Dear Dr. Don,
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What guidance can I give my college-age son on establishing his own credit? I suggested that he start his own account at a credit union to help obtain financing for the purchase of a used car. Can you give us some ideas where to begin?
The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the CARD Act, has made it tougher for young people to build a credit history on their own. The act limits how credit card providers may market cards on campus. It requires applicants younger than age 21 to have a source of income or an adult co-signer.
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If you have good credit yourself and a responsible son, you might consider adding him as an authorized user to one of your credit cards as an alternative to co-signing on his card. Your payment history will be reported on his credit report, which should help him to build credit. Personally, I'd rather see you do this than co-sign for him, because it's a lot easier for him to remove himself as an authorized user than it would be for you to drop off his account as a co-signer. Limiting the credit line on the account where he's the authorized user can potentially prevent overspending.
A bank account doesn't help build his credit, whether at a credit union or elsewhere. While some banks do use a credit report in the case of a new customer, a bank account doesn't help the depositor build a credit history. As an aside, banks have a separate consumer report that chronicles customer banking practices, such as writing checks with insufficient funds in the account. That is a separate issue.
Regarding an automobile purchase, buying a used car can make sound financial sense. That's because one avoids paying for the first few years of rapid depreciation on a new car. You can look at the real cost of ownership and compare costs of owning a new car versus a used one. Among the issues here are trade-offs between depreciation, maintenance and repairs over the next five years.
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