Credit Cards

How To Ruin Your Credit Card

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

It wasn’t just terrible; it was pre-foreclosure, ignored-payments awful; here’s what I learned after recovering and how you can turn things around, too. I had a costly trip, paid for on credit, three weeks before my financial world crashed in September 2008. Because I was ready to close on a new home equity loan that would combine my $60,000 in high-interest debt into a more manageable and tax-deductible monthly, I wasn’t concerned. Things looked good for the upcoming bonus season as well.

The economic collapse followed. The value of my house, on which I’d spent tens of thousands of dollars in renovations, plummeted. Only a wage decrease was given instead of an additional bonus. Our family’s opulent lifestyle was unaffordable because of investments that were worthless. Because we didn’t have any emergency funds, I raided our retirement accounts and our children’s education funds to cover our rising expenses.

As of December 2009, I had fallen behind on my mortgage payments by many months and was on the verge of foreclosure. Even my power and gas bills were late because I had so many credit cards maxed up. There was no other alternative except to sell the house, but the mortgage debt was still more than its market worth, even after the renovations had been completed.

When my lousy credit and poor financial decisions finally caught up with me in a year, it was too late. You’d be incorrect if you thought I’d learned my lesson about credit management.

Don’t make these credit mistakes

I made the worst error of all by blaming everyone but myself. So it wasn’t ideal, but my no-money-down mortgage wasn’t the worst thing that could have happened to me at the time. However, it was my own decisions that led to our family’s current predicament.

In terms of credit blunders, I’ve made them all. When money was tight, I neglected to make payments on my mortgage and home equity loan. I paid the minimums on our credit cards, then maxed them up again. As a means of resolving my financial woes, I applied for many new credit cards and personal loans. Throughout the entire process, I was confident that the next loan would finally, finally, relieve our family of all of our debt. How ridiculous, isn’t it?

I had a credit score of less than 550 as a result of such judgments in early 2010. The consequences of late payments and maxing out your credit card are well-known to those with poor credit. However, there are less obvious warning signs to be on the lookout for, such as:

I turned off automated payments.

As a result of my inability to keep a handle on my expenditures, I had to stop auto-playing some of my bills to free up some more cash. You can’t spend money if you don’t have it, as the saying goes.

I skipped the mortgage payment in order to pay down credit card bills.

What type of moron does this, you may ask? That is me! Fascinating fact: Skipping a mortgage payment sends a strong signal to credit card lenders. Additionally, if you miss a mortgage payment (or six), your credit card companies may close your accounts. To summarize, make your mortgage your first priority debt.

I continued to spend even during difficult times.

In the face of regular phone calls from creditors, a pre-foreclosure property, and a meager income, I continued to deny the truth. During the holidays, I racked up a large credit card bill by spending hundreds of dollars. Even when shopping at a high-end boutique, I received a phone call from my attorney regarding the short sale. It’s a shame to acknowledge, but I’m glad I did since it taught me a valuable lesson.

I assumed that because I qualified, I could afford it.

With good credit and a good salary, I borrowed money until my family was in financial trouble. Reduce your monthly mortgage payment to no more than 28% of your pre-tax income as a self-help measure. You won’t be sorry you made the choice you did.

I took advantage of every offer that came my way.

Let me show you something. In addition to the amount transfer, there’s another personal loan offer! It’s possible for me to spend and max out our credit cards again if I do both! Despite the fact that this dialogue may never have taken place, it’s as if it had.

I believed that borrowing would assist me in resolving my debt.

Low- and no-interest borrowing may be quite beneficial for those who are diligent with their money. I naively believed I was one of those individuals. No dose of reality hits you harder than losing your house and going bankrupt in front of everyone you know and a good number of people you don’t. It’s not quite the same as taking a screenshot and broadcasting your $0.63 checking account balance on social media, but it’s close.

How I improved my credit score

To face my new reality and rebuild my credit, I was helped by two unexpected incidents. To begin, our family’s poor financial situation was revealed. As terrible as it was to admit our financial woes, we had no choice but to do so. To be honest, it made it easier to say, “I’m sorry, but I’m unable to spend money on it at the moment.” In addition, I felt weirdly liberated during the process.

Resolving the lingering credit card debt was another factor that helped. Though another careless use of credit had allowed me to bargain some bills down to pennies on the dollar, I was still thousands in debt. However, my credit score rose as a result of making timely payments on my past due debts. Because I couldn’t apply for any new credit cards, I was able to cut down on my spending.

After the dust settled, I was able to focus on our family’s core goal: conserving money and improving our credit ratings so that we could acquire a more affordable home. It wasn’t until 2011 that my credit score had risen to 600, but I couldn’t get a low-interest mortgage. My SAT score had risen beyond 760 by the end of 2013.

I got a secured credit card with a $500 limit.

A security deposit is required for unsecured credit cards, making them more accessible. As a result, those with bad or no credit, make excellent credit-building tools.

By simply using my credit card for petrol, I was able to keep my bill under $100.

Among other things, this fulfilled two critical objectives. To begin with, I maintained my credit use below the 30 percent threshold advised by FICO. This allowed me to keep track of my expenditures and avoid overpaying, which made budgeting easier.

To me, keeping up with payment deadlines has become a form of religious observance.

Paying your payments on time is the most critical thing you can do to establish good credit. I also never missed a payment due once I reinstituted automatic, full payments.

I tracked my credit score.

Because I could see an increase in my scores, it was a great incentive for me to continue. I reviewed my credit report and score on AnnualCreditReport.com whenever I paid off a loan bill or reached a new milestone, such as lowering our credit usage ratio below 30%. To check your credit score, you had to pay a fee in the past; now you can do it for free thanks to services like Credit Karma.

What I learned from this experience

After damaging my credit and then recovering it, I learned a lot about financial responsibility. Consider the following key points:

  • Automate in-full payments.
  • Keep your credit balances as low as possible.
  • Recognize budget trickery for what it is — trickery.
  • Strategic credit card spending and repayment habits can help.
  • Do not overlook the importance of maintaining a robust emergency fund.

Many individuals are aware of the need to have an emergency fund, but the reality is that relatively few of them really do. However, I can tell you from personal experience that if your boiler fails in the midst of the winter, getting the heat back on is critical. Repairmen that accept credit cards are preferable, but this should not be a factor in your decision. It is easier to deal with unforeseen expenses if you have a large financial reserve.

All scars heal with time and good practices when it comes to credit

An FHA loan was secured for my husband and me after 3.5 years of patience, persistence, and cautious credit maintenance. That was back in 2013. Our house was the lowest-priced real estate deal that month, and it was in dire need of a lot of maintenance in every area. We’ve still got a long way to go. No three-prong outlets, a leaking toilet, and a junk-filled garage prevent us from parking our old automobiles in the garage. But we own it.

We have a lot of work to do in terms of our money. After all these years, we’re still dealing with the consequences of the short sale. I could go on and on about our financial woes, and I won’t even get started on our student loan debt. Even still, we are motivated to achieve since the alternative is so undesirable.

Even while credit scores do not tell us anything about our value, they might reveal a lot about how we think about money. The life you’ve always wanted is within reach after you’ve mastered the skill of managing your money to the point of financial independence. The best part is that you’ll know that your staff is yours, and not the banks. Credit repair organizations may be able to assist you to improve your credit rating.

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