The funny thing about bad credit is that it’s a slippery slope: the more trouble you get into, the more expensive everything gets, and the harder it is to manage it all. One of the ways the credit industry balances itself out is by charging higher fees and interest rates to people with lower credit scores.

So what do you do when you’re on the bottom looking up? When we hit bottom I knew that we had to do something to re-establish our credit rating. We were driving a car that was falling apart, renting our home, and had no real assets to speak of. So how did we come back from the abyss?

First, I sat down and took a long hard look at my finances. Then, I choked and accepted one simple truth: It was going to be expensive to raise my credit score back up. That’s where the finances vs. credit battle began.

The only way to raise your credit score is by getting and using credit properly. The only companies that were willing to lend me money all wanted to charge upwards of $250 worth of fees just to give me the privilege of paying better than 19% interest. So, I plucked up my courage and launched a multi-part attack on my bad credit score.

1) I invested a small amount of money into an Orchard Bank secured credit card. I started with $200. They paid a pitiful rate of interest (.02% If I remember correctly) on my savings account. But they did report monthly to all three credit bureaus. The other main benefit to getting that card was that I could simply make an extra deposit into savings any time I wanted, and it would raise my credit score. The icing on the cake was a very reasonable 9% interest rate.
When you have bad credit, an interest rate that low is unheard of.

2) I went ahead and applied for a high fee-unsecured credit card. I chose the Rewards 660 Visa largely because they report to the credit bureaus and they automatically raise your credit limit $75 each time you make three on time payments in a row and don’t go over the limit. The problem is, they had $250 worth of initial fees, and then an annual fee well over $100. As well as a 19% interest rate. I no longer carry a revolving balance on either of my cards though, so I was not really as worried about that.

3) I started monitoring my credit scores, and my credit reports. This cost an average of $30 a month.

4) I challenged incorrect items on my credit report. That was free and it did raise my score.

5) I sent $100 a month extra to my secured credit card to raise my limit. I did it for 5 months in a row.

6) I paid off my credit cards every month, on time, without fail.

So, all in all I figure raising my credit score from the mid 500’s into the high 600’s cost me around $1200 when I counted all the card fees and the credit monitoring service.

At first glance, that appears to be a terrible financial decision, I know. But the truth is, raising my score more than 100 points was worth every penny. And, as long as I keep managing my credit well, that improved credit score will continue to save me thousands of dollars on our home (by being able to periodically refinance), on our next car if we have to finance it, and on every better credit offer that comes along.

In other words, it was a temporary financial sacrifice for my greater financial good. And the most valuable thing I took away from the whole experiences was that I really and truly learned the ins and outs of my credit score and reports. I learned to manage my money. However much that lesson cost me, the rest of my life will be better because of it.

What do you think? If you were in my position would you be willing to pay all of these fees just to raise your credit score? Would you forgo repairing your credit altogether? Would you have explored other options and tried different methods of raising your score? Leave me a comment below, I’d love to have your opinions!

This entry was posted on Friday, July 4th, 2008 at 09:36 and is filed under Reader's FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.