Money Girl answers your most pressing questions about credit reports and building a good credit score.
One of the most common topics that Money Girl readers and podcast listeners ask me about is credit. So I decided to do a roundup of the most frequently asked credit questions. I’ll cover 5 questions here and 20 more in a video over at SmartMovesToGrowRich.com.
Question #1: Will Paying Off a Balance in Collections Increase My Credit Score?
Collection agencies specialize in pursuing delinquent debts either as agents for creditors or by purchasing debt and then attempting to collect it. Never ignore a debt so long that it gets turned over to a collections agency because that will definitely cause your credit score to plummet.
Kay asks: I checked my credit score and saw that it dropped over 120 points due to a small balance that just went to collections. If I pay off the debt quickly can I have it removed so my credit score will increase?
Unfortunately, all past due accounts remain on your credit report for 7 years from the original delinquency date. However, you may be able to negotiate with a collections agency to remove an item from your credit report if you pay off your balance in full. The agency isn’t under any obligation to comply with your request, but it never hurts to ask.
Question #2: How Can a Young Person Build Credit?
Building credit is a catch-22. You can’t get approved for it until you have a decent credit score, but you can’t build a good credit score without having a positive credit history.
Chasity asks: I’m an 18-year-old college freshman and was declined for several retail store cards. What else can I do to build good credit?
The answer to this common dilemma is to use a secured credit card. A secured card requires you to make a refundable deposit that becomes your credit limit. You have to make monthly payments, just like with a regular unsecured card—but if you default, the card company can tap your deposit.
Quick and Dirty Tip: Only use a secured credit card that reports payment history to the national credit reporting agencies—like the Capital Bank Open Sky Secured Visa®. That will help you build a credit history as quickly as possible so you can get approved for a regular credit card or an installment loan.