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A Personal Look at Bad Credit

A Personal Look at Bad Credit

When my brother Nick went off to college, I soon found out that he was learning quite a bit, though not always from the courses he was taking. From his e-mails to me, I pieced together that in addition to Freshman Comp and Chemistry 101, Nick was also learning how to make money wagering on pool in the student center and how to climb the fire escape out of the window of his dorm after hours. What can I say? My brother has never been one to learn from anything but experience.

After two years in college, Nick came home for the summer and started back at his old job of waiting tables in our hometown diner. I would be starting college in the fall, so I thought I could learn a lot from Nick, even if it was just about what not to do. I decided to drive over for a root beer float and some of my big brother's wisdom. I sat at the bar sipping on my float and listening to Nick's stories.

"My biggest mistake," he said, "was running up a lot of credit card debt in my freshman year." I was surprised to hear this, because I was sure my parents didn't know about it. "My next mistake," he continued, "was transferring that debt from one credit card to another. I was late on some payments for a little while at the beginning of last school year, too. By winter break, my credit score was pretty low."

"That's when I went to the financial counseling agency at the college," Nick said. "They took a look at everything I owed and helped me work out a plan to pay it off myself. If I'd been worse off, they might have recommended that I agree to a debt management plan or a debt negotiation service. With a DMP, I would have been making my payments directly to the financial counseling agency, and they would have used those payments to pay down my debt.

As it was, they thought I could raise my credit score a lot faster by doing it myself. On a DMP, the agency can't promise that your payments will be made on time, and that can take your score down even further. Plus, I learned that a credit counseling program shows up on your credit report -- and a friend told me that some people look at that like a Chapter 13 bankruptcy."

"Wow, guess I shouldn't open up any credit cards at all," I said. Nick shook his head, "You're wrong. It wasn't opening up the credit card that was my mistake. It was running up debt that was a lot more than half my available credit. It was making payments late, and it was my own mismanagement. I should have gone straight to the financial counseling agency. I might be a lot closer to a manageable amount of debt and a higher credit score by now."

Nick told me that having good credit was easy, but that there were a lot of misconceptions about what causes your credit score to rise. He told me I couldn't build credit until I opened a credit card or otherwise borrowed money. If I chose the credit card, keeping my balances low in comparison to my available credit could help me, but I should not pay off the entire balance each month.

"Credit bureaus that assign you a credit score want to see that you are comfortable carrying a balance month to month," Nick told me, "but that balance should be manageable. Also, transferring balances from card to card and closing the old cards is a bad idea, because the credit bureaus also assign scores based on payment history, and if you don't have much history with the card you have open, they don't have much to base a good score on. Oh, and never make a late payment. Even one can cost you a lot of points off your score."

I learned a lot from Nick about good and bad credit that day, much more than I ever learned about it from any college course. Nick graduated last year. He has his credit cards under control these days. I'm so glad I could learn from Nick's bad credit mistakes. I would never wish these situations onto my brother, but I sure learn a lot when he stumbles into them.

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