After years of zero debt and paying off her credit cards every month, Kristen valued her high credit score. But that was before the tsunami of divorce and single parenthood made it all but impossible to maintain. Kristen had been out of the paid workforce when she was an at-home military parent living in Germany. Once in the States, she knew she needed to return to school to train for what she hoped would be a well-paying job.
But again, things did not go exactly according to plan. She had trouble finding work in her field as a graphic artist. She was working part time, "and I just fell behind." Her student loans were in default, and she really didn't see a way to turn things around without a dramatic new start. She decided to take the radical step of selling her car and donating most of her belongings. She mailed what she would need to her grandparents, and then she bought one-way tickets for her daughter and herself from her home in Nebraska to Louisiana, to live with them for a couple of months while she got on her feet.
She found a job that used some of the skills she went back to school to acquire, and she purchased health insurance for herself and her daughter. And, with that glimmer of hope, she made some calls to see what she needed to do to get her student loans out of default (she now pays $5 a month on an income-based program, but she knows it will reset much higher). She's not even chipping away at the $46,000 she owes, since the total grows while she makes minimal payments, but at least she's no longer in default.
Last February, she filed her taxes as soon as she had the necessary documents, because she wanted to use her tax refund to help her begin to establish better credit. She got a secured credit card from USAA, with a $250 limit, which she has since raised to $350. She wanted to automate payments to be sure she never had to worry about a late payment hurting her credit. (After all, she was getting this credit card to help her rebuild her credit.) Her daughter needed braces, and she would have a $212 monthly bill. But if she put that on the card, she would have had a credit utilization of almost 85 percent -- and experts recommend no more than 30%, and preferably less.
A plan to improve credit
So she came up with a strategy. The orthodontic expenses do go on her secured card, but a few days before that, she makes a payment of $212 on the account. So when she incurs the charge, it does not raise her credit utilization. There are a couple of other bills she does this way, being careful to pay the credit card account before she puts a purchase on the credit card. She said she does occasionally charge other small expenses, but she has paid off the balance every month. In a sense, she is using her credit card as you might use a prepaid debit card. However, while a prepaid debit card does not report to the credit bureaus, her secured credit card does. And if she needed to dispute a charge, prepaid cards aren't bound to the same consumer protections that credit cards are (including secured credit cards).
Asked about her unique approach, Rod Griffin, Experian's director of public education, says,"I can see no reason her strategy wouldn't work, as long as the account is paid before the balance is reported by the lender." He added, "I'm assuming [she] has verified that the secured account is being reported. It's a good idea to verify that it is. While most secured accounts are, I've come across a rare instance in which it is not. If the account is not reported to at least one of the national credit reporting companies it won't help her build credit, even if the account is paid in full each month."
Kristen is doing that, as well as checking her credit score. She has seen her credit score (an Experian FICO score, provided by USAA) go up more than 100 points, from 426 to 529. Before her divorce, it was north of 700, and she'd like to get it there again. But in the meantime, "I'm trying to be smart with money."
Finding motivation, making mistakes
For her, that means using apps to help. She said graphic representations of her financial picture are more meaningful to her than columns of numbers, so she makes sure she quickly translates things "out of numbers and into pictures."
She rented some furniture, in hopes that those payments will be reported to the credit bureaus (she had been told that they would). That, she said, was a huge mistake: "Now I am stuck with paying $37.35 a week until February 2016 which will be $935 more than what the furniture is worth new." Worse, she looked at her credit report, and the furniture payments are not being reported. "The only things that I saw that are being reported is the USAA secured credit card and the program I have for getting my student loans out of default," Kristen said. And she is now paying off some old accounts, and will be finished with those in September.
A steady income is helping Kristen catch up -- but so did realizing she was spinning her wheels and getting nowhere. Moving in with her grandparents temporarily helped, and she was able to buy a car from her grandfather.
"I'm now able to provide -- to be a responsible adult," she says. And she's making progress against debts and raising her credit score.
Consumers can get their credit reports for free once a year from each of the three major credit reporting agencies through AnnualCreditReport.com. When you're trying to establish a credit-building plan, knowing what's on your report, and ensuring the information is correct, can be a helpful first step. Many credit issuers and other sources also offer credit scores for free -- including Credit.com, where you can get two updated scores every month. Keeping an eye on your credit scores can help you track your progress, and work to adjust your course along the way as needed.