Last year, my husband Mark and I were on the cusp of buying a quaint 1940s bungalow in the heart of Atlanta.
We had been married for about six months, had both recently received raises at work (him in business development at a bank, me in investor relations for an asset management company), and were enjoying the benefits of having two salaries while saving for a down payment on a house. We were hopelessly optimistic in the way only two newly married, first-time homebuyers could be.
I knew that our credit scores would factor heavily into the interest rate we would be offered on our mortgage, so I checked my credit report online. I noticed no errors, congratulated myself on a long history of on-time payments and felt very confident about our ability to get a good interest rate.
I went to AnnualCreditReport.com, which gives you your report for free, but charges you to see your score. I didn't bother paying the $20 for my score because I thought the report said it all. I assumed that it must be pretty high since there were no red flags and no late payments.
On the day of our loan meeting, my husband and I sat down in the glass-walled office of our regional bank and discussed our mortgage materials with the loan officer.
We reviewed our financial backgrounds and made small talk for an hour or so. The loan officer looked down at his computer to check our credit scores, and, after an unusually long pause, he stood up to close the door to his office. Returning to his desk, he said, "I think we may have a little problem."
My heart sank into my stomach.
Looking at my husband's score, the banker said, "Your average, Mark, is 816, which is really excellent. Great work."
"If you'll notice here," he continued, turning to me and pointing at his printout, "your score is a 680, which increases your mortgage interest rate by an extra .5 percent."
While my score didn't disqualify us from getting the house, it would add over $20,000 in interest payments over the life of the mortgage.
I was mortified.
The mistake that nearly cost me
From the time I received my very first credit card in high school, I prided myself on having a good relationship with credit. I've never been a big spender. I paid my card off in full every month. In fact, when I went to buy a car a few years back, I got a 0 percent interest loan, which I thought was a clear indicator of a great credit score.
Apparently, not so much.
As it turns out, I had three problems with my credit score: My credit utilization was too high, my account history was too short, and I had recently applied for new credit. I had heard that the bulk of your credit score was comprised of on-time payments, and I simply didn't know that these other areas could bring down my score so dramatically.
The banker typed at his keyboard for a few minutes, and asked, "Mark, do you have any debt?"
Mark replied, "Nope. Completely debt-free."
The banker smiled a little and presented his solution. "Here's what we can do: We'll take Leah's name and information out of the mortgage, and you'll be able to get the lower interest rate."
Knowing this was the house we wanted, and not seeing a better solution, we went along with his suggestion. Not more than 10 minutes later, we were fully approved for a mortgage, and a few weeks later, we closed on the house. While I was happy about our ability to get our little bungalow on one income, I couldn't get over the bitter sting of disappointment.
I genuinely wanted to help with the mortgage to show that I was an equal financial partner in my marriage. I didn't want my husband to feel like he was taking care of me, or that I wasn't contributing to our shared lifestyle. While my husband insists there's no resentment whatsoever (and I believe him fully when he says it), I feel like somehow I didn't earn the house we live in — like I've cheated the system to get a house I didn't deserve.
How I got back on the credit track
Wracked with guilt and fueled by determination, I started on a mission to get my credit score back in the "excellent" range. I was determined to show myself that I was deserving of the lower interest rate. Focusing on my problem areas (the credit utilization, the account history, and the credit checks), I took four simple steps.
1. I stopped defaulting to my credit cards
Almost immediately after the meeting with the loan officer, I started questioning whether I needed to use credit cards at all anymore. I had been using my credit cards as my default form of payment, charging everything from groceries to gas in order to get more cash back.
My knee-jerk reaction was to just stop using credit cards altogether, but I know that having a long history of on-time payments increases your credit score. Instead of charging everything I could, I started charging only things that needed the kind of refund and fraud protection credit cards offer, like plane tickets or online purchases.
For everything else, I used cash or my debit card.
A full year later I still do it, and truthfully, I've really never felt better about my finances. Paying with cash feels like a "clean" transaction. I don't have to worry about when a big credit card bill will come in and whether I'll be able to pay it. Now I can simply look at my bank account and clearly see what I've spent and what I have left to spend.
2. I paid off my 0 percent interest debt
I always paid off all of my credit cards in full, knowing that the interest charges can eat away at your finances. However, I had a couple of 0 percent interest debts on which I paid only the minimum, since I wasn't racking up interest charges: my car and a furniture store credit card. I thought that I was getting the money for free and that it would be silly to pay the bank extra if they didn't require it. After all, that extra money could be earning interest in savings, or returns in the stock market — not paying off a 0 percent interest debt.
This thinking backfired on me.
Combining the balance on the 0 percent retail card with my "standard" credit card spending, the amount of my total credit I was using (known as my "credit utilization") was almost 70 percent, exorbitantly higher than the 30 percent recommended by FICO.
Instead of "outsmarting" the banks, I was sabotaging my own credit score.
I made a concerted effort to pay off my car and furniture credit card by the end of 2013, which would mean monthly payments of $450. Combined with using my credit cards less, I was on my way to drastically lowering my credit utilization and increasing my credit score.
3. I resisted opening new credit
About five months after we bought our new house, our air conditioning went out, and we were advised by multiple companies to replace our entire HVAC unit. We knew from our home inspection that the HVAC might be an issue, but the seller denied our request to change it before we bought the house. We had hoped the unit had a couple of years left in it.
We had started building a "home repair savings account," but we hadn't had very much time to see it grow. After all, we had just made a huge down payment on the house!
But then we were faced with an unexpected $4,500 bill, and the very real prospect of taking out new debt to finance the new A/C unit. The HVAC company offered a very good deal if we opened a credit card through them — a discount on the unit plus a 0 percent interest rate for the first year — but I couldn't bring myself to do it.
Opening a new line of credit would show as a "hard inquiry" on my credit report (meaning a lender requested a credit check), and having a new line of credit would decrease the average length of history on my credit report. With my score still barely in the "good" range, these dings to my report could have brought my score down even more. Less than a year ago, I had applied for $5,000 in credit to buy a fabulous new living room and bedroom set. In that same year, I had applied for a $5,000 business credit card to get my little side hustle off the ground. To creditors, I looked like a debt-hungry wolf who couldn't afford her life.
Instead of saddling my husband with more debt, we drained a major chunk of our emergency fund to pay for the unit outright. Although it was really hard to watch our savings go, we have never regretted our decision.
4. I started tracking my credit score
I knew that my credit report was free from errors (since I had checked it before meeting with the loan officer), but I wanted to make sure I was tracking my credit score regularly to catch future errors.
I signed up for CreditKarma.com (for free!), and received monthly credit score updates and tips about how to keep improving it.
More than anything, this was a really potent awareness-builder for me. As I stopped using my credit cards and increased payments to my outstanding debt, I saw the effects of my good habits reflected in my slowly rising credit score. Seeing progress was a major encouragement to keep working hard.
Almost one year to the day after getting a wake-up call about my 680 credit score, I checked my credit score again: 783.
While the 100-point addition is certainly exciting, I'm most proud of the changes I made over the past year. I have no more debt. I don't feel attached to points or miles or cash back. Lastly, even though this sounds cliché, I finally understand what it means to have a "good relationship" with credit.
As my credit history grows longer and my score improves, I know that I'll be a proud contributor to our next mortgage, with the hard-won knowledge that I was an equal partner in earning our home.
Leah Manderson is a personal finance blogger. Join her newsletter for weekly tips and tricks on earning more, investing wisely and living richly.
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