How young people can build good credit scores
With no credit history, a debt-free college graduate is rejected for a car loan. He could boost his credit scores by using credit cards wisely, and his sister might want a student loan.
Dear Liz: Our son was recently turned down for a car
loan even though my wife and I were willing to co-sign and we have
excellent credit scores. The reason for the denial was "no credit
history." Because we had paid some college expenses and he had
basketball athletic scholarships, our son graduated from college debt
free.
My wife and I have always tried to live within our means.
Other than a mortgage and the occasional car loan that we almost always
paid off early, we have had no other debt. We encouraged our children to
live the same way.
Did we give them bad advice? What advice can
we give our daughter so she does not wind up in the same circumstances?
Through a combination of work, academic merit scholarships and our
savings, she is on track to graduate in 2013 without any student loans.
Should she take one out in her name just so she can pay it back and have
a credit history.
Answer: Your children don't need to take on debt to
build their credit histories. A couple of credit cards, used lightly but
regularly and paid off in full every month, will do the job.
You
may be able to give their credit histories a jump-start by adding them
as authorized users to your credit cards, if you have any. Find out
first whether the credit card issuer is willing to export your good
history with the card to the children's credit reports, because not all
issuers will do this transfer. You may have heard that some
credit-scoring formulas ignore authorized user information, but the
formula used by most lenders, the FICO, still would incorporate this
data in calculating your children's scores.
Another option is for
your kids to apply for secured credit cards. They would make a deposit
to the issuing bank and get a credit line in the same amount. A secured
card that reports to all three credit bureaus can help build credit
scores over time. A number of websites highlight secured-card offers,
including CreditCards.com, CardRatings.com and NerdWallet.
Tell
the kids to charge no more than 30% of their credit limits (10% or less
is even better), and certainly no more than they can afford to pay off
in full each month.
If your daughter wants to build up her scores
faster, she might want to consider a small installment loan. Having both
installment and revolving accounts can lead to higher scores.
Installment loans include auto loans, mortgages, personal loans and,
yes, student loans. If she does decide to apply for a small student
loan, make sure she fills out the Free Application for Federal Student
Aid and takes out federal student loans only. Federal student loans have
fixed interest rates, flexible repayment terms and plenty of consumer
protections. Private student loans have none of those attributes.
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