3 Valuable Lessons I Learned From Destroying My Credit

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  • Good credit is essential when it comes to borrowing, renting, and sometimes even finding a job.
  • A single late payment can ruin your credit almost instantly.
  • Having great credit is a lifelong process.

Here are three key takeaways from my journey to great credit.

I'm a Certified Financial Planner® and my credit score is around 800 -- well into the realm of "excellent" credit. It's been quite a while since I was turned down for any type of loan or credit card. But that wasn't always the case.

About two decades ago, I made some mistakes that young adults make and ended up destroying my credit. I went to college at a time when predatory credit card practices were still widely allowed, and before I knew it, I was in over my head in debt. At one point, my FICO® Score had fallen below 550, putting me well into the category of bad credit.

To be sure, the act of destroying my credit, and the general lack of financial knowledge that led me to do it, were big motivating factors in my journey to becoming a financial professional. I got serious about learning how credit works and using it to my advantage, and I also wanted to help educate others to help prevent them from repeating my mistakes.

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Good credit is an essential component of financial success

Consider this example. As of this writing, the average 30-year mortgage interest rate in the United States is about 5.3%. But what headline numbers like this don't tell you is this can vary dramatically depending on your credit score.

According to myFICO.com, the average 30-year mortgage rate for a borrower with a score of 800 is 4.75%. Toward the other end of the spectrum, the average rate paid by a borrower with a 650 FICO® Score is 5.80%.

When obtaining a $400,000 loan from a mortgage lender, this is the difference between monthly principal and interest (P+I) payments of $2,087 and $2,346. Now, this may not sound like a big difference at first, but over the life of a 30-year loan, this means the borrower with a lower credit score would end up paying an additional $93,240 in interest. That's money that could have been saved for retirement, invested, or used for another purpose that builds wealth.

It's not just cheaper borrowing. Good credit makes it easier to rent an apartment and even get a job in many cases. In simple terms, having strong credit gives you a tremendous advantage when it comes to building your financial life.

It only takes minutes to do years' worth of damage

Whether it's fair or not, you might be shocked at how much damage a single late payment could do to your credit. According to FICO's own data, a single late credit card payment can cause a borrower's credit score to fall by as much as 180 points. A borrower with excellent credit who maxes out their credit cards could see a drop of nearly 130 points, even if they make their minimum payments on time.

The point is that even one piece of negative information in an otherwise excellent credit file can have a major impact. And things like late payments typically impact your credit score for seven years.

Truly great credit is a lifelong process

Finally, here's one lesson I learned on the road to rebuilding my credit. Even if your credit is completely ruined (like mine once was), you might be able to get back to the "good credit" realm quicker than you think. With some smart moves like getting a secured credit card, paying the bill on time, and negotiating payoff agreements with my old creditors, I was able to build my score from about 550 to 640 within two years. This was enough to allow me to get a mortgage to buy a home, and to get an unsecured credit card, which further helped me reestablish my credit.

While good credit might be attainable in a relatively short amount of time, building great credit is a lifelong (and worthwhile) process. The average person with a FICO® Score above 800 has an average account age of more than 10 years, and 85% of people in this category are 43 years old or older. Many people get there quicker, and the best course of action is understanding how the FICO® Score formula works and planning accordingly.

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