How Young People can Begin to Build Credit

Dear Dr. Don,

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?

Thank you,

-Ron Revolving

Dear Ron,

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.

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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