Editorial Policy

I’ve proven you can make credit mistakes and recover

Laura Mohammad

June 6, 2014

You would think with my current credit scores that I have always been a model credit citizen. But nothing could be further from the truth.

In fact, I am a testament to the fact that you can improve your score to good and even excellent ratings just by following a few simple rules.

Twenty years ago, I was vaguely aware of Equifax, one of the three credit bureaus (the other two are Experian and TransUnion), and I had never heard of FICO, the credit score company most lenders use when assessing your creditworthiness.

Here are some of the things I was doing wrong 20 years ago:

Living without a budget. This was at the heart of all of my money problems. I didn’t have kids, so I didn’t worry about the expenses of future years. I had enough money to travel and eat out, so there was no thought about saving. I just socked away money in my 401(k), and that was that. I remember my best friend telling me one January weekend that she couldn’t hang out because she needed to draw up her budget for the year. Until then, it had never occurred to me to do such a thing.

Using my credit card as a loan. Later, after we had kids, we incurred a fair amount of credit card debt. We weren’t buying extravagant items, and now we had a budget, but it wasn’t realistic, so we always seemed to have a balance on at least one card. Because we did that, we were paying ridiculously high interest rates. Mary Hiers of Mint talks about the forgotten items we fail to budget for, such as the annual power washing of your driveway and charitable donations. Make sure you include EVERYTHING when you draw up your budget.

Taking out a cash advance on my card. I only did this once, but that’s one too many times. You incur interest rates immediately with cash advances. Never a good plan.

Paying bills once a month. Most of my bills came at the first of the month in those days, so it was usually OK. But my card bills were high by the end of the month, something Eric Rosenberg of NarrowBridge avoids by paying twice monthly. And there were times when I was late on a bill, usually when I was overseas. I suffered for this when I applied for a loan in 1994. To this day, I don’t know what my score was, but the lender expressed concern about three late payments, likely reasons my interest rate wasn’t that great.

Only in recent years have I known what my score is, and I now pay more attention to my credit reports. The reality is that lenders care deeply about your score, so there are a few things you have to pay attention to. Here’s what I’ve learned over the years:

Pay on time, every time. Even if you have to make a minimum payment on a card, do it by the due date. No exceptions.

Pay in full. Don’t let yourself get behind on card bills. If at all possible, pay your card off every month. If you must have a balance, keep your credit utilization ratio to 30 percent or lower.

Use your credit cards. Don’t cut up your card and don’t lock it in a drawer. If you don’t want to think about it, put a small, recurring, automatic charge on it each month, such as your gym bill.

Follow these three simple rules, and you’ll see a noticeable uptick in your credit score within a year.

I made a lot of financial mistakes when I was younger, but I am proof that you can recover and enjoy an excellent credit score.  It’s only a matter of following three simple rules.