Rebuilding Credit in your 20s

rebuilding credit in your 20s

rebuilding credit in your 20sQuestion: I recently got back on my feet from being unemployed while having student loans and credit card debt piling up.

I have finally caught up and I am now able to make more than the minimum payment. I am focusing on paying off my credit cards and then my student loans.

I decided that as I paid off a card I would just cancel it. I have 3 canceled cards which are now completely paid off and I was wondering if there was a way I could get them removed or does it not affect my score that poorly if the account is listed as closed?

I know now closing a card isn’t ideal but for someone with no experience and somewhat of a shopping addiction I decided it was best to not have it. The amount of credit I closed was about $8500.

My question is should I focus on paying more than the minimum for my school loans? I only have less than $10,000 and my total credit card debt is about $7,500. I know it’s best to get my credit card debt out of the way first. Can you recommend anyone in Orlando, Florida who may be able to lead me on a better path? Thanks!

Answer: You have raised several good issues so let me try and address them one at a time:

Closing Paid Off Accounts. It is commendable to have paid off your credit accounts but contrary to popular belief, carrying no debt does not help you build or rebuild credit. This may sound counter-intuitive but you have to look at it in terms of risk and stability.

Credit scores measure risk. The higher your credit score, the less risk you are to lenders and the more stable you appear. The lower your credit score, lenders view you as high risk for default.

Since a credit score is based off the information contained in your credit files, a paid off closed account gives no indication of how well you manage credit and debt. Closed accounts do nothing to help your credit scores.

Payment History. Payment history accounts for a big chunk of your credit score; in fact, it is 35% of your credit score. Recent late payments are much more detrimental then older late payments; however, closing an account will not erase your payment history with those accounts.

Negative payment history can remain on your credit reports up to 7 years. The good news is that the older the late payment history, the less effect it will have on your credit scores. After you have a series of late payments, it is good to counteract those late payments with on-time payments. This will decrease the negative effects of the late payments.

Length of Credit History. How long you have managed credit and debt accounts for 15% of your overall credit score which is why you primarily find older consumers with the much sought after 800 plus credit scores. I just recently answered a question from a consumer with a 40-year old Chase credit card looking to upgrade his account. Do not close credit accounts even if you never use them.

Paying them off is good but keeping small amount on those accounts is better. Even if you charge very small amounts each month and pay them in full and on -time, it will show you manage credit and debt very well. You will become a low risk to lenders and they will seek you out for their credit products at the best interest rates and card rewards.

Credit Mix. Multiple credit types make up 10% of your score. A good credit mix would be a mortgage loan; installment loans such as an auto loan; a line of credit from a bank, revolving credit such as credit cards; and even student loans. You are doing well in this category as you are paying off your student loan in addition to paying more than the minimum. Banks and lenders look at whether you pay just the minimum due or more than the minimum. Every bit of extra payment helps build your creditworthiness.

Rebuilding Credit. You are on the right path! I would suggest you do not close any more accounts. Continue to pay them but keep your balances low. Ideally a credit card balance should be kept to no more than 30% of your available credit limit. If you are more comfortable paying them in full that is okay, just do not close them.

Carrying small debt shows you manage your finances well and you do not max out your credit cards. Any time a credit card is maxed out the credit scoring model as well as a lender will view you as experiencing financial difficulty and a high risk.

As to your last concern, I do not have a referral for someone in your area. You may do well to Google “certified financial advisors” in your area. It may turn up someone who can further advise you. Good luck to you.

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