As a Mortgage Advisor and Credit Consultant there are some conversations that I have over and over again. There’s a lot of misinformation out there when it comes to mortgages and credit and I want you to have the facts. Here’s a sampling of the question(s) that I answered this week.
When is a credit score issued? Does everyone just start at “0”and work their way up?
A credit score is issued once a credit user has had 6 billing cycles worth of activity report to the credit bureaus. The score issued is based solely on the credit activity reported within those previous billing cycles.
An American cannot open a credit account until they are 18, but there is action that you can take right now to set your teen up for financial success!
Greenlight provides a great option as they have a variety of ways to get started depending on your child’s age. They have a really intuitive multi-functional app, a prepaid debit card for those well under 18 to practice and learn, and they do allow for a teen to be cosigned onto their “family cash card” so that you can start building that credit! Adding your child to your credit account as an authorized user is a great way to begin to collaborate on their financial goals and eventual success.
Once you add your authorized user, the entire history of that account is added to their credit profile, the good history and bad. So, if you are working to build credit, ensure that you use an account that has a positive history, with no late payments and no time spent at the max credit limit. The most important thing to consider when determining which credit account to use in order to build your child’s credit – the balance to limit ratio (What is the balance compared to the limit?). If you add your child to a credit account that receives a lot of use, this could start your child with worse than no credit – bad credit! If you have a credit account that has a high limit and receives very low use with the balance always remaining under 10% of the limit – this is a great option.
Some credit card companies have done away with the age limits for cosigning, but beware – there is no benefit at all to having a long-standing history of an authorized user account on your child’s credit and there are potential negative effects. Being as the credit score / FICO won’t be established until after they are 18, I recommend adding them onto an account as an authorized user after they’ve turned 17.
Also, keep in mind that anyone with a close relationship to your child can add them as an authorized user and begin to teach them about credit and serve as a financial mentor. You would want to be very wary of who you allow in this role as once your child is added as their authorized user on this credit account, the creditor can only make changes if requested by the account owner. This makes it very precarious to allow anyone to add your child to an account, you would need to ensure that this is someone with well established financial stability and long standing transparency and accountability.
The benefits to having a strong credit score are near innumerable. Creating these habits young can create a life of financial ease; with a high credit score comes opportunity by way of investments and loan approvals and significant savings as highest FICO receives the lowest available interest rates for personal loans, auto loans, credit cards, real estate loans.. etc.
Once your child has their FICO score established, they can look to be a landlord instead of paying one!
Here are a few more questions, with easy answers!
Does a part time job count as work history in order to qualify for a home loan?
Does that seasonal summer job they’ve had for the past few years count as work history to qualify for a home loan?
Can a young person cosign with a family member or go in with a few friends and get started with their real estate portfolio?