My parents will be the first to tell you I have never been that great with money management.
Keeping more than $50 in savings was always a struggle for me. When I was a teenager all of my extra money magically disappeared (I threw most of it away on body jewelry, overpriced band t-shirts, shoes, and tattoos/piercings once I turned 18), and after I reached my 20s all of my income went toward bills (living on your own is expensive when you work minimum wage jobs). By the time I was 22, I had racked up tens of thousands of dollars in student loan debt – which is still growing now that I’m back in school. On top of that, I managed to max out a couple of credit cards. Altogether, my debt totaled just under $40,000. And at 23, I took out a $16,000 loan for a new car. I never bothered to check my credit score up until then. That was last September.
When my need for a new car became top priority, I was forced to face my credit score. And based on my tendency toward “retail therapy” plus my poor budgeting, it was no surprise that my credit was a laughable 598. Yikes, right? It was rough facing the reality of adulthood. Realizing how much my credit limits my financial options and decisions, it was time to start focusing on the future. How could I change my spending habits and start to build up my savings? What did I need to do to raise my credit score to a respectable number?
First, I looked into my credit report on Credit Karma.
Part of what was dragging me down was the age of my credit, which is expected for a twentysomething. Over time that would improve and there was nothing I could do to speed up the process. Although 99% of my payments showed up as on time, I had two accounts in collections that I was unaware of. Another factor that was negatively impacting my score was inquiries, which popped up from all the times I had to apply for private student loans as well as when I went car shopping. Nothing to do about those except wait for them to fall off after two years. Lastly, the largest hit was of course my percentage of credit used. It was pushing 100%.
So, the biggest obstacle I had to overcome was the debts I owed.
It sounds like such a simple solution, but it was one of the most difficult actions to take. Paying off debts is not easy, especially when your income is already limited. But that was what I had to do. So, acting like a financially responsible adult for the first time in my life, I sat down and made a budget. (You can download my free budget binder here to help you reach your own financial goals!)
I noticed most of my excess spending was on restaurants and impulse buys, so that was the first place I made cuts. Less fast food and dine-in, and no more shopping out of boredom. I also shut off my Netflix and internet (temporarily, for about 5 months), and switched my phone plan to a cheaper data package. With so many unnecessary expenses gone, finding extra money to place in savings became easier. My need for my “emergency” credit cards became almost non-existent, and I was able to begin paying them down.
I put the snowball method into practice.
If you aren’t familiar with the snowball method, it’s essentially paying off the smaller debts owed first, and building up to the largest. Basically once you pay off one debt, you take your usual payment amount from that now-paid debt and apply it to the next debt as well. It’s useful because not only do you build more momentum the further you go, but you can see progress sooner rather than later. My smallest debt was a credit card with a few hundred dollars on it. I continued making my minimum payments on all my debts, but made larger payments on that particular credit card.
I continued to apply this method for 7 months.
Within a few months, my first card was paid off. I saw a 40 point increase to my score by the end of January. Not long after that, my second credit card was paid off. And by May, I had enough money saved up to pay off my remaining $2000* in debts (*student/car loans not included). Between January and May, I saw another 40 point increase. By the end of May, my credit score was just below 680.
In the two months since my last major score jump, I have seen a gradual increase of 15 more points.
I attribute this increase partly to the aging of my credit history, as well as a card limit increase. According to Credit Karma, my score today is creeping up on 700 – something I didn’t think possible so quickly. My next step is going to be looking into my two accounts that have gone to collections. Once those are settled, all that’s left is to keep paying down my car loan, and pay on my student loans while I finish my degree. It’s a good feeling.
If you’re trying to pay off your debts to raise your credit score, I highly recommend doing what I did!
Step 1: Check your credit score and find out where you’re at. Credit Karma is an awesome (free!) resource.
Step 2: Make a budget and – most importantly! – stick to it.
Step 3: Use the snowball method.
Step 4: Watch your score go up!