Podcast: How to Rebuild Your Credit and Improve Your Credit Score with Chelsea Fagan

Jeremy Quittner: Welcome to Teach Me How to Money. I’m your host, Jeremy. On this week’s episode, we’ll be talking with personal finance blogger and author Chelsea Fagan, but before we get going, our term of the week is credit score. A credit score is a point-based rating system developed by a company called Fair Isaac Co., it’s sometimes referred to as a FICO score. Your credit score will look at your credit data, which is regularly compiled by something called a credit bureau. These are the companies: Experian, Transunion, and Equifax, and a credit score can range from 300 to 850, the better you manage your credit, the higher your score is. Perfect credit is considered 850. Your score is determined by how responsible you are with credit. The most important factors: whether you are making payments on your debt on time, if you’re late or have stopped paying a loan, that’s going to have a negative impact on your score. But another factor is something called credit utilization, that’s essentially the percentage of the entire amount of credit that you have available at any time. So say you have a credit line worth $10,000, if you’re close to maxing out that line, that’s likely to have a negative impact on your credit. Lastly, your credit score is determined by the kinds of loans you have. The more variety, the better your score is likely to be. So if you have a mortgage, car loan or a credit card and you pay all of those on time, chances are your credit score will be higher than if you only have a credit card account. Remember, the most important things are to pay your bills on time and not to max out your total credit. So that’s our Jargon Hack for the week, now let’s get to the interview.

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Jeremy: Today we’ll be speaking with Chelsea Fagan, the founder of The Financial Diet website, as well as a YouTube channel of the same name. She’s also the author of the book, “The Financial Diet.” Chelsea offers young consumers money advice on everything from budgeting to negotiating your day to day purchases, not to mention breaking taboos around money. Today we’re going to talk about rebuilding your credit and ways to improve your credit score. Welcome Chelsea!

Chelsea Fagan: Hello. Thank you for having me.

Jeremy: Oh, it’s our pleasure. So I was reading this week that US consumer debt is at a record level, well over $1.3 trillion and credit card debt is about $800 billion of that. So what’s going on with that? Are we just such a debtor nation that we depend so heavily on credit cards? You know, we just kinda run up these enormous bills and like what’s going on? Why are we so dependent on debt, do you suppose?

Chelsea: Well, I would say the systemic reason for that is that most Americans, especially most young Americans are underemployed and underpaid, generally speaking. Most emergency or unexpected expenses are out of the range of most people’s cash at hand. So turning to credit cards, to solve simple problems that could otherwise be solved by cash, I think is a big reason. Certainly not why I got into credit card debt myself. I was an example that someone might love to point to as just being completely stupid and frivolous, but I don’t think that’s the reason that most people initially get credit card debt.

Jeremy: Tell us your story. I did want to get to that to that. So how did you get yourself into a lot of credit card debt?

Chelsea: Not a lot to tell here, I was in high school, this was like just pre-crash.

Jeremy: Pre-crash being the financial crisis?

Chelsea: Correct. And so this was still the era where, retail banks were allowed to set up booths in high schools to give people credit cards, which looking back is just unbelievable. But anyway.

Jeremy: Did your parents know that you were like applying for a credit card?

Chelsea: Absolutely not. You didn’t even need a co-signer, so I got my credit card. It was a Hello Kitty Visa credit card with $500. I think I got like Ugg boots and food and a couple of other things. And then I just threw it away. And of course, it went to collections and all this other stuff.

Jeremy: So you just threw the card away thinking, what?

Chelsea: Oh, I knew that I owed money, I just didn’t care. And so, and I threw it away and I, you know, I got myself into some other trouble with things here and there, but that was kind of what kicked off my terrible credit. And so not a big story there, but again, at the defense of most Americans, I don’t think that’s a very common reason people go into credit card debt.

Jeremy: Right, so underemployment, no employment or jobs that are…

Chelsea: Not having enough money, not being able to save an emergency fund and therefore like any unexpected setback can easily put you kind of on the path to the cycle of debt. And I think also for a lot of people, there’s an increasing relationship, I think with most Americans in debt where it’s so normalized to be in such extreme amounts of debt.

Jeremy: Tell me a little bit more about that. What do you mean by normalize that? “Oh, I have $8,000 dollars in credit card debt.” “Oh no big deal, I have $10,000.”

Chelsea: Well, I mean the average millennial is like $38,000 in student debt. So right off the bat, the idea of starting life with tens of thousands of dollars of debt is extremely common. It’s no longer unusual. It’s no longer something that, I think it’s something that many people consider a normal way to go through life. And it’s also socially normalized. So being a couple of thousand dollars in credit card debt comparatively probably doesn’t feel that bad. Similarly, you know, a lot of people, own homes, they have cars that they’re leasing, or that they are paying on payments that, there are many things in their lives that they don’t own outright that they owe money for. So the concept of being in debt is just sort of the only way to live in a normal quote unquote adult life.

Jeremy: What was your realization then? How much debt did you actually have by the time you had this realization? What was your realization that this was not okay, that you wanted to change things?

Chelsea: So, I was in debt to the credit card initially, like $500, obviously. And then by the time it was like all the interest in collections and fees and everything, I think it was like $1,300. But I also owed a lot of money to the state of Maryland and Washington DC, which is actually… I got arrested because I was driving on a suspended license was suspended tags, both of which were suspended because I had a ton of unpaid moving violations and parking tickets, which also negatively impacted my score. Because those were also in collections.

Jeremy: How old were you at the time?

Chelsea: When I got, I think I was 21 or 20, so pretty early. And then all of that debt combined I think was maybe around $5,000, something like that. And I was 22 or 23 and I got my book advance for my first book, which was like $22,000. And you don’t get it all at once, but you get it in like two checks. And that was obviously the most money I’d ever seen in my life. And so I was like, “oh, I can, you know, pay this debt off.” So I got on a payment plan and just paid it off because I was like, if I don’t do it now, I’ll never do it.

Jeremy: So it was really the advance that gave you this money to get you out of the hole?

Chelsea: Totally. Totally. And I lived out of the country for four years, so I actually wasn’t even in the country where my credit score necessarily had a huge impact on my life. I, in part, moved out of the country because I was like, “well I’m screwed here. So let’s start over.” Like I was like a murderer haha.

Jeremy: Where did you move to?

Chelsea: I lived in France for four years. And actually I initially went, cause I could go to school for free there because I could do my classes in French.

Jeremy: Was that a motivation that you wouldn’t have to take on student loan debt in order to go to school?

Chelsea: Yeah, I went to a community college and then I got into a bunch of schools that I was initially going to transfer to, but they were very expensive. And if you go to a French university that just their regular classes, it’s like $2,000 a year if you’re not a citizen. So it’s pretty obvious.

Jeremy: I want to talk a little bit more about your transformation in terms of thinking about finances because I think this is incredibly important. You’re accumulating debt, you had this arrest and then you had the advance, but something clicked along the way. Can you tell us a little bit about what that was and it sounds like going to school abroad was part of this, like you decided not to take on more debt?

Chelsea: For sure. Well, I mean, I want to say that that was totally just like a smart decision, but it was more that my parents refused to co-sign on any of the student loans that were available to me because they knew I was completely unreliable. Which looking back, they spared me, I think.

Jeremy: So this was out of necessity that you want to get an education.

Chelsea: Partially, yeah. And then the one school that I would’ve been able to go to, it still would have been a decent amount of debt. So I was like, you know what? Screw it. I don’t really even know what I’m going to do after college, so I’m just going to go with the cheapest option, which was going to France. A lot of people, I think when they try to kind of turn around their debt, credit, whatever situation, a lot of times it’s because they realize like how shitty life is when you have really terrible credit scores or you know, massive debt. That wasn’t necessarily my case. It was more that I realized that, I grew up quite poor. So having that money in my hands for the first time was the first time I ever felt like I had options as far as what I could do with money. And I really loved that feeling. And I thought, well, the only way I’m going to continue that feeling and that snowball effect is to get rid of this like debt that’s haunting me. Because by the time I left the country like I literally didn’t even ever answer my phone because it was always collections, always debtors.

Jeremy: It sounds really upsetting,

Chelsea: And it was, not a way to live. Yeah, no, for sure. For sure.

Jeremy: Was that stressful?

Chelsea: Absolutely, and it was also just humiliating. By the time I was in college my family definitely was more middle class. My family has, you know, really kind of built their own financial life over the past couple of decades. So, it was not that constricting feel of being poor where you know, the car breaks down and you’re like, “are we going to lose our home” kind of situation. So it wasn’t quite that level of stress, which obviously is much worse, but it was a level of day to day anxiety and embarrassment of, I’m not even able to be a full adult because I can’t even answer my phone because I know it’s going to be a debtor. So I would say it was more embarrassment than anything else.

Jeremy: Right, so it was a series of different things that led you to have this kind of turnaround in your life in terms of becoming smarter about money. And I’m wondering what were your first steps? Beyond paying off the debt. Did you read the Wall Street Journal or the New York Times or…what were some of the things that you, how did you educate yourself?

Chelsea: How did I educate myself?

Jeremy: About money.

Chelsea: I really didn’t for the next, so I paid off my debt and then I was like, I guess if I just don’t mess up more, then I’m okay. And then at 25, which is when I started “The Financial Diet.” I, at that point, had a salaried job for the first time.

Jeremy: Doing what?

Chelsea: I worked at another media company. I was in the most stable place I’d ever been in at that point in my life. I had the means to save. And I realized at that time, “Oh, you’re not actively terrible with money, but you really don’t know anything about money” and that sort of like spawned, you know. So there was like a three year period where I was just like, “Okay, you’re coasting, like you’re not actively ruining your life.” But it took a while to then move to the stage of like being proactive and understanding money,

Jeremy: So said I have, $10,000 in debt, what are some strategies? It just seems like I can never get ahead of it because either the interest rate on the credit card is so high or I’m not making enough to pay off big chunks of it at a single time. What are some strategies that you can offer or some tactics or tips that you could offer to people to just really take control of that?

Chelsea: So, it really depends on the situation and there are a lot of specifics which would change the situation because there’s obviously a range of solutions, right? Ranging from like literal bankruptcy all the way to just spending better. For a lot of people, it’s very, very difficult psychologically to get out of that nihilism of being like “I’m already in this much debt.” And then you add to it like you know, $100,000 of student debt that you can’t wash away in bankruptcy. Like it can get to a place where you feel hopeless. So I would do whatever is in your power first to consult with a professional or at least someone who’s intelligent about money and debt that you trust because again, depending on the various factors of your situation, there’s a whole range of options. Obviously refinancing is another option. Debt consolidation is another option. There are a lot of different ways to go about it, but I think the biggest first step for us is, what we recommend is like you have got to be completely honest about it, unashamed about it.

Jeremy: There’s a lot of shame around it, right?

Chelsea: Post on Instagram about it, be completely honest, release that demon because I feel like the vast majority of what keeps people paralyzed in these situations, no matter what their next step should be, is that they feel like they can’t talk about it, they’re ashamed about it, and then they just let the debt accumulate, which is exactly what I did. And honestly, if at that time I had forced myself to be like, “I’m, you know, however, many thousand dollars in debt.” And I couldn’t hide it any more than I would never feel bad about saying no to something new that I couldn’t do or asking for help from people who maybe could have given it to me or advice. So definitely you have to just start by being radically, radically honest about it.

Jeremy: Yeah. So talking about it, you said to consult a professional. Can you offer some tips about what kinds of professionals you’re talking about? Like a financial advisor? Go to your bank and say, help me? Or I don’t know. What do you do?

Chelsea: It really depends, right? Because some are going to be expensive and not necessarily affordable to the average person. Depending on the amount of money that you have, there are, I would start by just Googling your situation, the particulars of your situation. Asking your bank is not a bad idea. Sometimes retail banks do offer this kind of help.

Jeremy: Like credit counseling?

Chelsea: And debt counseling and all of these, because a lot of times the bank itself will offer solutions like honestly calling your credit card company sometimes and just speaking to a human being can be a good first step and they’ll offer plans sometimes. Like that’s what I did. I was like, I called Visa and I was like, “Help!” And they were like, “okay, this is what you have to do.” And they put me on a payment plan that was affordable for myself. I mean obviously if it’s available to you to speak to like a true financial advisor, that’s not going to be a bad idea. But generally speaking, if you’re drowning in debt and unable to work with it, you probably aren’t also going to like a CFP (certified financial planner) so there’s, I mean there’s a lot out there. There are also frankly a lot of snake oil salesman. So I always recommend that people Google all the different titles of the different financial advisors to make sure that they’re certified to make sure that they have to act in your best interest, to make sure that they’re not just skimming your money off the top unnecessarily. There are a lot of third parties that will get in the way of you, helping with some of these problems. And this is a complicated issue because some of them are good in the sense that like they will just lead you through the process and help you and you know, whether it’s like disputing things on your credit report or negotiating with creditors and banks for you. If you are someone who is extremely avoidant, these third parties can be a good option for you. But if you’re someone who is not extremely avoidant and is willing to deal with these, often just calling the debt holders themselves can be a great first step.

Jeremy: What do you say? Like “Hi, I’ve got…”

Chelsea: I was crying, I was literally crying.

Jeremy: How did they respond to you when you cried?

Chelsea: She was like, sweetie, don’t cry. And she very sweet.

Jeremy: Did that help?

Chelsea: For sure! So initially, like with my initial debt, it had gone to that point to collections and so they were like, you know, obviously we can’t deal with this in-house we can put you in touch with people who will. And so like I started by calling Visa ended up like, you know, going down the rabbit hole and eventually ending up with the service who was handling the debt. And a lot of these companies are extremely scummy, but I mean like, look at how they make their living. They are so desperate to get someone on the phone who will be a live body and pay a debt. What a lot of people don’t know is that a lot of debtors and collections, people are basically paid on a kind of commission where they are incentivized to just get someone to pay a dollar.

Jeremy: Like a bounty hunter in a movie or something.

Chelsea: Basically, it’s like a bounty hunter and so once you get on the phone with these people and you put a card number down and you’re like, “I’m ready to be on a payment plan.” They come in with fireworks and champagne and they’re like, “oh yeah, let’s get you paying.” So it’s often, I think, just making the call as the most difficult part. And again, each situation is going to be very different, right? If you are facing bankruptcy, and you may be even need to talk to an attorney, you’re in a situation where you’re maybe going to potentially lose your home. These are all very different issues that will have very different solutions and necessitate, like you may end up needing to talk to a lawyer, there are all kinds of ways to go. But the first place to start I think is Googling the particulars of your situation. You can read about what other people have done, you can talk to other people who’ve been through it, and then you can start one by one talking to these sources of debt and seeing, what can be figured out because they’d want to work with you.

Jeremy: And this can all help you rebuild your credit if you’ve destroyed it basically like if you start being responsible around it and start talking to your lenders, coming up with a payment plan over time that can help you rebuild your credit.

Chelsea: For sure, obviously there is the question of bankruptcy, you know.

Jeremy: You mean whether you should file for it or not?

Chelsea: Right. Because obviously that will have a huge impact on your credit.

Jeremy: Bad or good? A bad impact or a good impact on it.

Chelsea: Bad. You know what, I should be more specific in my terms generally bad, but for someone who is completely drowning and has no future ahead of them, where it’s realistic to make some of these payments, ultimately it could be a good thing in the long term. So it’s not universal, right? That doing something will positively impact your credit score in the short term. But doing nothing about it is always the worst option on the short and the long-term, especially for mental health. Because as we were saying, once you get to a point of hopelessness, there’s kind of nowhere to go, but down, if you keep on that road. No one’s going going to magically come around and pay your debt for you. So you have to at some point face up.

Jeremy: So you also talked about you negotiate your day to day expenses and just sort of like go to the mat over that. And I’m wondering, that’s important in terms of, sort of factoring into keeping a budget or reducing your expenses or you know, this can factor into our conversation about debt. What are some of the things that you’ll just absolutely go and negotiate over?

Chelsea: Negotiate in what way?

Jeremy: To lower prices.

Chelsea: Oh, most things. So there’s different genres of that, right? I’m very big on building up loyalty because once you build up loyalty and have a person that you can speak to in these stores or service providers, you’re much more likely to get good deals and good rates and all that stuff. Like I was saying, I’m desperate to get my Medallion Status, but I also will frequently like message Delta myself to be like, “can we work this out somehow and you know, get, you know, freebies or whatever.” So that’s a big one. Anytime a good is damaged in some way, I’m like, “you better give me a good price on this,” at checkout, that kind of thing. I’m not shy about anything like that. And sometimes I’ll honestly seek out a product that’s slightly damaged, because I’m like, “I can fix this” and then it’s, you know, severely reduced in price.

So I’m definitely big on trying to find discounts where you can. And in terms of negotiation, Oh, the biggest one that a lot of people don’t know. So I live in New York obviously, and most people rent here, or a lot of people rent. And I am sure that my landlord hates me on some level because I’m very much like on his case, but he likes me enough to keep me. And honestly, if you are a good tenant who takes good care of your place, pays your rent on time, doesn’t make a fuss, your landlord almost certainly wants to keep you because changing you out is more expensive. Which gives you leverage to do things. Like, for example, they just renovated the garden apartment that’s two floors below us. And I saw that they put in all new appliances that are much nicer than the appliances that we have. So I emailed my landlord and I was like, “can we get these appliances?” And he’s like, “I’m not sure” like hemming and hauling. And I was like, “okay, well if I buy these appliances and have them delivered, can I take that out of my rent?” And this is what we’re going to do.

Jeremy: Oh amazing! So he agreed to that?

Chelsea: Yeah, because it doesn’t cost him anything. He’s like, “fine, whatever, screw it.” And summer, especially where I live is very transient for them. So they’re desperate to keep people in the units if they’re good tenants. So things like that, I’m like very aggressive about negotiating down. What I always find, I have called my bank on multiple occasions because I didn’t realize an account was still open and I was getting charged an account fee, which like dinged my credit score and things like that. And I will stay on the phone with someone for four hours to get something, off my score or get something reimbursed. And I think a lot of people don’t realize that, whether it’s like a consumer good or where you live or anything like that. Being polite but persistent and knowing what you’re entitled to and knowing your value can get you so far in life and get you so many little perks and reimbursements and all those things that you’re looking for.

Jeremy: I’m wondering if you can help us with a listener question. This person wrote in to ask, “how credit card debt affect your credit score. Is it better to close an account after your debt is paid off or should you keep it open?”

Chelsea: So I’m going to qualify this and retroactively qualify this entire show with the fact that I am in no way a financial expert. Although word to the wise, a lot of people in financial media are also not financial experts, but they don’t necessarily, they obfuscate that a little. That being said, carrying debt, it depends. Are you missing payments? Or making your payments late? Obviously if you are messing up your payment schedule, that’s not good for your credit score. That’s going to have a negative impact. Closing a card, generally, will have a negative impact in the short term both because it lowers your overall available amount of credit and, depending on how old the credit card is, it might reduce your window of how long you’ve had credit. Also, you have fewer cards open, although that will typically bounce back faster than other kinds of dings let’s say. But, I would interrogate your reason for closing it because if you’re simply closing it because you’re like, I’ve paid off my debt, we’re done. That’s kind of misunderstanding the concept of a credit card.

Jeremy: Right, excellent. Chelsea, thank you so much for coming on Teach Me How To Money. This has been so much fun talking with you!

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