When you’ve gone to the trouble of establishing good credit, it’s only natural that you want to help others do the same. It might feel like a moral obligation, but there is a right way and a wrong way to do it.
What makes a clean credit profile? Bills paid on time. Not just any bills, but those paid to creditors reporting to the national credit agencies. You probably pay your rent, cell phone bill, and car insurance on time, but they don’t rate through Experian, Equifax, and TransUnion. To build a credit report for home loan purposes, you need to get credit from a company that will report your repayment.
We’re not talking about having giant credit lines or maxing them out. A safe way to begin might be to apply for a gas card, a department store card, or a secured credit card. The last option requires you to keep funds on deposit with the institution, and in return you get a credit limit equal to a fraction of your deposit. The collateral ensures you will be motivated to make timely repayments of credit, or you lose your account. There’s very little risk to the institution.
Here’s what not to do: Share your good credit with someone else by making them an Authorized User on your account. Parents often do this for their kids when they come of age. However it can backfire on the kid. Consider a recent case of a beautiful credit record dating back to 1999 for a borrower born in 1989. Her credit score is based on having a long credit history, but she was only 10 years old when the account was opened. That her parents made her an authorized user on their account generated a good credit score for their daughter, but since our borrower was not the one making the payments over time the entire credit score was invalid. She didn’t meet the loan credit criteria as a result.
In another case, Mom came in to apply to buy her next home. Running her credit profile reminded her that she had given her son a credit card to use. Without her knowing, he had maxed out the card to its five-figure limit. The payment was so big that Mom’s debt ratios don’t qualify her for the new loan.
The perfect scenario is to have at least three credit lines, paid as agreed, for at least one year. This is the minimum profile to establish a “qualifying” credit score when you buy a home. Remember, it’s not that you max out the card, it’s that your payments are made on time. You need to use the card for a purchase at least every six months, or the report goes dormant and won’t help your score.
The Federal Trade Commission reminds you that using a credit card is a form of borrowing – You have to pay the money back. Check out their site at http://ftc.gov/bcp/edu/microsites/moneymatters/credit-cards.shtml for good information about how to choose a credit card.