The topic of credit cards has often drawn criticism, and for good reasons. For one, they often come with interest rates as high as 29% (yikes!). Second, they're very easy to use, and given that just about every merchant now accepts credit cards, one can easily get in over their head if they're not mindful of their spending habits.
I should know -- in September 2015, I hit my absolute lowest credit score that I've ever had -- a low score of 530. For reference, a score of 530 had put me in the bottom 9% of consumers who have a credit score. The average score is about 715, so I was in a bad spot.
How did I let it get this bad?
At the time, I was in my 20s and made some bad lifestyle decisions to make it seem like I was wealthier than I really was. I bought a fancy car and just had to have the latest and greatest of everything I owned, all just to impress people I didn't even like. I suffered from "lifestyle creep", which is a phenomenon that occurs when an individual's spending level increases as their income increases. However in my case, my spending increased way more than my income, which, as I soon found out, is a DANGEROUS habit.
Before I knew it, my relationship was over, and I had to move back into my parents' house with tens of thousands of dollars in credit card debt with countless blemishes on my credit report. Luckily I managed to land a higher-paying job soon after this rock-bottom moment, but I knew I had to get my money management habits under control.
How did I get myself out of this?
Recall that I hit my lowest score of 530 on September 12, 2015. It took me until August 26, 2021 to get my score back over 700. That's almost a FULL 6 years. Today, I'm just under the 800 score threshold, which would put me in the top 23% of individuals with a credit score.
To say that it took hard work would be an understatement and it would leave out all of the other steps that it took to get back to a respectable state of credit. Those steps included:
Monitoring my credit score more closely
Creating a budget in MS Excel
Creating a plan to tackle each debt account one-by-one
Increased my income by switching jobs
Hiring a credit repair service to dispute inaccuracies in my credit report
Changing my perspective on credit cards and how they should be used
What is a low score, and what does it mean?
Credit scores range from 300 - 850 and are reported by FICO and the 3 major credit bureaus. When you apply for any type of loan, whether it's a personal loan, a school loan, a credit card, a mortgage, or any other type of loan, the lender will fetch your credit report from either one or all of the bureaus to determine how risky of a borrower you are. On your report, you will see a score as well as all of the items that make up your score such as your credit accounts, utilization, payment history, late payments, and age of accounts. The score is a weighted representation of the aforementioned components, so the score is usually a good measure for what the lender will see in the rest of your report. If your score is low, and you apply for a loan, it will usually result in one of two outcomes:
You will flat out be denied.
If you are approved, you will likely have a higher interest rate on the loan compared to.
According to Experian, scores fall into the following buckets:
Exceptional | 800 -850 |
Very Good | 740 - 799 |
Good | 670 -739 |
Fair | 580 - 669 |
Poor | 300 - 579 |
It should be noted that a "low" versus a "good" score can vary from lender to lender. For example, some car lenders as high as a 740 credit score to be considered "Top Tier", whereas a mortgage lender may accept scores as low as 720 to be considered "Top Tier". To be safe, aim as high as you can to avoid having to pay more in interest and/or upfront fees.
To Sum it Up
Your credit report is your pass to financial capital. It's one of the very few barometers that does not care about your social status or income level -- it only cares if you've been able to sustain financial responsibility over time. Even the rich are susceptible to poor credit reports if they don't stay on top of their bills and keep spending relatively low.
A poor credit report and low credit scores will end up costing you more. It can lock you out of financing that you may need at a critical time, such as when buying a home.
Do not fall into the trap of "lifestyle creep". If you're fortunate enough to increase your income, continue to keep spending levels low.
If you want to play the points and miles game, you will likely be applying for multiple credit cards. If you want to get approved for the best cards, you'll have to have at least "good" credit. For the more premium cards, you'll have to at least have "very good" credit.
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