Hello! Today, I have a great guest post from Paul Martinez on how he cleaned up his credit and removed 104 negative items from his credit profile. He also went from a credit score of 480 to over 750!
In 2008 my world came crashing down. I went from being a multi-millionaire on paper to being $1,000,000 in collectible debt within a few short months.
At the time, I was running a $5,000,000 a year mortgage brokerage, and due to this credit market crash, 80% of our revenue evaporated in 2 months, yet our expenses stayed the same.
In addition, I had dozens of real estate assets, and I could not meet the payment obligations.
To be expected, my credit score dropped to around 480. For those who aren’t sure, that is a horrific credit score that can prevent you from simple things like getting a checking account.
It was not a super fun time. It was during this time that I was forced to figure out how I would go about repairing my credit.
I quickly realized it was going to be a combination of credit repair AND credit building that, over time, would bring my scores back over 750+. And that is exactly what happened.
A little backstory…
I always figured I was the golden child out of college, as everything I touched seemed to work out well. Youth has a way of inflating your ego and masking how good you really are. I will explain.
Unless you are born with a silver spoon in your mouth, or you have massive amounts of guidance already from being born into a successful entrepreneur family, you have to learn on the job.
That means if you dare to dream big and be great, you will stretch yourself beyond your limits. In these areas of constant stretching, you will have what I call knowledge gaps.
Have you ever heard the saying, “You don’t know what you don’t know”?
This is what that means. You stretch past your current competency, and you enter into areas where you could get caught by an unknown.
Let’s break this down into phases, so you can see how this played out to where I even needed to fix my credit in the first place.
This story starts off with me building a company and buying assets and ends with the credit market crash (real estate crash) of 2008.
Phase 1: The Golden Years
In 2003 I started and grew a mortgage brokerage company from $0 to $5,000,000 a year company. Things were going great, which fueled my ego as I was pretty young, and the combination of youth and success created blindspots that I could not see.
Things were going so well that I started to enter into investing in real estate. Not just single-family homes but land development as well. On paper, I was a multi-millionaire with a few dozen real estate properties in a variety of different real estate classes.
Everything was incredible!
Until it wasn’t.
Phase 2: The Real Estate Crash of 2008
Enter the 2008 real estate crash. This was not only something that was hard to see coming for me, but the entire world, for the most part, was caught by surprise. With the exception of a handful of hedge funds that made out pretty well shorting the markets.
Real estate crashed and crashed hard. At the time, I owned dozens of properties all with mortgages on them.
To make it worse, all cash flow was tied to a business that depended on real estate. We were brokering real estate loans for goodness sake.
The first major meltdown was Bear Stearns (an enormous Investment Bank at the time) at the beginning of 2008. As mentioned, within a few months of the collapse, the mortgage brokerage company’s revenue dropped 80%, but the EXPENSES stayed the same.
At the exact same time, all the over-leveraged real estate we owned dropped 50-70% in price, and EVERYTHING was under water.
So what does this mean?
You have a huge problem and have to decide to keep the real estate or the business. There is one challenge, though, you can’t pay for the real estate without the business.
Also, the real estate was so far gone that it was going to take YEARS for it to come back. When these types of situations happen, you don’t have years, you have months.
The famous economist John Maynard Keynes said “the markets can remain irrational longer than you can remain solvent.” Unfortunately, from experience, he was spot on!
Phase 3: Tough Decisions
So, where does that leave us?
Well, you can do the easy thing and file for bankruptcy, and your life will be good again in a few short years. Or, you can learn your lessons, increase your business competency and ride it out for the full seven years.
This means negotiating with creditors, having tough conversations, and taking FULL responsibility for your own actions to deal with the situation in its complete form. It also brings us to credit repair and, how that was initiated, managed, and what the result was from the efforts.
This will put the magnitude of the situation into perspective. Most people that do credit repair have a few items they need to work on. In my case, there were 104 negative items to figure out!
At first, I attempted to try to repair my credit on my own. I went down the path of getting super organized and coming up with a system for doing this.
After several months of managing the process, I realized that there were better ways to do this. At the time, you didn’t have as many solid companies to do this activity as there are today. However, there were a few, and I chose Lexington Law. You can read my Lexington Law review here.
Why did I do this vs. doing it all on my own?
Because aside from this process, I still had to spend enormous amounts of time trying to build my business back up and deal with the collapse of the credit markets. So I quickly realized that there was an opportunity cost to this activity. And it wasn’t just time, it was also energy.
Unfortunately, the opportunity cost was maybe not being able to have enough energy to recover and grind out of the mess. This is why I say that bankruptcy is easy. You file, and you move on.
In this scenario, the problems go on and on until they are resolved by you. Day by day. Month over month. Year by year.
This, though, was the equivalent of getting a real-life Ph.D. in business. I wasn’t thinking about that at the time, but looking back, it is exactly what it was. You can’t learn it in books, you can understand it completely through other people’s situations. It is you in the trenches learning on the job.
So, before I hired out the process, I did the below steps on my own to build the foundation of repairing my credit.
Exact Steps I Took to Fix My Credit
Before you start, you want to have a clear understanding of what you need to do, at least in a general sense. Below are the steps I took that cover portions of credit repair and then credit re-building. These two things go hand in hand.
Get Your Credit Report
You can get your credit report from a number of different places. Some of these places just give you one report and no scores. In my opinion, this does very little to help you see the entire picture.
You want to get a combined credit report with scores. Let me explain what this is. There are three main bureaus that matter. Experian, Equifax, and Transunion. That said, you need ALL three credit reports and ALL three scores.
Instead of going to all of them individually, you can do what I did, which is go to Experian, set up and account, and get a combined report with scores that give you all of the above. It costs around $40 but is exactly what you need to get started.
Look for Errors that are Easy Fixes
At first, you look for things that are not correct for some quick wins. Examples would be inaccurate personal information, accounts that are not yours, duplicate negative accounts, fraud, or even missing positive accounts that should be on your credit report.
Pay Bills on Time From Here on Out
I am going to assume that credit is a problem due to not being able to pay certain bills. It is ok, as life happens. But, here is what is important. Choose what you can pay and will pay, and never miss payments on those things.
What this shows is that mistakes were made, hard times happened, but you are still responsible.
Become an Authorized User on a Credit Card
So what is an authorized user?
It is where you piggyback on someone else’s account.
If you can and have someone that is SUPER responsible, and if they use their credit card, they pay it off every month and leave no balance, then this strategy makes sense. If you become an authorized user on another person’s card that is not responsible, it just compounds your problem.
The catch is that not all companies report authorized users, so the cardholder has to call and make sure that they report authorized user accounts.
Get a Secured Credit Card that Reports to Bureaus
What is a secured credit card?
This is where you can get a credit card, but you have to put up the amount of money that they lend you in credit.
So it works like this, if you want a credit card with a $500 limit, you have to apply and then deposit the $500 with the company. They then send you out a card with a $500 limit.
Why this works is they then report your usage to the three major credit bureaus. This shows that you are responsibly using credit and making the payments each month.
Never Use More Than 30% of the Secured Credit (pay it off every month)
In my situation, I did just that. I got a secured credit card for $1,000. Then I bought monthly small items on it like groceries. Every month, I paid it off in full and on time.
You still never want to go over 30% of your credit limit. So every month, you would not want to spend more than $300 in the above scenario.
Decide Whether to Hire Credit Repair Specialists or do it on Your Own
As we spoke about before, I began doing this on my own. After several months, I decided to outsource it.
Here is a tip, this is like a full-time job, so if you already have a job, I do not recommend trying to do this on your own.
The amount of money it takes to hire someone is nominal in comparison to the time it will take you. Also, if you are not EXTREMELY organized, do not even attempt it. Hire it out and manage the process.
Lessons I Learned from my Credit Repair Journey
The lessons I learned from the event itself and then going down the path of fixing it on my own at first and then hiring it out were invaluable. So let’s dive into those.
Lesson 1: Building GREAT Credit Takes Time
This sort of thing does not happen overnight. If you have 1 or 2 things to fix, that is the exception. However, if your situation is like mine was, and you have dozens, this will not take one or two months.
The key is coming up with a good strategy with a good team and then being consistent and patient.
Month over month, things will get better, and one day, all the negative items will be gone.
Lesson 2: Building Good Credit is Faster Than Achieving Excellent Credit
When you build credit, there is a difference between striving for perfection and just getting your credit good enough to get good rates when you need, for example, a loan.
So as you are working your way up, good credit can be anywhere from 690-720, whereas excellent credit is more like 720-800+. Worrying about getting up to a perfect score doesn’t make a ton of sense. You should strive to have good credit as you are going through this process.
The time it takes you to achieve good credit is going to be far less than focusing on excellence.
Good credit will get you what you need and solid rates as well. It is ok to keep going and get excellent credit, but try not to obsess about it.
There is an opportunity cost for your time, energy, and focus.
Lesson 3: Having a Good Credit Mix is Important
When I first started to dig into the concept, I knew zero about it. I kind of just found it out by necessity of needing to repair my credit and also figuring out how to build BACK my credit.
First of all, what is a credit mix?
It is pretty much as it suggests and is a mix of credit types that make up your overall score. Some are classified as installment and some are revolving. I learned that they are BOTH important.
Let me explain.
The Different Types of Credit Accounts that Fall into Two Important Categories:
What Is Installment Credit
Installment credit doesn’t revolve like a credit card. How it works is that you have a fixed amount that you receive, fixed monthly payments, and an end date.
Here are some examples of this type of credit:
- Mortgages: When you buy a house, you get what is called a “mortgage,” where the bank lends you money to allow you to buy the house. So if your mortgage was $300,000 and you put down 20%, or $60,000, then your actual loan amount would be $240,000. The $240k is an installment loan.
- Personal loans: Various different people can give you a personal loan, but in this case, let’s say it is not your family and is an institution that will actually make you sign paperwork. If it is a bank, you will have an agreement with them, and they will begin to report this financial agreement to the three major credit bureaus. That said, this is an installment loan.
- Car loan: Most of us have been here; we go into a dealer, we pick out a car, and the bank agrees to give us a fixed rate loan for that car and, in turn, expects us to make monthly fixed payments.
What is Revolving Credit
Revolving credit is another form of credit that most of us are used to. The simplest form of this is any credit card or department store card.
If you have ever owned a credit card from Visa, Mastercard, Discover, or AMEX, this is Revolving Credit. If you have ever had any department store credit card from Macy’s, Bloomingdales, and so on, you have also had revolving credit.
Lesson 4: All Credit is Not Created Equal
Let me explain. If you have an Amex Black credit card and then a department store credit card, they are not the same. The Amex Black is going to matter more in the eyes of the agencies. Or anyone for that matter.
If you took the cards and split tested spending on them, say $100 a month, and paid them off and then measured how each impacted your score, the credit card will beat the department store card every time.
But how much you want to know? No idea. Only the credit agencies know exactly, but there for sure is a difference.
The magnitude of the item is important too. For example, a mortgage will carry more weight then a small credit card.
Lesson 5: Credit Utilization Matters a Great Deal
But wait, “I only have two credit cards with $5,000 limits each on them and my score is so low.” Well, the next question I would ask is what is the balance you carry. If you tell me the balance on each is $4,500 plus, then credit utilization is part of your problem.
You never want to take these credit cards over 30%, and preferably you are using them and paying it off monthly. This way, you “utilize” the cards and build your credit, but you don’t OVER utilize the cards and the credit higher-ups like that.
Think of credit like a muscle. You have to work it out, but if you do it too much, you can tear a muscle, and if you don’t do it at all, your muscle will wither away.
Lesson 6: Too Much Credit or Too Little Credit is Important
Ok, so what does all this mean?
Well, here are some examples:
- How many credit cards should I have? The answer is not zero, but also not 15. They are not going to tell you the perfect amount to get the perfect score, but it is safe to say you want a few normal credit cards and a few department store credit cards.
- How many installment loans should I have? The answer again is not zero and not 15, unless you are extremely wealthy and it doesn’t matter, but we are talking about the average American here.
There are other low-risk ways to get types of credit that are not as dangerous as taking out a big mortgage if you were not already planning to.
The gist of the story is you want to have a bit of installment credit and a bit of revolving credit. Not to much, not too little. Then, use it wisely.
Lesson 7: Breaking Credit Repair Up Into Small Manageable Chunks is Best
So, when you look at the credit repair journey, it is a daunting task. I know it was for me. I was stressed out with everything I had to grind through, and then it felt like I was committing to a full-time job that I was not going to get paid for.
So I sat on it for a few days and decided, ok, just like any big project, let’s break this down into smaller, more manageable chunks of work. Once I did that, it was MUCH less overwhelming. So I began to do it on my own.
Lesson 8: Doing it Myself Was Simply Not Worth It
I learned within the first few months that doing the credit repair myself was a giant waste of time. Look, if these companies were thousands of dollars a month, then maybe, but they are not. Not to mention they are experts in this field, and I am not.
They have follow-up systems to deal with creditors and credit agencies that they have built over years. It just made much more sense to pay a little and pass off the burden to professionals, for me at least.
Then my only job was to manage the professionals.
Wrapping Up on Credit Repair Lessons
This is for the ones that need to hear it. Hard times come and go, and the sun will shine again.
The great thing about living in this day and age is you can connect with people who have shared similar situations and struggles.
Even if you never talk to them about the situation, their stories leave clues and can guide you through your own journey. These stories help you to reverse engineer your own tough situations instead of going into them blind.
Almost all of my mentors I have never met, or they are figures in history that are long gone.
The bottom line is stuff happens. Unforeseeable things that you just have to deal with. You are not alone in this. So if this is your situation and you are looking for guidance on what to do, let this be a small part of your journey back to a SOLID credit score.
Author bio: Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce. Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.
Do you think your credit score is important? Why or why not?