finding ways to be more efficient with time and money, and sharing what he learns with others. Rise Early | Retire Early!