Credit Score Case Study: An Aspiring Investor Tackles Debt, Month Two
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 300â850, 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 Credit.com 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.
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.
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 annualcreditreport.com. 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!