Q: My daughter has been living at home, working, and going to community college. She’ll be out on her own next year and will need to buy a car, but I really don’t want to co-sign her car loan. Is possible for her to establish credit quickly?
A: If your daughter has taken out student loans for her education, then she may already have a credit report and credit score, created when her first loan was reported to the credit reporting agencies. It is worth checking. Suggest she visit AnnualCreditReport.com and try to get her credit report from one of the three major credit reporting agencies (Equifax, Experian or TransUnion).
But whether or not she has a credit report, she will likely need more than just student loans to earn a high credit score. It will be helpful to have at least one revolving account, such as a credit card, on her reports. Here are several ways to get one:
The first option is to add your daughter to one of your credit cards as an authorized user. Do you have a credit card with a perfect payment history and low balances? If so, when you add her as an authorized user it’s likely that account will then appear on her credit reports. In fact the entire account history will probably be reported, giving her the benefit of a well-established account on her reports. “Credit age” is one of the five main credit score factors and by allowing her to “piggyback“ on an account you’ve held for years, her scores will likely get a boost.
However, there are two downsides to this approach. One is that you are responsible for any purchases she makes, regardless of whether you specifically approve them or not. So you’ll need to be confident she’s not going to go on a spending spree and leave you holding the bag. (You could add her to the account without her knowledge, but that may deprive her of a valuable learning experience.) Additionally, at some point you will want to remove her from your account, and when that happens, it will be a good idea for her to have already established her own credit accounts.
That leads to the next three approaches, all of which involve her getting her own credit card. She may be eligible for a student credit card. As long as she can demonstrate she makes enough money to pay back the balance, she should be able to get one of these cards, despite her limited experience with credit.
If not, she can consider a secured credit card. With a secured card, she will have to place a security deposit with the issuer, usually in the range of $250 – $500 to start. Her credit line will likely be equal to that deposit.
Of course, she may not want to tie up the money she uses as a security deposit for the secured card indefinitely, and so she may want to consider another option. eCredable is a new credit bureau that works with BBVA Compass so consumers can get the NBA American Express Credit Card, with a credit line up to $2,000. She will need to join eCredable and share her bill payment information for accounts like rent, mobile phone, utilities and insurance. (These may be bills she’s already paying each month but that don’t typically appear on traditional credit reports.) If she has been paying those bills on time, she can earn a credit score that allows her to apply for the card. As she uses it, her payment history will be reported to all three major credit bureaus, and she will start building a traditional credit history.
Regardless of which approach she chooses, the key will be to make sure the new account is paid on time and that balances remain low in comparison to the credit limit. As long as she doesn’t have any negative information in her credit reports, she should be able to build decent credit scores fairly quickly, which in turn should help her get a decent interest rate when she buys her car on her own next year.
Gerri Detweiler is Head of Market Education for Nav, which helps small business owners monitor and build strong personal and business credit, and create financially healthy companies. She is the coauthor of Finance Your Own Business: Get on the Financing Fast Track with attorney Garrett Sutton. She’s been answering credit questions for more than twenty years. Email yours to her at [email protected]