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Topics addressed on March 16, 2011:
Paying off a debt early won’t help credit scores
I have a friend who took out a personal loan just so she could build up her credit. She's nearly 40 with no credit. She still has six months of payments to make on it. I was wondering if it is bad to pay it off early or does that help her?
Your friend was correct that in order to establish a credit history she must first have a credit account opened in her name.
While paying the loan off early may save her some interest fees, it is better for her credit history to leave it open until she has been approved for other credit accounts. Open and active accounts are scored more highly than closed accounts because they demonstrate that you are managing credit well now and not just in the past.
However, it can still be a positive start to her credit history, even if closed. The important thing is that all payments were made on time. She also should review her contract carefully to ensure there is no early repayment penalty. Such a penalty will not affect her credit history, but could result in additional expense.
With an established credit history, she may be able to qualify for a credit card. If so, she should give serious consideration to getting one. A credit card will help her build a strong credit history and credit scores more quickly.
Unlike an installment loan that sets a specific payment amount each month, a credit card allows the holder to decide how much they want to charge and how much they want to pay each month.
Because the holder makes these decisions, credit card use provides much greater insight into how the individual will manage other accounts. As a result, credit cards play an important role in establishing strong credit scores.
Thanks for asking.
- The "Ask Experian" team