For years, we’ve said on Clark.com that once your consumer debt equals or exceeds your annual income, it’s very difficult to get out from underneath it.
But that’s exactly what Anthony Earl did. He managed to tackle $30,000 of debt and raise his credit score by 300 points in the process — all while earning under $30,000 a year working for the government delivering mail to state facilities in Salt Lake City, Utah.
Anthony refused to take poor credit and mounting credit card bills as a fact of life. And that’s why we want to share his story with you.
Journey to debt freedom
Every day at work, the 40-something state employee’s mail delivery route takes him from Layton to Sandy straight through the heart of his downtown Salt Lake City. It’s a route peppered with breathtaking views of the snowcapped Wasatch mountain range. But life wasn’t so picture perfect for Anthony when he was digging his way out of debt for nearly five years.
His problems with credit card debt and low credit scores started because he chose to go into debt helping a family member when she needed it most.
People end up in debt for all different reasons and helping a loved one is one of the noblest, though the consequences are no less dire just because your heart is in the right place.
‘My sister was separated from her husband and he was not providing financial support. Every time the state found him, and garnished his wages, he would just switch to another job,’ Anthony says. ‘I stepped in to help, and ended up in a bad way. When my sister’s husband finally started supporting her and their children, I had accrued just over $30,000 in credit card debt on a half dozen cards.’
Being unmarried with no children himself allowed Anthony to swing the financial commitment to his sister from April 2006 to March 2008, paying for her groceries and utilities.
But during that time, the former Army and Navy man who served during Operation Desert Storm was racking up more and more late pays on his own bills.
When he checked his credit scores from Equifax, Experian and TransUnion, he discovered they averaged out to 512 — firmly in the sub-prime credit category.
‘All of my friends had scores that were in the high 600s to 700s, and they were telling me that I needed a score in the 600s to get a loan for a vehicle,’ Anthony says. ‘The situation was depressing was because I did not know exactly how to improve my credit score, so I could not get a new vehicle loan.’ (Anthony continues to ride his old, beat up 1998 Ford Ranger with 121,000 miles on it and a rebuilt transmission.)
After listening to the Clark Howard Show, Anthony quickly formulated a plan that he put into action beginning May 2008. He began throwing the bulk of his money at the credit cards with the highest interest rates first, while still making more than the minimum payment on his other cards.
But he made a few critical errors along the way.
Don’t close down a card you pay off
‘When I had one card paid off, I would then cancel that card, and then proceed in the same pattern with the next card,’ Anthony says. ‘Ouch, I was stabbing myself in the back by doing this! My debt-to-credit ratio would jump to about 90% after I canceled the paid-off card.’
This is a classic mistake and twofer that’s really easy for most people to correct. Thirty percent of your credit score is keeping a low credit utilization rate. So each time Anthony canceled a card, he reduced his available credit and actually raised the percentage of the credit he was using.
Meanwhile, another 15% of a credit score reflect how many lines of open credit you can responsibly handle. Between the two, that’s almost half of your credit score right there.
That’s why you should resist the temptation to cancel a credit card when you’ve paid the balance down to zero. It’s better to keep it open and use it for small charges twice a year.
Address your late pays in whatever way you can
Anthony also had some sporadic late pays that were dragging his score down. So he came up with a very old-school solution to address that problem.
‘I started sending all of my payments USPS Priority Mail, so I could track when they arrived, and I changed myself so that I was positively sending every payment in early. Paying $5 was much better than paying a $25 or $35 late fee,’ Anthony told Clark.com. ‘Whenever I got a late fee charge, I would call the company and challenge it, and then send in a written statement saying the same thing accompanied with copies of my proof.’
Do this if building your credit score is important to you
With those problems under control, Anthony had to find a way to build his credit score back up. The quickest way for him to do that was to apply for more credit.
Applying for credit is the kind of move that pinches your score by 10 or 15 points in the short term because the risk you pose to a lender rises when you have more credit that you could potentially charge up and default on. But ultimately, it raises your score in the long run when you demonstrate that you can responsibly manage having a higher available credit limit.
So Anthony got two additional major credit cards — not store cards that don’t really help your score at all — and practically guarded them with his life.
‘These extra cards were locked away and I would use them only for small purchases under $50, so they could be paid off when the next card statement came,’ he says.
After four years of paying down his debt in a timely manner, Anthony made his final payment in May 2012 on the debt he took on helping his sister. And at last check, the blended average of his credit scores had climbed from a sub sea-level low of 512 to a Wasatch mountain high of 805.
Reducing debt in Anthony’s has made so much more possible.
In early 2013, he bumped his 401(k) contributions up from 3% to 6% to pick up his employer’s full matching contribution, and he also started a rainy day account.
Read more: How to get out of debt in 10 simple steps
Now that you’ve heard Anthony’s story, what can you do in your own life to be a rising credit star?
Know that there is no magic bullet to fix your credit
Credit repair companies may say they’ll remove bad credit marks from your record for a price. But what these firms typically do is use a technique to temporarily raise your score by a significant number of points for a few weeks before it plummets back down again. Anyone who says they can magically eliminate bad items on your credit report is telling you a big lie. Use the money you would pay them to pay the debts you owe and that will improve your credit score on its own.
Find out what’s in your credit report
You have a credit file at each of the three main credit bureaus — Equifax, Experian and TransUnion. Once each year, you’re allowed by law to see your credit file.
AnnualCreditReport.com is the only legitimate site to do this for free. Pull one report every four months. That way you’re never more than 120 days away from knowing if there’s funny business going on with your files.
Challenge errors with the credit bureaus
Errors on credit reports are common. Maybe your credit file is ‘married’ to somebody else’s who has a same or similar name, or maybe there’s a false lien supposedly filed against you. It could be anything; those are just two of the most common examples.
When there’s something wrong on your credit file, you need to file a dispute with both the credit issuer and the credit bureau simultaneously. Send all of your documents by certified mail, return receipt requested, which means you have to use the manual form, not the automated system.
If the problem is not fixed, re-dispute it with the bureau. If that fails, you must sue both the credit issuer and the credit bureau in small claims court. Most of the time, both parties will cave before the court date and remove the black mark from your report.
Don’t apply for in-store credit
Store cards don’t build your credit the way major credit cards from banks or other lenders do. In fact, they actively hurt your score. Opening a single store card will ding your score by up to 30 points for 24 months. Plus, store cards have historically had a much higher interest rate than most other regular cards. If you’re going to run a balance, the upfront benefit of a one-time discount doesn’t work out for you.