Lizy Hoeffer

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How I Got Out of Debt and Built My Credit


Guys, nine years ago, Lizy Hoeffer was a hot mess! Sure I had a successful job, I owned a home, and I had a cute dog, but underneath the surface, I had a mountain of debt, including credit cards, student loans and a car that was underwater. I was one car issue away from a total financial crisis.

I didn’t grow up in a family that used a budget. My mom worked two jobs to make ends meet, and living on credit cards seemed to be normal. I mean, come on – why do they give you a limit if they don’t think you’re going to spend the whole thing? Sounds silly, but I am not the only person with this mindset. I am embarrassed to say that spending became a way for me to cope with stress. I bought things because I got an adrenaline rush, and in some way, it made me feel in control, like the more stuff I had the more successful I was. I hate to admit this, too, but the items I bought weren’t even things I needed or loved. The overspending definitely took its toll on my self-esteem, but more importantly, it had a terrible impact on my credit.

At the time, my spending was at an all-time high and my FICO score was around 640. Now that will still qualify you for a home loan, but it will be at the cost of higher interest rates and mortgage insurance, along with higher premiums on insurance, utility deposits, credit card interest rates, and the list goes on. It costs you more money not to have the best credit.

Luckily, my credit was easily repaired because I had been making all of my minimum payments on time. All I had to do was keep my accounts open for longer periods of time (two-plus years) and pay down the balances to no more than 30% of the limit. Sounds super easy, right? Because all dramatic life changes are! In all seriousness, it took me two years to get out of debt and raise my credit score to 700.

So by now, I am hoping you are curious about how I did it! Luckily, my future husband introduced me to a book that completely changed my life, “Richest Man in Babylon.” It taught me how to live on a budget and manage to “pay myself first” while paying down my debt. Sounds too good to be true, but the plan is so simple, and after one to two months of getting started, you will be totally hooked on how much money you save versus how much money you spend. It’s so awesome that I created a budget tool to help you stay on track (you can download it here). I am hoping that it will be helpful. If you have any questions, email me at teamhoeffer@guildmortgage.net. I promise I will walk you through it!

So here’s how to get on a path to financial health: Look at your paycheck stubs and figure out your net income. This is the figure that is deposited directly into your bank account. If you are paid every two weeks, multiply this number by 26. If you are paid twice a month, multiply this by 24. If you are paid weekly, multiply it by 52.

After you have your net figure you will need to comprise a budget of 70% of this number – yes 70%. I know this means making some sacrifices, but ramen noodles really aren’t that bad; in fact, I will share some great recipes! In all seriousness, this will be tough, but it just means fewer Starbucks and paying attention to all of the things you buy.

The next step is to make a list of all of your open collections (ignore charge-offs*), credit cards,  installment loans, balances, interest rates and monthly payments. Twenty percent of your net income will need to go toward principle balances.* You will make your minimum payments within the 70%, so this is above and beyond that.*

Now, there are a couple of rules of thumb here:  Financial advisors will tell you that the smartest thing to do is to pay your highest interest debt first. The book advises that you make even payments to all of them, and experts like Dave Ramsey say to start with the lowest bill first. My personal opinion is that if you start with the lowest bills first you will feel more successful, and feeling successful is the most powerful strategy in keeping this going. So while you may pay a little more in the long run, your chances of success are much higher. Here’s a personal tip: Put all of your credit cards in a ziplock bag, and insert it into another ziplock bag filled with water. Stick the bag in the freezer and the next time you want to buy something, it will take a couple of hours to melt. This gives you time to think about whether the purchase is worth it.

Once you pay off a debt, apply those funds toward the next card/loan – and so forth. I promise one day you will find yourself with a calculator figuring out how many months you have left until you’re debt free!

Lastly, deposit the remaining 10% into a money market savings account. This will let you collect some small interest earnings, and you usually cannot withdraw the funds as easily as you can with a checking account.

It took me two years to get out of debt, and even though I’ve had some ups and downs, overall, I’ve never found myself in that situation again. I am now using tools like Mint to help me stay on track and instead of principal reductions, I am applying  20% of my net pay toward investments like my 401K and real estate. My hope in sharing this personal journey with you is you get some proven tips to get out of debt and start living a more financially healthy life!