Building or Rebuilding Your Credit through the Family
Are you just starting out? Perhaps you just graduated high school and are headed off to college? The first thing you are probably going to do towards building your credit history is take out student loans. Student loans are not weighted heavily when it comes to your credit history. They are installment agreements, but until you start paying for them or pay them off in full they are not considered a good indication of personal credit history.
There are a couple of reasons for this that will be brought up later on, in a blog post dedicated to student loans. The point is that through the use of credit cards you can build credit, but as a newly graduated 17 or 18 years old, it will be extremely tough for you to get a decent credit card.Companies will offer you credit lines, but with higher interest rates and lower credit limits. Building credit as a young person, you want to have good interest rates in the event you do use the card and only make a minimum payment. It is also helpful to have a higher limit than you ever intend on using because of the credit utilization ratio.
Two things will make you look good when you are new to credit building: paying off the account each month and having a high limit you never reach.
Individuals who are rebuilding credit will also run into the same issues as those trying to establish their credit. You will discover no one wants to give you a good interest rate, and you will only be given a small credit limit if you can even get a line of credit.
The issues of finding affordable credit to utilize are not as important as finding a company willing to give you credit and a decent credit limit.
You want the amount you owe to be small but when other companies see you are being given high credit limits, it is often easier to get new credit.
Using family to obtain credit is by far the oldest strategy in existence, in terms of building credit. When credit scores became emphasized in our culture as highly important, the usage of family accounts to increase your score to gain more or better credit offers became common.
How it Works
- Determine if a family member is willing to sign you on as an authorized user of their account and provide you with a credit card in your name.
- If you are tied to another account, in name and with a credit card number assigned to you, the information will be reported to your credit report.
- You will need to keep the account at a zero balance, if possible. This strategy works best if you have a zero account balance each month.
- If you cannot get a zero balance, then make sure you are keeping the credit balance below the 30% mark for the credit limit. Basically, if you are given a card with $500 as the credit limit, you should never let that card be over $150.
- Keep the credit account open, in use, and paid off.
Having the account will show that you are establishing credit. By keeping it paid on time and in use, you are showing that you can pay the card and are consistent with those payments. If you don’t use the card, it is not going to help you build credit. There is nothing to report other than an unused card. Some companies might report this as “good standing,” most will not even bother.
In fact if you open an account, but never use it, you can see “no history to report,” instead of “good” or “late payment.
An Alternative Option
Credit cards can be dangerous. You have a limit, but you are also tempted to spend up to that limit. For younger generations, this can be especially difficult. They may have trouble stopping their spending because they think of just one little item, until it adds up to be a lot of money owed.
Another way to build credit without the danger of revolving credit, is through a car loan. Here is how it works:
You as the younger generation, will save up money from having a steady job.
You will amass enough to either pay for a car outright over a period of one year or a sizable down payment to help lower the monthly payment. It will take time, but if you are serious about owning a car, then saving $5,000 working part-time from the time you are 16, will ensure you have at least that much. Even a couple of summers working full time can provide you with a good down payment for a vehicle. This strategy also works well for those that are much older and still don’t have a credit history or bad credit history.
Bring your parent to a bank to help obtain the car loan. The bank will see that you have no credit history and assess the cosigner’s credit history. An interest rate will be determined.If the interest rate is affordable, below 5 percent the strategy will be slightly different.
For an interest rate below 5%, you are going to pay the loan off in two years. Yes, you are going to spend a little more because you are paying interest. However, it is the consistency of the payment being on time combined with the length of the loan that will help you build credit.
Furthermore, when you finally pay the loan off in full you will show that you are reliable.
If the interest rate is less than desirable, anything over 5%, then you are going to pay it off within a year. You will still make payments for a few months to show that you were on top of the payment requirements of the installment agreement, but then you will pay everything off. It is not going to help your score as much as keeping the line open longer. However, you are going to show that you had the capability of paying it off in full, as well as the ability to lower the amount owed.
With this strategy, you want to show that you had savings, as well as the ability to make on-time payments. You also want to ensure you are not entering into a situation that would harm you financially. Paying high interest can become a burden versus helping you.
There is another way you can utilize this car loan strategy to build credit when you are young. You have the option of paying on a loan with high interest and tied to a family member, for a year, then approaching banks for a new car loan. State you want to get the loan under your name, so you would like to refinance, as well as obtain a significantly lower interest rate.
If the deal is not worth the refinancing costs, do not go for it. If it is worth the refinancing fees, then get the loan into your name, at a lower interest rate, and benefit from a longer payment history. You will also benefit from showing that it is solely in your name versus tied to another.When you build a credit history, companies look at whether or not you have a long history, but also at how you obtained the loans. Someone who is not qualified to obtain a loan on their own will not be considered a person with “great” credit.
- This strategy works for new credit creators and those rebuilding credit.
- You need to tie to a family account to be accepted and find a decent interest rate/credit limit.
- You can use other lines of credit versus a credit card.
The most used form of creating and building credit for younger generations and those rebuilding their credit is credit cards. However, it doesn’t have to be this way. You don’t have to depend solely on credit cards as a way to use this strategy. Any line of credit you can obtain, like a car loan, mortgage, or a personal line of credit will help you increase your credit score, as well as build credit. The point is you are using a type of credit that you can afford to build consistency in your credit history.