Paula's Credit Journey: Her Tips to Stay on Course
Paula Pant is a national speaker, finance expert, and founder of AffordAnything.com. Her mantra is "You can afford anything, but not everything." She is an investor with an 800+ FICO® Score and seven rental properties and has ditched the 9-5 lifestyle to pursue her passion - travel. She has been to more than 45 countries with the belief that money can fuel your dreams.
We spoke to Paula about her journey from no credit to bad credit to good credit. Here are the nine questions we asked her:
1) What did you know about credit growing up?
I learned absolutely nothing about credit during my childhood. Unfortunately, credit and debt were not taught in any of my schools; I received zero personal finance education.
My parents were recent immigrants, and they were trying to figure out how the credit, banking and investing system work in the U.S., so they weren't in a position to teach me about financial topics. Of course, this was before the internet, which made self-learning more difficult.
Culturally, my parents held an aversion to debt; their only debt was their mortgage. As a result, I grew up assuming that debt was rare and unusual. My operating assumption is that almost nobody held credit card debt; I assumed everyone paid off their balance in full each month, and that carrying a month-over-month balance constituted an extreme situation. Throughout my late teens and 20's, I avoided credit card debt, not because I was financially savvy but rather because I naively assumed that most people were debt-free, and I was just following the crowd.
During my freshman year of college, I remember sitting in a classroom with around 15 other students, discussing life skills that were facilitated by a teaching assistant.
I raised my hand and asked, "What do those letters in the car commercials mean? What's APR?"
Someone replied, "It's the annual percentage rate."
"But what does that mean?" I asked.
Nobody replied; neither the teacher nor any other student could explain the meaning of those words. A few people had memorized the acronym, but nobody comprehended what it actually meant.
2) When did you realize you needed to start working on your FICO® Score?
The summer after my sophomore year of college, I was offered a seasonal job as a kayaking instructor on Hilton Head Island, South Carolina. I had a free place to live on the mainland, about 30 minutes away, and I needed a car in order to commute from home to work. I didn't own a car, nor did I have the cash to buy one, so I went to a used car lot and tried to take out a loan from the dealership. But I didn't have any credit history - zero credit - and my parents refused to co-sign for the loan. I technically also didn't have a job at the time, I only had a job offer. Naturally, the dealer rejected my loan application.
That put me into a bind. I needed a car to start the job, but I couldn't buy a car without a job and credit. So I turned to a dealership that advertises loans to people with "bad credit and no credit," the type of loans with an enormous interest rate and a weekly, rather than monthly, payment schedule. It was my only option for buying a vehicle. I called the dealer, and they ran a hard inquiry and approved me for a high-interest loan with a weekly payment schedule.
At the last minute, I ended up not going through with the loan. My mom had been driving a car valued at $4,000, and she wanted to upgrade, so she gave me her old car. But that experience taught me that I needed to start building a credit history and paying attention to my FICO Score.
Shortly after that, I opened my first credit card - a college card with a $5,000 limit - and used it to make small purchases, paying off the balance in full every month. I still have that card open, to this day, to maintain the longevity of my oldest credit account.
3) Did you make any credit mistakes early on? How did you recover?
The second-biggest mistake is the story that I described above, which is having no credit, and therefore putting myself in a situation in which I had to turn to a predatory lender in order to borrow.
The biggest mistake, though, was ignoring medical bills that I received in college because I felt too overwhelmed to open the envelopes and deal with them. This caused me to be severely past due on paying several medical bills, which resulted in those bills getting sent to collections. This trashed my nascent attempts at building a good FICO Score.
4) What steps did you take to improve your FICO Score?
Initially, I held just one credit card and paid off the balance in full each month. After a few years, I began reading about the five major factors that influence your FICO Score, and that's when my tactics became more sophisticated.
I keep my oldest credit card accounts open, even though I'm not actively using the card; I put one small recurring purchase on the card per month and make an automatic payment in full. This keeps the card open and active, therefore improving the average account age.
I routinely request increases to my credit limit, which improves my debt utilization ratio. If I'm making a big-ticket purchase, I pay off the balance in full within a few days, rather than waiting until the end of the month, again for the sake of improving my debt utilization ratio. I also refrain from making too many hard inquiries, especially if I know that I'm going to apply for a mortgage or a refinance.
5) How did you find the information you needed to improve your FICO Score?
The internet is the best source of information out there. Everything I've learned about improving my FICO Score has come from online articles.
6) What was the biggest challenge for you to improve your FICO Score? How did you overcome it?
The biggest challenge is that for many years, I had no need for installment loans; I only had revolving credit. While I knew that I shouldn't artificially generate unnecessary loans, I still felt frustrated by the fact that my credit report reflected only a history of revolving credit.
7) What do you do to maintain your credit?
The single most important thing that I do is put all of my accounts on autopay, which ensures that I'll never make a late payment, not even due to accidental oversight. My perfect history of on-time payments is critical.
The second-most-important thing that I do is consistently keep my debt utilization ratio under 20 percent, and often under 10 percent, by manually making payments on a weekly basis. This happens in addition to the monthly autopay, which is set up as a precautionary measure. In other words, if I'm on my game and making weekly payments, then my debt utilization ratio is fantastic. But if I'm busy or sick or just forget, then the monthly auto-payments are there as a safety net feature.
8) What do you think the biggest credit myths are about credit?
The biggest myth is that holding a balance on your credit card, month-over-month, improves your credit score as compared to paying off the balance in full each month. This is just patently untrue.
9) What advice would you give your younger self?
Start building credit immediately! Having no credit is almost as limiting as having bad credit. Put everything on autopay to protect yourself from yourself. And open your bills, no matter how overwhelming they might feel.