Your credit isn't your life, but it affects much of it. Your credit score determines not only your credit card limits, but how worthy you are to rent or buy a house, lease or own a car, get insurance, sign a phone contract, secure a student loan, or even get a job. With 48% of people surveyed telling NerdWallet they wouldn't date someone with bad credit, your credit score has outsized influence over not only your financial well-being, but possibly your happiness.
Credit horror stories crop up every day for Todd Christensen, an accredited financial counselor with nonprofit counseling agency Money Fit in Boise, Idaho. He was meeting with a couple that had one partner lose a state job with substantial benefits and take a position with half the income. They came in saying they had about $28,000 to $30,000 in debt. After pulling their credit report and going through bank accounts, credit cards, and store cards, he had bad news: Their actual debt was double that. “We tend to try to minimize [debt] in our minds,” Christensen says, “because, when you're in that kind of debt, it would paralyze you if you had to think about it all day long.”
About 10 years ago, Christensen was talking to an adult learners' class about payday loans (“every credit counselor's favorite topic”). A woman came up to him after class and said she'd taken out three payday loans for $500 each. At the time, if you couldn't make the payment every two weeks, you would just pay the 15% fee and get another two weeks to make the payment. The fee was $225 every two weeks just to get an extension. She'd been making those payments for five years, and that $225 payment for five years came out to $29,000 — on a $1,500 loan. Even worse, she still owed the original $1,500. “Not a single penny of those weekly fees went to pay down the debt,” Christensen said.
Edwin Liou, manager at credit and travel site CreditCarrots.com, had multiple credit cards, a mortgage, car loans, and never missed a payment. But when he checked his credit score, it was around 600, well below the 750-plus deemed “excellent.” As he discovered two weeks later, credit agencies didn’t have his three credit cards on file — nullifying his on-time payments — because his bank misspelled his name when submitting the information. Meanwhile, a local gym made a mistake when canceling his membership and charged him a fee that was never paid. It took him eight months to fix the errors, but he eventually got his credit score up to 736.
A few years ago, a woman in her early 20s came into Christensen's office after buying her first truck. She'd been living on her own a year, and bought the truck at a “buy here, pay here” used car dealership that charged 30% to 40% interest on a used car loan. Thanks to a lack of credit and eagerness to get into a vehicle, she took out a loan for $10,000 on a truck that was “only worth $4,000 to $5,000.” At 30% interest, her loan added $3,000 a year to her payments. After six months, she couldn't make the payments and the dealer repossessed the truck (“and probably sold it to somebody else for $10,000,” Christensen said). She still owed more than $9,000 on the truck, but got a bill for towing fees, repossession fees, storage fees, and cleaning fees that totaled more than $13,000 — with a threat from the dealer to sue her and garnish her wages. “We are just way too in love with our vehicles in this country,” Christensen says.
Another woman came into Christensen's office with a total monthly income of $2,000, but a nearly brand-new truck with a $600 monthly payment. She commuted 30 miles each way, at 18 miles and $3 per gallon, and, with insurance, was paying nearly $1,000 a month just for her vehicle. “I told her 'Do you realize that you don't earn any money for rent, food, clothes, or day care until after lunch?'” Christensen said. She filed for bankruptcy eventually; Christensen suggested strongly that she get rid of the truck.
James Garvey, CEO of Self Lender, honeymooned with his wife in Argentina and set all of his bills on autopay before he left. There was one credit card he missed, though, and that resulted in two months' worth of missed payments. "My credit score was damaged for years,” Garvey told Business Insider.
CNN Money got one of the all-time greatest credit horror stories when it found Toni Riss of Texas and her First Premier card's 79.9% interest rate. The card, which targets consumers with poor credit, was Riss' lifeline after she'd gone through bankruptcy to pay medical expenses But her rate went from an introductory 29.9% to 79.9%. First Premier Bankcard CEO Miles Beacom says that switch shouldn't have happened, but acknowledges that the 79.9% existed before being trimmed to 59.9%. Even worse, folks who hold that card are charged $135 a year in fees as they try to repair their credit.
When Matt Schmidt, CEO of Diabetes Life Solutions, was getting close to buying a house and taking out a mortgage, he decided to pay off his student loans ahead of schedule to minimize his debt. It was a bad move: "My student loan was my only type of 'installment' debt. Even though I paid off my debt, FICO penalized me for not having installment debt," Schmidt told Business Insider. His credit score dropped between 40 and 50 points and delayed the purchase of a home by nearly five months.
When Maria got a call one night from someone claiming to be from her credit card company, saying her account was past due, she took it seriously. This was, after all, supposedly the company’s final attempt before taking action on the card. He took payment over the phone … and two days later her account was empty and three new cards were opened in her name. It took Maria a year to clear her credit report from this scam, but it all could've been avoided if she'd either set up automatic payments or told the caller she’d hang up and contact the card issuer on her own, Barclays says.
Carlos found the condo he'd been dreaming about: in the right neighborhood, and with a view of the river. But his mortgage application was denied when a loan officer found a credit card with multiple late payments and a high balance that threw his debt-to-income ratio out of whack. What was the card? It was one he'd never applied for, which makes this another tale of identity theft that couldn’t even be traced back to a mysterious phone call. Identity theft, fraudulent cards, credit bureau errors, and even divorces can affect a credit report — which makes checking it a priority, Barclay's says.
Liz Weston, NerdWallet's personal finance columnist and author of the book, “Your Credit Score,” had her credit score dinged by a library book that was boxed up accidentally and put into storage. The late notices, meanwhile, all ended up at the wrong address and weren't missed until well after Weston had moved. “By the time I figured all this out, I had a collection on my TransUnion credit report and my FICO score there dropped more than 50 points,” Weston told Business Insider. Though paying off the fines didn't help immediately, her credit score healed over time.
You may want to worry about a parent’s finances along with your own. “I was on the phone with a gentleman in the South whose 95-year-old mother-in-law had fallen a few months ago, was injured, and needed to be moved into assisted living,” Christensen said. “His wife and brother-in-law started going through her finances and found out that she had $44,000 in credit card debt.” The family was worried that the credit card companies were going to come after them. Christensen assured them that they were not responsible for it — credit card debt is unsecured, which means a credit card company can't come after an heir's property. But the family may lose anything bequeathed to them by the estate as lenders look to make their debt whole; in that way, debt can be inherited.
At 49 years old, employed since 1993, and owning the same home since 2000, Doug H. had been without late payments for a decade. He and his wife had credit card debt, but also household income of more than $90,000 annually, a mortgage of only about $2,400, and a credit score of 690. Then Bank of America made a mysterious, dramatic, and disastrous move — for seemingly no reason, it abruptly cut his credit cards' limits by about $30,000, increasing their credit utilization score, causing a credit score drop of more than 50 points, he told Bankrate. The bank’s move caused another domino to tumble as his wife, who had a 720 credit score, was told by American Express that her limit would be cut by $5,000, which will affect that card’s credit utilization score too.
When Christensen was providing credit counseling to bankruptcy filers, he worked with a client who had filed at least one bankruptcy petition a year for the past six to seven years. As he was preparing to work with her and looking at her bankruptcy filings, he found that she'd filed eight to nine times during that span and had many of those filings dismissed for not finishing the process. Though you can file a Chapter 7 petition only once every eight years — Chapter 13 filings have far fewer issues — even incomplete filings can drag down a credit score. “It ain't pretty,” Christensen says. “A bankruptcy will typically drop your credit score 30% to 35%. With credit scores ranging from 300 to 850, if you're in the 800s, you'll lose 150 to 170 points for filing.” While just one bankruptcy can land the average person in the low 500s, this woman was the only person Christensen had ever met who had a score in the 300s.
Much like Garvey, Lisa Fox, a financial expert, got into financial advice after a single missed payment dropped her credit score to 500. How does that happen? "Because my student loan provider listed each loan as 19 individual ones, it reported on my credit as 19 missed payments," Fox told Business Insider. The damage lingered for years on her credit report, but the incident taught her to consolidate loans and pay them on time.
Isaac and Miko had great jobs but simply didn't pay attention to day-to-day spending. Why should they? They didn't splurge on big items. Yet one night at their regular dim sum place, their credit card was declined. When they got home and checked their account online, they discovered they had accumulated more than $10,000 in credit card debt without realizing it. You don't need an expense-tracking app to keep this from happening, but Barclay's notes that it pays to check in on your accounts every so often.
Credit experts often warn people off of department store credit cards when they’re buying a fall wardrobe or giant television. BuzzFeed News passed on a story of someone who applied for a credit card at age 18 because he was hungry and had forgotten his debit card at home. So he signed up for a credit card and bought two Snickers bars — a $5 purchase that he bizarrely decided not to pay back. “I don’t know why I was the way I was,” the buyer said. The late fees hit nearly $500; family members stepped in to pay off the debt. But it stayed on the buyer’s credit reports for three years.
Holly Johnson’s worst debt decision of all time was a $25,000 car loan she took out in her 20s, she told NerdWallet. After all, she was making only $8 an hour at the time, which meant the car represented half of her take-home pay. She moved back in with her parents, which some might consider the true horror here, and didn't get clear of debt until she was married. Now the author of the financial blog Club Thrifty, Johnson has one final awful aspect of the story to share: She eventually sold the car for $2,500, a tenth of the loan (never mind the interest) she took out to buy it.
Christensen met a man recently who had six to seven accounts being handled by collection agencies. They were small, but they were all related to medical conditions. With student loans, it was somewhere between $25,000 and $30,000. With health his predominant concern, he hadn't made a student loan payment in two years, and his loans were in deferral and approaching 50% of their original amount. All of the above pushed his credit score into the low- to mid-400s. He was a small-business owner doing well and trying to improve his credit for a small-business loan, and Christensen said he was going to try to refinance his student loans into one student loan and pay it down. “The reality is that, even after paying a student loan, the original one is still going to show up on a credit report for the next seven to 10 years,” Christensen says.
You’ve divorced and share custody of kids with your wife. If you’ve got the means, it might make sense to buy a house for the wife to live in — with the mortgage in your name but the payments to be made by her from your support payments. It made sense to the man reaching out to MarketWatch’s Quentin Fottrell for advice. But the ex-wife contacted the lender, changed contact information so no alarmed calls would come, and stopped making payments. She went on to abuse medications, take out credit cards in his name and get a payday loan. Filing police reports and giving up the house for a deed in lieu of foreclosure weren’t the answer he hoped. “They all continue to say the debt is mine,” the man told Fottrell. “It makes it almost impossible to get a loan and, if I do, the interest rate is terrible.”