Ben’s Challenge, Week 7: Credit Score Update

This is the latest update on my attempt to do the ReadyForZero New Year’s Challenge. If you want to read previous updates (and I know you do!) just click here: Intro, Week 1, Week 2, Week 3, Week 4, Week 5, Week 6.

In this week’s update we’ll do all kinds of fun stuff, including:

1) look at my credit card payment for this month
2) find out if my credit score has improved
3) see how my credit score would change in different scenarios

My Credit Card Payment

When I started my New Year’s Challenge, I had $3,200 in credit card debt. That amount was leftover from 2011, and I was determined to get it completely paid off in 2012. My first task was to decide how much I could pay each month. I solicited advice from readers of this blog, and, based on encouraging responses from friends and personal finance bloggers Ben Edwards and Carrie Smith, I decided that I would attempt to pay off $480 per month, which would make me debt free in about 7 months.

So far, it’s been two and a half months, and I feel like I’m making some serious progress. Since January, I’ve been following the tips in our Zero Debt Action Plan to help me save money and conquer my debt. And Last month I made my first $480 payment as planned, bringing my debt down to $2,716, which felt great!

So how much did I pay off this month?

Let’s go to my trusty ReadyForZero snapshot to find out: 

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Okay… so the bad news is that I didn’t quite pay $480 this month. The good news is that I paid about $355 – which means I’m $355 closer to being debt free! As I said in last week’s update, you can’t let minor bumps in the road throw you off course. It would have been great if I paid $480 again this month, but no matter what, my debt was not going to disappear this month, and that means perseverance is the most important thing to keep in mind.

I’m actually really happy that I’ve had two months of significantly paying down the credit card. My new debt total is $2,361, and next month I should be able to bring the total balance down below $2,000, which would be fantastic.

My Credit Score Update

In Week 3 of my challenge, I got my free credit score from CreditKarma.com, and it was a whopping 742, which was exciting. More recently, I signed up for their new free credit monitoring service, which delivers alerts to your inbox when there’s a change to your credit report. It’s a very useful tool, and luckily so far I haven’t seen any alerts regarding erroneous or negative additions to my credit report.

However, I was curious to see whether my credit score had changed in the last month, so I logged onto CreditKarma to find out. Here’s what I found…

Okay, I have to admit I was a little disappointed that the score had not changed, because it would have been fun to see that score go up even higher. But I guess it’s not too surprising, because the only thing that has changed about my finances in the last month is that my credit card balance went down. Apparently that was a small enough change that it didn’t affect my credit score.

That made me wonder, though: what would it take to make my credit score go up? To find an answer to that question I relied on a great tool…

My Credit Score Scenarios

In our Zero Debt Action Plan, we describe various ways to improve your credit score. And thanks to CreditKarma’s Credit Simulator, it’s easy to predict the outcome of different actions you might take. The simulator is a really neat tool that allows you to test various scenarios and see how your credit score might change.

Scenario 1: Pay off my credit card balance

The most obvious thing I could do to help my credit score would be to keep paying down my balance, and in fact that is what I’m planning on doing. But we already saw how my credit score stayed the same since last month despite the fact that I paid off over $800 of my balance. So what would happen if I paid off $1,000 over the next couple months? According to the credit simulator said there would be no change. Darn! However, if I paid off my balance entirely (which I could do in the next 5 months), here’s the predicted outcome:

Wow! That is a pretty big change. According to CreditKarma, only 22% of Americans have a credit score above 750, so it would be great to climb all the way up to 778. But that’s not something I can do immediately, so let’s see if there are any other actions I could take (other than paying off my balance) that would boost my score…

Scenario 2: Increase my credit limit

One of the main components of your credit score is your rate of credit utilization, or in other words, the percentage of your overall credit you’re using. For example, if your credit card allows for you to spend up to $10,000 and you have a balance of $1,800, then your credit utilization is 18%. So what would happen if I convinced my credit card company to raise my credit limit by $5,000? The credit simulator says…

That’s not a very big difference! I suppose even a small increase like that might help if I were about to apply for a car loan or a mortgage. But since I’m not planning on doing either of those things anytime soon, it’s probably not worth it (especially since it’s possible for the credit card company to lower my credit limit rather than raise it, when I call to ask for a review of my credit limit).

Scenario 3: Get another credit card

There might be a better option, however. What if I got a new credit card? Theoretically, it should help my credit score because (A) it would increase my credit limit substantially and (B) it would add another account to my credit report – which is apparently something I need. The downside is that applying for a new card would put a hard inquiry on my credit report. Would that outweigh the benefits? Without the credit simulator, I’d have no idea. But using the simulator and I can find out. Here’s how my score would change if I went out and got another credit card with a $10,00 credit limit:

So you’re telling me I could add 16 points to my credit score simply by getting another credit card? I suppose the risk is that I would start charging more things and run up my balance. However, that has not been a problem for me in the past. I do have a balance on my single credit card right now, but I’ve never come close to reaching my credit limit. I’ll have to seriously consider this option and decide if it’s worth the effort to pursue this potential 16-point increase in my credit score.

In the meantime, I’m going to continue working to stay within my budget and next week I’m going to write an update on my attempts to generate some extra income – so be sure to check back next week and see how I did!

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  • Zack Jones

    Ben,
    I think you’re being a little hard on yourself. The fact that you were able to pay $355 towards your debt is a victory and not bad news. Let’s assume your minimum required payment is $100 for the credit card. You paid $255 ontop of the minimum required payment. You should be proud! FWIW, I would have setup the goal a little differently. Although you state your goal is to pay the card off in 2012 you’re actually trying to pay the card off in 7 months. I threw together some quick numbers so they may be off a bit. You started the year with $3200 in debt. Interest at 6.9% is about $220 per year so you’re really looking at paying off $3420 in 2012. That works out to $285 per month. So I would have set my planned payments to $285 and anything above that I would consider bonus payments. I think you set your monthly payment goal a little high and when you didn’t achieve it you’re disappointed when you shouldn’t be. At least I don’t thnk you should be :).

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      That’s a great point, Zack – thanks so much! I think your insight about making manageable goals is very important. Otherwise, it’s too easy to get discouraged. It’s all about relishing the progress you’re making while continuing to do the little things necessary to reach the big goal. Due to the encouragement from you and others, I’m actually feeling very optimistic about paying this off. I hope you’ll keep following my progress and share any further insights you have!

      • Zack Jones

        I’ll keep following. I get motivation from you can Carrie. Seeing you guys working hard to pay off your debt makes me want to work even harder at paying off mine.

  • Ryanhuhu

    I really like a lot of your articles. Keep it up.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Thanks, Ryan!

  • http://carefulcents.com Carrie Smith

    I agree with Zack’s point. You should be too discouraged at all. The way I look at it is, you disciplined yourself to pay off $355 this month on your credit card. That’s freaking awesome! :) I’ve been having a downer month myself (emergencies and unplanned expenses), sometimes you just can’t account for everything. Still the important thing is for us to keep going. Even if it’s a little less than we aim for, we are still making progress.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Exactly! As long as the trend is toward zero, then I’m happy. I’ve been reading your updates too (like this one: http://www.carefulcents.com/february-debt-goal/ ), and am really enjoying them. It certainly helps to know that others are striving toward the same goal I am. Keep up the good work!