So, I checked my credit score today and realized that my score went down. I used Credit Karma to check my score. Credit Karma allows you to check TransUnion and Equifax. My score with TransUnion went down by 34 points. Equifax went down 27 points. The reason for the significant drop in both scores are the same. That is, my credit card balance has increased.
I have a $3000 limit on one of my credit cards. The current balance as of today’s date is $2,364.82. I’m not sure if that includes the $45 I spent yesterday on food and drinks. Clearly, May and June have not been kind. My self discipline simply went out the window. One thing led to another and before you know it, I had over $2300 in credit card debt.
It all started when I returned a rental car to Enterprise. They noticed scratches on the side of the passenger door that wasn’t there when I rented the vehicle. I didn’t have their insurance and it turns out that my insurance company didn’t cover the damage either. The reason being is that I had a non-owner’s insurance policy, but collision damage to a rental vehicle somehow wasn’t covered. The total damage with fees, etc, was about $700.
Thankfully, I rented the vehicle with my credit card, and so I’m filing a claim with my credit card company for them to reimburse me the cost. I should know their decision by tomorrow, but, for now, that $700 is on my card.
In addition to the damage on the vehicle, I had a known yearly expense that costs me nearly $600 annually. My work reimburses me half of that expense, but I won’t be able to receive the $300 from my job until late July. So, that $600 is also on the credit card.
The remaining $1000 or so though is from my undisciplined spending. This includes overspending on a vacation and spending way too much on food and drinks. So, as Dave Ramsey calls it, it’s a bunch of stupid debt. I was being stupid and I admit it.
It’s VERY hard to remain disciplined ALL the time. Once I started using the credit card, it felt good, and so I just kept using it. Thankfully, at most, I can only use $3000. Even though I have other credit cards, I almost forget that I do, because I don’t touch those. For what it’s worth, the interest rate on the credit card that I have been using is 6.24%. But, my goal is to payoff the card as soon as possible and get back on track to being debt free.
Credit Score Restoration Plan
Well, since my credit score declined by using my credit card, I figure paying off the credit card balance should fix the problem. I want to pay the balance off as soon as possible, but without tampering with my current savings and investment plan. That point cannot be stressed enough and it’s the backbone of how I handle my finances. Let me explain.
Right now, I am maxing out my Roth 401k at work and my Roth IRA. For the Roth IRA, I contribute about $459 per month. I am also contributing $790 per month to fund my dividend portfolio. Conventional wisdom suggests that I should, for example, use that $790, and also perhaps my $459, to pay down on my credit card debt. Then, once the credit card is paid off, restart investing. In fact, that is what Dave Ramsey teaches in his baby steps. Well, they say personal finance is personal, and that’s true for me too. I don’t care if it’s conventional wisdom, but that approach doesn’t work for me.
It’s very important that I maintain my current levels of savings and investing. Doing so helps me affirm and strengthen what I believe to be is a very good habit. I don’t want to break a good habit. Moreover, I consider those contributions as mandatory expenses. They are just as important as my mortgage and other expenses. In doing so, I am following David Bach’s advice when he teaches that you should pay yourself first.
By the way, this also applies to my student loan balance. The $2000 a month that I intend on making towards my student loan, starting in August, still applies. I’m not planning on paying less per month towards my student loan. For more information, visit my post on I’m Getting A Divorce.
So, any money used to pay down my credit card balance will have to come from funds above and beyond my current levels of saving and investing (and paying down other debt). I note for the record, however, that if my current standard of living can no longer afford to keep up with my current levels of saving and investing, then I will first look to reduce the contribution to my dividend portfolio before I reduce the contribution to my retirement accounts.
My primary plan is to pay off the credit card with the 20k bonus I will receive from work. Truthfully, I think I was more willing to use the credit card because I knew that this windfall would eventually be used to bring it back down to zero. While I don’t know when exactly I will be receiving the bonus, the current status is that it’s at the highest levels at my job. So, I fully expect to have the cash in hand in July.
If for some reason there is a delay in getting those funds, then I hope to make significant reductions in the credit card balance from the various reimbursements discussed above. Also, because of my current transition that is taking place at my job, there’s a decent chance that my overall living expenses will be significantly reduced and my overall income may be slightly increased. The combination of both will allow me to devote extra payments towards my credit card balance. But, I’ll know for sure what my income and expenses are in August.
It’s been said that when you find yourself in a hole, stop digging. The same applies for getting out of debt. The first step in getting out of debt is to stop getting more debt. It’s a lesson that I should take to heart. The increased utilization of my credit card resulted in the dramatic decline of my credit scores. My credit rating went from excellent to good with TransUnion, sitting at 737. My credit score with Equifax is sitting at 756. While Equifax is still rated as excellent, 750 is the cutoff and 756 is a little too close for comfort to that line.
I’m not going to suggest that you should never use a credit card. Under the right circumstances, credit cards can be a useful tool. Just be careful how you use credit cards. Remember, at the end of the day, you’re still going to be responsible for paying all that borrowed money back. Also, the increased use of your credit cards have the potential to reduce your credit score.
Let me know what you think. Do you have a credit card? How do you decide when you use your credit card?