4 Things I Wish I Knew When I Had a 515 Credit Score

When I went car shopping in my late 20s, I knew my credit was bad. I'd charged up a bunch of credit cards about five years earlier, then let the accounts go to collections because I couldn't pay. But I couldn't bring myself to actually look up my FICO® Score to see just how bad it was.

Delaying the car purchase wasn't an option. My old Corolla had over 200,000 miles on it and was beyond repair, according to my mechanic.

Finally, the guy in the dealership financing office told me the three-digit number I didn't want to know: My FICO® Score was 515. Anything below 579 is generally considered poor -- which means getting credit is hard and you pay exorbitant interest rates when you're approved.

I still drove away in a new (used) Kia Rio that day. It cost $7,700. My only option was to finance it at an atrocious 18% interest rate.

More than a decade has passed since then. Today my credit scores are in the high 700s -- not perfect, but still within FICO's "very good" range. If you're struggling with bad credit, you can rebuild with time and patience. Here are four things I wish I knew when I was trying to improve my 515 credit score.

1. Time is the only way to heal negative payment history

I used to see a lot of ads that made outlandish claims, such as promising to add 150 points to your credit score in 30 days. So I thought that maybe I'd be able to repair my credit quickly when I finally needed the car loan I'd been dreading.

It's true that you can repair your credit score fairly quickly if your reports have errors or outdated information. But what if all those negative marks on your reports are accurate -- as was the case with my credit report? Time is the only thing that heals the damage.

Negative information, like accounts in collections, stays on your credit reports for seven years. A bankruptcy can remain on your reports for up to 10 years. But the impact of negative information starts to fade before that, so long as you build healthy credit habits.

2. A secured credit card is the easiest way to start rebuilding

I wish I'd known sooner that a secured credit card is tailor-made for situations like mine. Essentially, you put down a deposit and that deposit becomes your credit line. When you have bad credit, opening a secured credit card is one of the best ways to heal.

Since you're putting down a deposit, there's less risk to the issuer. That's why even people with bad credit scores can typically open one. Your payments get reported to the credit bureaus. Your score improves over time if you pay on time and keep your balance low. Building positive information on your credit reports is vital, since payment history determines 35% of your credit score. In fact, it's the most important credit score factor.

3. Your rent and utilities aren't helping you build credit

I always paid my rent and utilities on time. But because landlords and utility providers generally don't report to the credit bureaus, those on-time payments weren't improving my credit.

Today, there are several rent-reporting services that allow you to build credit history by having your rental history reported to the bureaus. (Most of these services weren't around when I was struggling with bad credit.) Not all credit scoring models use rental payment history to calculate your scores, though many newer models consider this information if they receive it.

4. Paying down loans helps less than paying off credit cards

I put every extra penny I earned into getting rid of that toxic car loan. Within 18 months, I'd paid it off. Though my score had slowly improved as I made on-time payments, I didn't get the big boost I expected when I paid it off.

Not all debt payoff is equal in credit score formulas. Your credit utilization ratio, which is the percentage of your open credit that you're using, determines 30% of your score. Credit cards and other lines of credit, like a HELOC, affect credit utilization. But paying off loans doesn't reduce your credit utilization ratio, and you want that number to be as low as possible.

Don't get me wrong: Paying off an 18% car loan was absolutely the best thing to do for my personal finances. But it didn't give my credit score the jolt I was hoping for.

How I kept improving my credit

By the time I paid off my car, my credit score was in the low 600s, which FICO® considers "fair" credit. I applied for a few credit cards designed for bad credit and fair/average credit. Finally, I got approved for a $300 line of credit.

I only used the card once a month (to buy gas) to keep my utilization low. I paid off the bill in full each month. After about six months of on-time payments, the issuer increased my limit to $1,200.

I started applying for a new credit card every year or so. I aim to pay off the balance of each card in full each month. I haven't always been perfect on that front, but since rebuilding my credit, I've paid at least the minimum amount due on time. Usually, when I carry a balance from month to month, I'm taking advantage of a temporary 0% APR.

Recovering from bad credit is doable, but don't expect it to heal overnight. Aim for slow and steady progress.

Above all, don't be like me. Don't put off looking at your credit reports. Take action before you're in desperate need of financing and have no other choice but to accept terrible terms.