Case Study: Held Back by Past Financial Mistakes, Fighting Bad Credit and $90K in Debt

Hi, it’s me again—your Good With Money Friend! It’s time for another case study. This time we’re talking about how to recover from past financial mistakes.

You guys really enjoyed our first case study. It tackled problems related to student loan debt, employment instability, and paying through the nose for rent in a high cost of living area. I’ve been hoping to do another one, but all of my friends’ most recent money issues have been too specific to their situations to be helpful to a broader audience.

Until now!

A friend reached out, asking for help repairing her damaged credit score. So she scheduled a 30 minute call with me to discuss her options, because I’m literally that bitch.

Obviously it turned into a ninety-minute call, mostly because I love the sound of my own voice. (Vocal fry ’til I die!) But really because the more we talked, the clearer it became that her credit score wasn’t her main enemy on the battlefield for financial stability. It was like a machine gun a mile away: an easy threat to identify, making a huge racket and scaring the shit out of everyone, but not actually that threatening in her present circumstances.

If you’ve struggled with debt, or you want to hone your Good With Money Friend skills, read on. Hopefully hearing about her situation will help some other folks!

Meet Melissa

Melissa is a married woman in her late twenties. She has shared custody of two grade school-aged children.

Her first career was as a mental health crisis counselor. That is an incredible, noble career that demands a lot from those who are called to it, and greatly benefits our society. So of course the pay is also pure shit! Even though it also requires an expensive degree! Urge… to rant… rising—!

I inhale, holding my rage inside my lungs; I exhale, letting it pass through me. It is not within my power to rewrite the rules of our society, but it is within my power to help people navigate them. That is where I must consciously devote my energies today.

Due to a combination of stress and money (bosom companions, those two), Melissa decided to change careers. She now works a more lucrative job in a white collar field. But during the years where she was a crisis counselor, she used credit cards to fill the holes in her woefully inadequate paychecks. The debt got bigger and bigger, crippling her budget with repayments, exactly as credit cards are predatorily designed to do.

These past financial mistakes piled up on each other. Eventually her best option was to get as much discharged as she could, and consolidate the rest. But that left her with a damaged credit score, limiting her long-term options.

How debt consolidation works

We haven’t talked much about either debt consolidation or debt discharge, so if there’s interest, we can go in-depth with a future article. (Leave a comment if those subjects interest you!) But here’s a quick summary.

Debt consolidation is a way of combining multiple debts into one. I’ve heard people mention debt consolidation like it’s a silver bullet. I’ve also heard jerkass titans of my industry describe it as a universally terrible choice only idiots would make. Neither is true!

Whether it’s a good or bad thing to do depends entirely on your situation and the terms of the consolidation. Generally, people often use debt consolidation to bring down their monthly payments in exchange for extending the repayment timeframe. So depending on your situation, that might be a great solution or a terrible misstep.

Let’s say I owe money on five different credit cards. Each one is on track to be paid off in one year by making monthly payments of $100. That means I’m paying $500 a month in bills for the next year.

A debt consolidator might pay off my five credit cards instantly, then say “Okay, pay me $300 a month instead, but do it for two years.” In the long run, I’d give them more money, right? That’s $7,200 versus $6,000. So it’s a bad deal if I can easily afford my regular $500 monthly payments. But if you’re in a situation where $200 back in your monthly budget would be life-saving, it may be worth it to pay more in the long run for greater comfort along the way.

Debt consolidation can also mean that you’re rolling all your payments up into one… for a lower interest rate. In this case, it could actually end up saving you money over the long term. But low-interest debt consolidation loans are only available to those with sparkling credit scores.

How debt discharge works

If you owe money to a creditor, your creditor may be willing to discharge all or part of that debt. Discharge means the debt’s canceled, forgiven. Sounds awesome, right? But of course it’s not that simple.

Creditors are allowed to charge interest on debts because loaning people money is inherently risky. They might lend out money to 100 people, and 99 pay it back, but that one guy just can’t. Maybe he lost his job, or passed away, or moved to the secret socialist utopia we’re building on the moon. Sometimes the creditor just has to take the loss. They’re good though, the profits from the many far outweigh the losses from the few.

You can get debts discharged. But creditors really don’t like doing it, because it means they’re agreeing to lose money on you. Usually, they’ll only accept it if you can prove you’re more likely to declare bankruptcy or give them absolutely nothing. They would rather get something.

And forgiveness comes with a price. Your creditors get to leave a huffy one-star Yelp review on your credit report. It’ll stay there for seven years, telling every potential creditor about your past financial mistakes. During that time, you’ll have a much harder time borrowing any more money. And if anyone will loan it to you, it’ll probably be at a very nasty interest rate.

Which makes reaching some long-term goals a lot harder. Thanks, System, for making it unnecessarily hard for people to fix past financial mistakes!

About her financial goals

Melissa has incredibly modest goals. Her main one is just to make these past financial mistakes go the fuck away!

She wants to learn to be more thoughtful about money. She feels burned by those mistakes, and doesn’t want to be taken advantage of again. All she really wants is to get to the point of debt-free financial independence. That way, her choices can come from her authentic desires rather than compromises driven by desperation and necessity. That’s some hashtag relatable content for us!

Her debts are her main source of pressure. Although she has worked in a very underpaying field in the past, she transitioned to a new career that pays much better. She’s in line for a promotion and pay bump, but she’s not sure how much more to expect. (Don’t worry, we discussed strategies to negotiate for more!)

She and her partner live in a typical home, and she’d love to downsize to a smaller home, perhaps even a tiny house! But since the kids are still fairly young, she knows that’s not realistic right away. And as long as this debt deferment is hurting her credit, she knows buying a new home—even a smaller one—may come with a higher price tag.

She also knows the rate on her car loan is pretty high, so she’s interested in fixing her credit to potentially refinance that as well.

Digging into her numbers

Her current debts are a mortgage, a car loan, two private student loans, one federal student loan, and the consolidated credit card debt repayments. I won’t describe her other incomes and expenses, as I don’t think they’re really relevant. I don’t doubt she’s pushed herself to live as frugally as she can. This is just about min/maxing our way to a net worth of zero.

• Credit score is around 680 right now. (Hey, not bad, all things considered!)
• Credit report will reflect the discharged debts until 2026.
• Debts are about $920 per month.
  • Debt consolidation repayment is about $380 per month, due to be fully repaid in 18 months.
  • Private Student Loan A is $7,500 with a 5.6% fixed interest rate. Its minimum payment is $130/month.
  • Private Student Loan B is $5,200 with a 2.75% variable interest rate. Its minimum payment is also $130/month.
  • Federal Student Loan is $35,000 with a 2.75% fixed interest rate. Its minimum payment is also $280/month. This loan is in automatic forbearance with no accrued interest due to the coronavirus pandemic.
  • Car loan is 10% and has 43 remaining payments of $500/month.
• Expects a raise in the next six months, but doesn’t know the amount.
• Expects a tax refund of about $8,000 in the next month, woohoo!
• Wants to refinance her car loan down to a better rate, but needs better credit to do it.

Extra considerations

I decided to factor two uncertainties into Melissa’s future. One is that federal student loans will get another forbearance extension. The other is that $10,000 of federal student loans will be forgiven.

I’m not a superstitious person overall, but I am rather pessimistic when it comes to planning. I hope for the best, but prepare for the worst. So I’m really, really hesitant to assume these two things in my calculations. But ultimately, I do feel that both seem like pretty likely outcomes, especially considering the timeframe for it is anytime between now and 2026.

If I jinxed it for everyone, please return in the future to roast me over an open flame in the comments. (FWIW, Piggy completely disagrees with me about the likelihood of any amount of student loan forgiveness. In her words, “I’ve heard that campaign promise before. I’ll believe it when I see it.” Which does seem pretty fair!)

As usual, I kept my math pretty simple and imprecise. Calculating out things like interest accrual takes way too much time. This is napkin math. I have video games to play, goddamnit!

My recommendations

Refinance the auto loan… or not?

Melissa was focused on bringing up her credit score to bring down her auto payment. And I get it, because her auto payment is her biggest bill besides her mortgage.

However, I think it’s not the best use of time to chase a refinance on her auto loan. Although 10% is a pretty sucky rate, the loan has a relatively short term overall. A debt repayment’s length can matter more than just the interest rate. A long loan with a small interest rate can become more expensive than a short loan with a high interest rate. 

Moreover, lenders tend to lump people together in batches when analyzing their credit scores. To realistically qualify for a better rate, she’d probably have to move up by at least 20 points to join the 700 club (not the one with Pat Robertson). And asking creditors to reevaluate her will only weaken it, by creating new hard credit pulls.

It costs extra money to refinance debt. With only three and a half years left on that loan, I think it’s not a good use of her time and energy (and dollarz) to chase a refinance.

Additionally, even if she could greatly improve her score, and get her rate cut in half (spot-on the national average for an auto loan), it would only lower her monthly payments by about $65/month. Frankly, $65 does not impress me! It ain’t nothing. But if you’re going to tire yourself out squeezing a lemon, I want to make it a much juicier one.

Fix the damaged credit score… or not?

If the auto loan refinance is off the table, credit score improvements become much less of a focus. And I think that’s for the best.

No matter what, Melissa’s credit score will get a big boost in 2026. So I think the easiest thing to do here is… nothing?

My advice here is to sit back, relax, and let the score correct itself with time.

There are little tricks you can do to get a quick boost. (Read about them here.) But again, I think it’s not worth the time! After all, what does she need a good credit score for? She has a home and a car, and no short-term plans to need any other big loans approved.

A high credit score is only useful insomuch as you need it to qualify for favorable loans. Don’t need a loan any time soon? Then it’s safe to let your score rise naturally, over time, with good debt repayment habits.

Reminder: we hate credit scores. They’re classist, racist, ageist, and of questionable actual value. Alas, our hatred of broken systems continues to do diddly squat to dismantle them.

Fully undo these past financial mistakes

When Melissa spoke about her debts, it was clear that they were a millstone around her neck. “A few years ago, I couldn’t have said any of these things aloud,” she said, as she rattled off how much she owed. They were something that made her sound disappointed in herself.

Past financial mistakes can be such a source of shame and self-recrimination. Lots of people struggle, but it’s a taboo subject among many of them. So they suffer in isolation, which makes it even worse.

Debt can teach a person to hate themselves. Dealing with past financial mistakes feels like your past self let you down. And that’s a terrible way to feel about her. Your past self should be a source of pride! She lived through a lot of difficult experiences that made it possible for YOU to be YOU today. Don’t think less of her for needing to learn skills she was never taught.

Reading between the lines, I think Melissa wants financial stability for its own sake. But she also wants to forgive herself, lay down the burden of regret, and move forward emotionally. Sounds great, right? Here’s one pathway I see to get her there.

How does she get there?

In situations like these, I really like to build a timeline of what debt repayment could look like. It helps me see the light at the end of the tunnel of debt.

Tunnel of Debt: A legendary theme park ride at the now-closed Bitch Nation theme park. Decommissioned by cowards at the insurance agency just because it <checks notes> made everyone puke their guts out from stress, break up with their significant others, dissociate, and lightly want to die.

Step one (Now)

Also known as March of 2021, to all you creepers reading in the future. I hope the robot overlords are treating us well.

While federal student loans are in forbearance, put the extra $280 from your usual Federal Loan payment into Student Loan A instead. As we discussed before, there’s no great reason to continue repayments when you have such unusually generous forbearance terms. Stick to minimums on everything else.

This will help you make faster progress on your most-hated loan. With the extra money, you could be done in 18 months (instead of 57). You’ll then have $130 more every month.

Step two (April of 2021)

Keep your $8,000 tax return as an emergency fund. Store it in a high-yield savings account.

Emergency funds are so freaking important, y’all. They keep you safe from reentering the cycle of debt. This would be a pretty large one, but I don’t think that’s absurd when you consider two kids in the picture. Kids are great at causing unforeseen financial emergencies!

More on said financial emergencies and emergency funds:

• You Must Be This Big to Be an Emergency Fund 
• On Emergency Fund Remorse… and Bacon 
• I Think I Need to Go the Emergency Room? 
• Financial Lessons Learned from a Night in the ER 
• 3 Times I Was Damn Grateful for My Emergency Fund (and Side Income) 

Step three (August of 2022)

Your debt consolidation repayment finishes on schedule, and Private Loan A finishes ahead of schedule. At some point you’ve had to resume payments on your federal loans, so that $280 can’t be spent in other ways anymore. Hopefully they make up for it with a modest loan forgiveness plan at some point. So you have $380 + $130 back in your budget, a permanent raise of $510.

In addition to the usual minimum payment of $130, you now start putting the $510 each month towards Private Loan B. It will only take 8 months of these $640 payments to kill it next.

Step four (June of 2023)

Private Loan B is dead. That gives you another $130 back each month for a permanent raise of $640. You put that $640 towards the federal loan along with its $280 minimum payment.

Step five (October 2024)

Your car payment finishes on time, giving you $500 more toward a permanent raise of $920. With your federal loans down to $10,280, you up your student loan payments accordingly, giving the feds $1,420 each month going forward.

Step six (April of 2025)

Congratulations! You have no more debts besides your mortgage. You’ve given yourself a permanent raise of $1,420.

Once you get to this point, you have a lot more options. In one year, your credit discharges will stop appearing on your credit score, likely giving you a huge boost. So you can start to make future plans that include easy access to financing.

Other ways to do it

This isn’t the only possible order. It isn’t even necessarily the best one. It’s just the first one I ran the numbers on, because I think it had a nice mix of quick and slow rewards. Fixing past financial mistakes isn’t a super fun goal, so rewards are important!

For example: my hunch is that Melissa won’t be eligible for auto loan refinancing anytime soon. And although that loan has a short total repayment date (which is good), it still has the highest percentage interest rate overall (which is bad). So Melissa could adjust this plan to put the $280 from Step 1 into the car instead. It would take her 13 months to pay the car off, and $500 back is a HUGE boost to any budget.

But the most mathematically optimal route isn’t always the best. With all these debts, I would assume that things feel uncomfortably tight for Melissa right now. That’s why I chose this order. Eliminating one of the smaller debts only gives her a little more breathing room, but it does so quickly.

And remember her damaged credit score? It’ll only improve as she makes debt payments on time and in full.

Can she get there faster?

Yes, definitely! There are a ton of factors that could jump this timeline forward.

Although she’s expecting a raise soon, I didn’t factor one in. Even if it’s only a few more dollars every month, a few dollars can make a big impact on a debt’s principal.

She could also prioritize the debt repayment over the emergency fund. (I talk about this strategy here.) Let’s say Melissa gets $8,000 back after filing taxes this year, as she expects. She could keep only about $2,000 for emergencies, and use the rest to fully repay her debt consolidation. That would immediately give her $380 back into her monthly budget, and shave six months off of the above timeframe.

Personally, I think that’s a pretty dang good way to spend a windfall! Especially if it would mentally help her feel that chapter of her life was fully closed.

Forgive yourself for past financial mistakes

In the battle against past financial mistakes, Melissa waved around two double-edged swords: debt consolidation and debt discharge. Although that’s very dangerous and could definitely put out someone’s eye, I think she did a great job! She’s well on her way to a fresh start. I wish her all the best, and hope this guide is helpful to others who find themselves in a similar situation.

I think the moral of this story is: your past financial mistakes don’t define your worth as a person. I held myself back from ranting on the subject, but I honestly believe that our system intentionally promotes and preserves ignorance. It is a source of never-ending profit for lenders. And they have grown very bold in their greed.

Nothing is unusual about Melissa’s situation. In fact, it’s downright cliche! The average American carries $90,000 in debt. She did what everyone else was doing. That doesn’t make her dumb or bad, for fuck’s sake! Recognizing those past financial mistakes for what they are—and starting the deeply uncomfortable process of correcting them—speaks highly of her intelligence and moral fiber. We do far too little to enable good decisions from an earlier age.

Biggest isn’t always baddest

Another takeaway that everyone can see from this example: your biggest bill isn’t necessarily your baddest bill.

In video games, you often meet bosses who have a few little minions with them. Trying to fight them all equally is impossible, and the little ones can suck your health bar through a milkshake if you fixate on the big boss alone. Dispatch those little annoying debts! It’s a tough strategy because it means the hardest part of the fight is the first. But after a few turns, everything gets easier and easier.

I’m, um, leaving now… to go play video games, if that wasn’t perfectly clear.

Currently catching up on Valkyria Chronicles 4. It’s a Brokeback Mountain game, because it makes me yell “I wish I knew how to quit you.” I managed to kill the two optional mini-bosses in Chapter 8 by cheesing a scout/sniper combo. But when the battle ended, how many bonus experience points did I get for my save scumming hard work and tactical genius?! None. Nothing. The game FARTED IN MY FACE and MADE ME SMELL IT. So if you know that pain, please describe your journey of healing in the comments below.

If not, I guess you can tell me about your past financial mistakes too! Do they haunt you? Or have you fully exorcised those ghosts? What’s the one thing you’d say to your past self, if you could go back in time and shake yourself by the shoulders? (Besides winning lotto numbers.)