Last week, I tackled two of the credit-related questions posted on Mint’s Facebook page, here. I enjoy writing Q&A pieces so much that I’m doing it again!
In fact, it’s going to take me several weeks to answer all of them.
Enjoy installment number two:
Question #3: “I have no idea where’s a good place to start as far as establishing credit. I am 23 and feel like I’m already behind.”
Establishing credit for the first time can be intimidating. Everyday you hear stories about consumes losing their homes, filing bankruptcy and otherwise being in seemingly inescapable debt. Sounds like a barrel of laughs, doesn’t it?
Seriously though, it’s smart to tip toe into the world of credit if for no other reason than it’s nice to have access to inexpensive capital especially if (and when) you want to buy a home or a car.
There are several ways to establish credit the first time. They are:
Authorized User Strategy
Despite rumors to the contrary, being added to an existing card belonging to a parent or spouse as an “authorized user” is still an effective and safe way of establishing credit.
Think of it as having a credit card with training wheels. You’ve got a card in your name and you have full charging privileges but you do not have any liability to make the payments.
When you become an authorized user, the credit card account is reported to your credit reports. That means if it’s an old card that has been paid on time and has a low balance relative to the credit limit, it can be extremely helpful.
And, if the primary cardholder misses payments or gets in trouble with the card, you can always have your name removed from the account and get it off of your credit reports.
Secured Credit Card
If the authorized user strategy doesn’t work for you, then you can always get a secured credit card. A secured card is when you make a deposit with a bank and the bank issues you a credit card with an equal amount as the credit limit.
You’ll want to choose one that reports to all three of the credit reporting agencies in order to get the credit building benefits.
Credit Builder Loans
Check out a local credit union and ask them if they offer credit builder loans. A credit builder loan is a small loan extended for the purposes of building credit.
The lender places the amount of the loan in an interest bearing account and you make payments for a year or two to exhaust the debt. During that time, they’re reporting your on-time payments to the credit bureaus.
Some lenders will allow you to have access to the money during the payoff period, while some will not.
Question #4: “Does a paid collection raise your score vs. an unpaid collection, or does a paid have no effect?”
I think what the Minter is asking is whether or not paying a collection will improve your credit scores. I have good news and I have a heavy dose of bad news for this one.
First the good news…paying off or settling a collection is the smart and right thing to do.
When you have an outstanding debt in collection there’s always a chance the collector will sue you. By satisfying the debt, you eliminate the chance you’ll get dragged into court or have your wages garnished.
Now the bad news…
Paying a collection is very unlikely to have any positive impact on your credit scores. Paying the collection does not do anything other than update the balance to show $0. And, the incident is what’s having the impact on your scores…not the balance.
Don’t take this as a suggestion to not pay your collections. I’ll be the first one to tell you to work with the collection agency to craft a fair settlement or payment.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.