Personal Finance

Credit Score Case Study: An Aspiring Investor Tackles Debt, Month Two

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This is the second post in a series chronicling James’s journey to improve his credit score.

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Last month, I gave you some background on James and introduced you to his quest to improve his credit. He’d like to start investing in real estate, and his low credit score is one of the things preventing him from getting a loan.

When we checked in last month, his credit score was 617. On a scale of 300–850, that doesn't seem too bad, but many lenders won't even consider you for a mortgage if you have below a 620 score. Even if they do consider you for a loan, it isn't going to be at the best rate. James hovers near the mortgage minimum, but would like to raise his score considerably.

What is an Average Credit Score?

With credit scores ranging from 300 to 850, a score of 617 is pretty close to the middle; you’d think that was average. If you aren’t familiar with the FICO scoring system, this may seem pretty good. But the system skews toward the top. According to a article, this is how scores play out:

  • Excellent: 750+
  • Good: 700–749
  • Fair: 650–699
  • Poor: 600–649
  • Bad: 599 and under

The average credit score as of April 2015 is 695. (They come out every six months, so we should have a new one next month.) But when you compare that to the chart above, it falls into the “Fair” category.

My lender won't even consider someone under 620, although there are a few lenders who will go as low as 580.

Related: How to Improve Your Credit Score

Secured Credit Card

Last month, we looked at some of the options that James has for increasing his score. We discussed setting up a secured credit card to make small purchases and then pay them off in a timely manner. On-time payments make up around 35% of your credit score so late payments can have a pretty big effect.

James didn’t have the opportunity to set up this card yet. Late in the month, a BiggerPockets member commented that perhaps he shouldn’t focus on setting up a secured card, but instead focus on paying down the one he already has, then use that card as he had planned on using the secured card. Since his limit was fairly low, but the card was almost maxed out, opening another card probably wouldn’t have the effect we would hope for.

This is a great point and one I had not considered. James is going to hold off on setting up the secured card and instead focus on making on-time payments on his current card.

Side Job

Another idea James was going to look into was adding an additional source of income. He was able to get a side job doing landscaping two weekends a month and will bring in an additional $250.

This is a really great side job. It’s not some specialized-skill job; almost anyone can do landscaping, and almost anyone can get this job. James will be outside doing physical labor and making some extra money. Plus, he’s going to be learning how to do landscaping, which will help him in future real estate projects.

James wants to increase his credit score so he can qualify for low-rate mortgages. He’s going to take this extra money and put it all into his credit card balance. His plan is to get under 20% credit utilization in 2–3 months.

Late Payments Affect Credit Score

James shared his latest credit card statement with me, and I noticed a late fee on it. When I asked him about it, he had to look at the statement again. He hadn’t noticed it before. He made his payment this month but paid it five days late, which cost him $25.

Payment history is 35% of your credit score, so every payment you make after the due date affects you huge–not only in dollars out of your pocket, but dings to your credit.

Now that James is aware of the due date of his card, he’s going to be more diligent in his payment schedule. He has added it to his calendar so he doesn’t get hit with the late fee again.

James Needs a Budget

While I was talking to James, the subject of budgeting came up. Or rather, the lack of a budget came up. James has a steady job, so making a budget should be an easy thing. He isn’t paid through unreliable commission checks; his salary is the same every month. For the most part, his expenses are the same as well. But what really throws off a budget isn’t those same recurring expenses, it’s the infrequent, easy-to-forget expenses.

So we looked around, and found You Need A Budget. This tool is built around four rules that help you plan how your money is spent both on a regular basis and on those odd-ball expenses like car insurance.

This month, James is going to track his spending to see where every dollar goes. If you don’t know exactly how you spend your money, it’s difficult to know what can be cut.

James is going to spend some quality time figuring out his expenses and tracking the whole thing using his new budgeting system. Do you need a budget? YNAB offers a free 34 day trial.

Credit Score Check-in

Last month, James’s credit score was 617. This month his score also checked in at 617. While there was no improvement, there was also no drop. Your credit score is like your weight: It fluctuates all the time by small amounts unless there is a big change in behavior. You aren’t going to gain or lose weight if you eat the same things all the time, and you aren’t going to get a better or worse credit score if you do the same things all the time.

Since James was so surprised at the late fee, I’m betting he has paid these before. They don’t show up in a special place on the statement, they get lumped in with all the other charges in date order. It’s easy to miss if you aren’t looking for it. We will see in the coming months how his on-time payments help him and his score.

Investing in Real Estate With No Money

The whole point of James taking action and fixing his credit score is to start investing in real estate. But like many of us who want to invest, he wants to do it NOW. It’s tough to go it alone with no money, a low credit score, and no experience.

He has his eye on a property and is speaking to potential partners to get started. He’s working on his credit, and once his card is paid off, he will begin to save money for down payments and rehab costs. He is looking for more opportunities to bring in extra money and to reduce his spending.

Related: 4 Ways To Build Your Credit Score Today (Without Spending Any Extra Time)

James is taking action. He isn’t flying off the starting gate and sprinting toward the finish line, but he does have a plan and is actively working toward his goal.

Take That First Step

Are you reading this because your credit score is less than ideal? Are you looking for ways to improve your score? Start with your credit report. Get a free copy once every 12 months at Go over it and make sure all the information is correct. If you find an error, send a letter to both the credit reporting agency and the company that is reporting incorrectly. Tell them exactly what is wrong with the information, and include as much proof as you can. Here’s a sample letter from the FTC to get you started.

If all your information is correct, start looking at the due dates of your bills, and make it a point to pay on-time every month. If you do pay on-time, every month, look at how much you owe versus how much your limits are and reduce your credit utilization. Ideally you want it below 20%.

Have you improved your credit score? What technique yielded the best results?

Leave your questions and comments below!

Mindy Jensen has been buying and selling homes for more than 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real est...
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    Scott Trench President of BiggerPockets from Denver, CO
    Replied almost 5 years ago
    Way to go James!
    Kyra quon
    Replied over 4 years ago
    James you’ll get there!! I just want to f/u on my own credit journey (low scores due to debt-to-limit ratio) that I’m finally up at 726, w 31% debt ratio, and w the cash I was able to finally access (+ another source), we were approved by a hard lender w his 75% LTV financing. We’re finally putting an offer in on a flip! James — keep at it, it works!!!
    Wilson Churchill from Madison Heights, Michigan
    Replied almost 5 years ago
    Fortunately, late payments only show up on a credit report if they are 30 days late or more.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied almost 5 years ago
    Thanks, Wilson. I wasn’t sure exactly how that worked. So this month, James only paid out of pocket for the late charge, which still isn’t nothing, but better than a ding on the credit report.
    Jon Lafferty Investor from Woodstown, NJ
    Replied almost 5 years ago
    They may not show up on your credit report until 30 days but even 5 days late on a credit card may hurt your cash flow. Depending on the fine print if you are beyond a credit cards grace period they have the right to change your interest rate drastically by payment lateness. There is a huge difference in 8-12% interest and the typical 20% interest these companies charge. Be careful with payment lateness.
    Timothy Friars
    Replied almost 5 years ago
    Did not know this. Was a bit concerned about a bill I recently forgot about for 3 days… :/
    Derrick Watkins Specialist from Stamford, CT
    Replied almost 5 years ago
    Good Post…….I’ve been working on my credit score the past three months and one other rule i think that was missed is don’t pay anyone to clean up your credit report. It’s a waste of time and money. With all the free information out here today and a little work and commitment you can get the desired results. So far i’m about 60+ points improvement.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied almost 5 years ago
    Derrick, this is an excellent point. There are some worthy companies that help you clean up your report and repair your credit, but they are not-for-profit companies. And it takes time. You won’t clean up your score by 100 points in 2 weeks. Thanks for reading and congratulations on your improvement!
    Nicole A. Rental Property Investor from Columbia Maryland and Tampa Florida
    Replied almost 5 years ago
    James could also try calling his credit card and asking that the late fee be waived. The worst they can say is no or maybe he’ll get his $25 back!
    Kyra Quon from Oakland, California
    Replied almost 5 years ago
    Me & my rehab partner are in the same boat. My credit challenge: high balances on several cards. I noticed that they also look at your balance-to-limit ratio of your entire credit cards, so I’m actually paying off cards which have lower interest first, so that more $ goes to the principal & not the interest. That way balances go down quicker, which improves the ratio & hence your score. My on time payments are 99%, so I know that the high ratios can also clobber your score. I’ve been buying my work lunches at the 99 cent store, by the way, so that every penny is going to get those cc limits down. 🙂 I also use ScoreSense to monitor my credit monthly. Good luck fellow investors! -kyra
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied almost 5 years ago
    Thanks for sharing, Kyra. Credit utilization makes up 30% of your score. A good credit utilization is 20-30%. Have you considered a side job to increase your payment schedule?
    Nicholas B. Finance, Credit, and Insurance from Northwestern, Pennsylvania
    Replied almost 5 years ago
    I’m sorry, but this is just bad advice. You’re going to pay the monthly interest for each and every card as part of you minimum payment. Paying extra on lower interest cards will just leave a higher balance to pay higher interest on the other cards next month. Always pay your higher rate cards first! You’ll save more interest each month that way, which can be used to pay down more of the balance. The per card utilization simply does not factor nearly as high as the overall utilization. You may be buying a couple of points higher score now, but in the long term, this strategy will slow your overall debt and utilization reduction.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied almost 5 years ago
    Nicholas, Paying the higher interest rate cards first makes monetary sense. I totally agree. In the first post for this series, I talked about the Dave Ramsey way of doing things, where he recommends you pay the lowest balance first, then the next lowest, and so on. His idea is that you are seeing progress by paying off an entire balance. For someone who is mired in debt, this small ‘win’ could be what keeps them going, instead of saying ‘oh this is useless, I’m not getting anywhere’ It isn’t the best way to pay off debt, but paying off debt at all is better than just continuing on. However you get there, is the best way for you. Thanks for reading!
    Nicholas B. Finance, Credit, and Insurance from Northwestern, Pennsylvania
    Replied almost 5 years ago
    Fair enough, Mindy. I was actually referring to Kyra Quon’s comment that stated: “I’m actually paying off cards which have lower interest first, so that more $ goes to the principal & not the interest. That way balances go down quicker”. The fact is that more money goes towards the interest on higher rate cards. I think that Ramsey is more about elimination of payments. ie. pay off the auto loan so that you don’t have that payment anymore, then use that to pay off other debt every month. The model doesn’t really work in revolving credit since it’s generally only $25 as a base payment, and then a percentage of your balance. They even calculate that percentage after they add interest, which makes it snowball into an even higher payment! Employing the Ramsey strategy in revolving credit is a sure fire way to put more of your hard earned cash into interest every month and less into eliminating your debt. Thanks for your article, though Mindy. There is plenty of good advice!
    Tatyana M. Investor from Tobyhanna, Pennsylvania
    Replied almost 5 years ago
    One can set up an automatic minimum payment on a credit card. It will not help you reduce debt but will eliminate the problem with missed payments. In order to reduce debt, one must pay more than the minimum. Another thing to remember about credit score is that the agencies also calculate your debt to available credit ratio – the amount of balance you carry vs the credit limit. I found out that they do it even if you pay entire balance each month. The way to get around is to make multiple payments throughout the balance cycle. For example, each time I get $1,000 on my c.c., I make the payment. This way by the end of the month I don’t have to shell out several thousands at a time and my balance vs available credit stay high. Did i mention I have a cash back credit card? Last year i “earned” over $900 in this perk. And it’s not taxable income ?
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied almost 5 years ago
    Thanks for the tip, Tatyana. I’ll be sure to share it with James.
    Jeremy Roberts Investor from Lexington, Nebraska
    Replied almost 5 years ago
    I am not sure if James is paying interest on his $910.00 credit card bill but one way that could help pay it off faster is to find another credit card to open that will let him transfer a balance at 0% for 12-18 months. Working his landscaping job he should be able to pay it off quickly. This will also help with his credit card utilization factor as well. As others have stated Credit Karma is a useful tool to use while repairing your credit score. I get on Credit Karma a couple of times a month to watch my credit score and find tips to help improve my score.
    Kyra Quon from Oakland, California
    Replied almost 5 years ago
    The risk with James trying to open another credit card right now could be that he will be denied, due to his current poor credit, and it will show as a credit inquiry. The credit inquiries also damage your score. At least that’s what I’ve understood from my own research…ditto on Credit Karma — I use that as well, in addition to Score Sense, which gives all 3 credit agencies: Transunion, Experian, & Equifax.
    Jeremy Roberts Investor from Lexington, Nebraska
    Replied almost 5 years ago
    I agree that it would hurt his score if he was denied but using Credit Karma usually gives you a good idea of what cards are good to apply for and should have a high success rate of approval for his current score. Also Capital One has just about a card for everyone’s credit score. The big thing is just to get one that you can move his $910.00 to an interest free for so many months to help pay off. The credit inquire will damage your score but it is very minimal and would have a very low impact compared to the savings he would receive with no interest.
    Nicholas B. Finance, Credit, and Insurance from Northwestern, Pennsylvania
    Replied almost 5 years ago
    The best advice I can give to anybody who chooses to use revolving debt (credit card debt) is to constantly request credit limit increases. If you’re going to carry a balance, you want it to be as low of a proportion of your available limit as possible and absolutely no more than 20%. You really need to look at a $10,000 card as a $2,000 limit. Most lenders will consider an increase once every 6 months and some will do it automatically if your score is on the rise. Often they don’t even pull a credit inquiry if you show a responsible history with the card, paying down a good portion of the original balance. Even if they do a hard inquiry, your score will benefit more from better utilization than it will suffer from an inquiry. Of course, having no credit card debt is great. On the other hand, if you’re paying higher rates on installment loans and can qualify for 0% or low interest rate offers while still keeping your utilization low, why not take advantage of free or low cost money? It just takes some effort and a bit of strategy to get there. Just make sure you don’t get yourself in over your head!
    Shaun Reilly Landlord and Rehabber from Newton, Massachusetts
    Replied almost 5 years ago
    This is actually the best advice in the comments by far. By far the easiest way to beef up your credit utilization ratio is to up the limits not lower the balance. Lowering the balance is the smart financial move but not the most bang for you buck to artificially manipulate your FICO score. In James case having $910 of debt with only $1,000 in credit looks terrible. Make that even just $5K and that looks great. Make it $50K and that much better. As long as you don’t actually USE the new credit it is great to have for this reason. Side benefit is once you get the good credit and have the high limits you get all these great 0% offers and you CAN use the credit to do all sorts of deals you didn’t have the opportunity to do before.
    Russell Brazil Real Estate Agent from Rockville, MD
    Replied almost 5 years ago
    Too many aspiring investors do not first take control of their personal finances. Investing is something that we should be tackling after we have already learned to run our own finances like a business.
    Ashley Murrell from Redmond, Washington
    Replied over 4 years ago
    Is there any update on James?