How My Credit Score Almost Cost Me My Dream House

Leah Manderson
Posted

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.

RELATED: How the All-Cash Diet Changed My Life

2. I Paid Off My 0% 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% 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% interest debt.

This thinking backfired on me.

Combining the balance on the 0% 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%, exorbitantly higher than the 30% recommended by FICO.

RELATED: 10 Things You’re Embarrassed to Ask About Credit

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.

“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.”

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% interest rate for the first year—but I couldn’t bring myself to do it.

RELATED: A Better Way to Pay Your Credit Card

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.

  • Nancy

    I raised my credit score 100 points too. I think it might have been this combination of events. I disputed an invalid address on my credit report. (I have never lived in Georgia.) I paid down a significant portion of a credit card that was nearly maxed out. (I had transferred a credit balance to a new lower-interest card, choosing a max just over what I owed.) I passed the 2-year mark living in the house I just purchased. (I’m not sure if that makes a difference?)

    My score is due to come up again soon, I think, due to the time I have held my oldest credit card. When I was married, we had a joint CC account that had been open for a very long time (maybe 20 years?). When we divorced, I cancelled that account. My oldest individual CC account was only a couple of years old. Words to the wise – have an individual credit account so, if something happens, you can keep longtime credit history even while cancelling joint accounts.

    Due to the divorce, I was shopping for a new house at the same time that my credit score took a dive. Luckily, my credit was still strong enough to qualify for the mortgage I wanted. I can only guess that I might have otherwise qualified for a lower interest rate, but I still got 4.25% due to the housing market, so I can’t complain too much. But it is nice to have my score back in the high 700s.

    • Leah Manderson

      Hey Nancy,

      Thanks for commenting, and congrats on bringing up your score, too!

      I’ve heard that divorce has a variety of effects on a credit score, and thanks for sharing your experience with how you managed that transition. I bet you could write a very useful LearnVest article on the topic!

  • SFKate

    Great story! Question for the author: As a financial blogger, I’m sure you are on top of this, but have you added your name to the mortgage since purchasing the home? I’m not 100% sure, but I think it’s doable and wouldn’t affect the interest rate. My concern is that you are protected should anything happen to your husband, that you would not get kicked out of your home?
    On a personal note, when my partner and I bought our house 2 years ago, we met with a mortgage broker *first* before we even started looking at houses. He ran a credit report for each of us that was more in-depth than the ones you get for free online and he was able to tell us what to do to “fix” certain red flags before we “officially” applied for a mortgage. He was a great member of our house buying team and we were so grateful to have him walk us through the process, as we too were nervous but excited first-time buyers.

    • Leah Manderson

      Hey Kate, I’m listed as an “owner” of the home, but my name isn’t yet on the mortgage. I have definitely thought about going that route, but have had other priorities in the meantime. This was a good reminder to get my butt in gear though! ;)
      It’s funny, I was so cocky about my credit history that I didn’t think I would have a problem. I have since learned to get my ego in check!

  • Jen

    What a ridiculous article. a credit score of 680 is above average and only raised her monthly mortgage payment $55. I’m not saying she shouldn’t have learned more about how to improve her credit score, but I find the fact her loan officer shamed her pretty ridiculous.

    • Leah Manderson

      Hey Jen,

      Thanks for reading, and I’m sorry you didn’t like the article.

      Yes, my score was above average, but it wasn’t enough to qualify me for the best rate on a mortgage. And, the whole point was that I THOUGHT my credit score was higher than it was, but I had some self-sabbotaging habits that I didn’t even know about until they bit me in the butt! After I learned all about credit utilization, length of credit history, etc. did to my credit, I wanted to shout it at the rooftops–informing other people of what I didn’t know!

      Anyhoo, again, thanks for taking the time to comment. I hope this illuminated the point I was hoping to make with the article.

      Warmly,

      Leah

  • Natalie

    This is an excellent, PRACTICAL article. Your suggestions are doable on any income and also give cautions for those not yet in such a situation. Thank you, thank you. I appreciate your advice and am trying to get my credit score up by 100 points, to a 780 (or higher!) I am a single parent with one income (and no child support) and I now have more knowledge and motivation to get where I want to be; even on a lower income and tight budget. This article was timely and just what I needed to read.

    • Leah Manderson

      Hey Natalie,

      You can totally do this! I strongly recommend trying out Credit Karma if you haven’t already. It was one of the most educational and influential factors in my success.

      Then, just use cash! No need to charge things on credit–even when everyone wants you to earn their rewards, points, miles, etc. It’s just not worth it :)

  • David T.

    Leah,
    I appreciate you being open and honest, and sharing everything. The details were great and the article was written well. I do think that you could focus a little less on your credit score and pleasing FICO. The credit score is based on debt, using debt to prove you deserve access to more debt, but in the long term debt only slows you down in life. I get the importance of having a good score, but it seems like you based alot of your life and personal fulfillment on a score that only gives you access to more debt in your life, which most people would agree racking up debt isn’t the way to go.
    You’re so smart and ahead of the game, pay off your home, and pay cash for the next one, let FICO find someone else to sell debt to.
    Kind regards,
    David

    • Leah Manderson

      Hey David,

      Thanks for your comment. You do make a good point in that credit score isn’t everything, and that FICO is a rigged game, but in truth, my credit score could have been the difference multiple tens of thousands of dollars in interest on a mortgage.

      I can also see how you might think that i based a lot of my personal fulfillment on the credit score, but please be aware that that was just the focus of this article–it wasn’t a place to talk about the myriad other goals I was working at in 2013 (like building my business, improving my marriage, travel, fun, etc.)

      Lastly, I think I was just trying to prove something to myself, not necessarily to FICO. It was important to me to *feel* like I deserved the low mortgage interest rate we got on our home.

      Anyhoo–you gave me lots to think about, and I hope this was a good clarification of some point!

      Warmly,

      Leah

  • rbel

    I enjoyed the article. I have a question though. My credit score is 746. I’m trying to raise it. My utilization is a problem too. Should I focus on paying down all of my cards to less than 30% or pay the card with the highest interest rate? My card with the highest utilization has the lowest rate. Thanks.

    • Leah Manderson

      For credit score purposes, pay down the one with the higher utilization. However, since your credit score is already “Excellent” there’s no pressing need to increase it. I would focus on saving money on interest, and paying down the highest rate card!

    • credithelper

      That is a pretty good score. FICO checks multiple things. You can get hit for having maxed cards, or cards with high utilization, but you can also get hit again by having multiple cards with a balance. Any balance. Your best bet for FICO scoring is to have ALL cards at a 0 balance except for one, have that card report 1-9% of that card’s limit, and you’ll have optimized your credit cards for the best scoring possible. You don’t want all cards at 0, as that will also hurt your credit score, crazy as that might sound.

      In your case, pay off anything over 50%, aim for under 30% if possible. Then work on the highest interest first. Paying off more cards will help you, and paying off your highest UTL card will help you score wise, so that is up to you. One of the best forums for credit advice is http://ficoforums.myfico.com