Credit Education

Q:

I’m trying to help my 19-year-old in building credit with a high credit score. I thought adding him to our AMEX would help but it’s not showing up. Should he get a secured credit card?

A:

First, AMEX does not report the open date of the original card holder, they report the open date as the date the Authorized User was added. Open date equals length of credit history; length of history has a major impact on score. Secondly, a consumer must have at least six months of credit history before FICO will even calculate a score.

This is why adding him to your AMEX card didn’t accomplish what you hoped.

Here's what you should do:

• Add him to another credit card, any other card, the older the better. The card has to be activated when he receives it; but it’s not necessary for him to use it. (It’s probably better to put it in a drawer – out of the reach of temptation.)
• Then, you wait for the credit card provider to report to the credit bureaus. This could happen in a few weeks or take as long as 60 days.
• After this, he should get a new card in his name only.

After six months, his FICO score will calculate based on his history.

If you add him as an Authorized User first as advised above, he'll be able to get an unsecured card; he won't have to get a secured credit card to accomplish this part of the plan.

Q:

Will getting his own credit card improve his credit score more than being an authorized user on our card?

A:

No. FICO scores will see them both as his cards, your card will be better for his scores as it has a longer history. He still needs his own card. He needs to use his card to establish his own credit, and at some point you want to remove him as an Authorized User so his scores are, well, his. And yours are yours.

After about a year, consider removing him from your card. Authorized User accounts are often abused, have a potential harm with some lenders. So, once you've got him off to a good start, it's not needed, remove him.

Q:

How else can we help him raise his credit score?

A:

He really needs installment history, A Secured Installment Loan from a Credit Union works great. Make it as small as the credit union will allow with a 12 month term. If needed, you can the make payments. (Or, this could be another teaching moment; let them be responsible for the payments. A mistake is very costly, so – your call.)

Q:

What else can we do to raise the credit score for a low rate on a car loan?

A:

Auto history is everything when buying a vehicle. If you have a paid off vehicle, or one that is close, then you could refinance it in a joint loan with your son. Make absolutely certain it is an “auto loan” so your son can have this auto credit history. He needs a minimum of 12 months credit history without mistakes to get a good rate on his first car loan.

Q:

If I do all this, what can I expect?

A:

Recently, one of our analysts followed this plan when her granddaughter went through college. When she graduated, her score was over 770 with auto credit history.

Last year, she bought her first car with a 2.1% interest rate – because she had previous auto history. Without auto history, her 770 score would have cost her 13% interest for the first 12 months.

Final Note:

This works – provided your child pays as agreed on all debts, no late payments! This would be a very good time to educate them on the importance of credit and their credit score and how critical it is for them to be perfect in paying their obligations. One 30-day late payment will destroy a mortgage credit score – they will be worse off than if they never started.

With these steps you can get your child off to a great start building credit – using credit wisely while maintaining a high credit score. You can save them years and thousands of dollars in interest. But you should also teach them the credit facts of life: they must be ready to pay as agreed on all their credit accounts. It would be much better for your child to wait until they understand this and are ready to seriously take on credit obligations. For some, it could be at 18; for some 25; for some…

You might also be interested in our brief article for those starting from scratch: How to Establish Credit for a High Credit Score .