My daughter is going to college in the Fall and she has not established any credit. She plans to buy a home immediately after she graduates and has a job. Is it a good idea to add her to my credit card as an authorized user to help build her credit?
—Jana, Grand Junction
Great question! Adding a family member as an authorized user should be a stepping stone to help them establish credit, but not a long-term solution. While it will help build her credit file, it may not help secure a mortgage loan in the future. Once the authorized accounts have helped her establish new credit and credit scores, she should start establishing credit on her own.
Most lenders require removal of authorized user accounts before they will approve a loan since the credit report and score is not an accurate reflection of the borrower's own credit history. As an authorized user, you are not responsible for, and usually do not make the payments on the credit card. If most of your credit is based on authorized accounts, once removed your daughter's credit scores may decrease dramatically.
It is important that the account you are adding to your daughter's credit has a long payment history, no late payments and low balances to have a positive impact on her score. Once she has established credit with these authorized accounts, it is important she builds credit with her own accounts. Secured credit cards are a great way to build credit. Most banks and credit cards offer secured credit cards or lines of credit. You provide a refundable deposit (usually around $200- $400) and the bank or credit union provides your children a credit card with a line of credit based on the deposit. Be sure to confirm that the bank or credit union will report to all three credit bureaus (Experian, Equifax and TransUnion) so your daughter gets credit for these accounts on their credit file.
Once a good payment history is established (usually 12 months) they will often refund the initial deposit and now your daughter has an unsecured credit card. As always, it is important she makes her payments on time and keeps her balances below 30 percent of the high credit limit. Once she has established credit on her own, you might even remove her as an authorized user since mortgage lenders may require the removal of the authorized accounts to reflect her own credit history. Having three or four accounts on her own will help minimize the potential decrease of her credit scores when the authorized accounts are removed.
As I mentioned in previous articles, it is important she does not close these accounts in the future. Over 50 percent of your FICO score is based on payment history and the length of the payment history. Establishing credit at a young age and keeping these accounts open for a long period of time will have a positive impact on her scores.
Many buyers may not be aware of the importance of establishing credit in their own name. If done correctly and with proper planning, new home buyers won't have as many credit related hurdles to jump over when it's time to purchase that new home.
It is a great idea to build your credit at a young age but remember to always pay your bills on time and keep those credit card balances low.
Branch Manager, NMLS #1721861
Cherry Creek Mortgage