building a credit history

[srblanco7]

Despite it being amongst the worst time in modern memory to buy a used car, DD put her mind to finding a "new to her" vehicle (with the caveat that we'd help her buy on a 50/50 contribution basis). We were prepared to pay cash for a 2018 Nissan Rogue, but were offered a $750 incentive to finance (a minimum of) $7500 thru Nissan (3 year term, but can be paid off after 6 mos with no prepayment penalty). We ultimately chose this path. A factor in the "finance" decision was beginning to build DD's credit history. She currently has none to speak of and when we went to price insurance, found that getting her a policy on her own vs. under our policy was 2x the cost ($1500/year vs. $3k/year) because she had no credit history. Insurance agent's recommendation was to finance the vehicle (with me as co-signer) and for DD to get a low limit credit card to be used for small purchases and paid off each month with the mindset of beginning to building her credit history while she's still in college.

The goal - from a risk management perspective - is to have her vehicle and insurance separated from ours/our assets (meaning if she were in a personal injury accident, our assets would have a degree of separation). I was advised that this approach really won't work until she's living on her own (that is, if she's still living primarily at home when not at college, it won't provide for the separation).

Sharing our experience to hear from others on your thoughts and insights on getting kids well positioned to launch on their own.

[disneysteve]

One of the first things we did when DD turned 18 was put her savings and retirement accounts into her name instead of custodial accounts and have her get her own credit card.

You can also make her an authorized user on one of your cards.

She also had a couple of small student loans in her name.

She’s now 25 and her credit score is just under 800.

[MonkeyMama]

I personally wouldn't do a car loan (or carry a balance) to build credit. But that's me. You can build credit with credit cards paid off monthly. That is how we built our own credit (starting age 16) and had decent credit when we bought our first home in our early 20s. We never had any other loans. Except for the mortgage, that is the only loan we have ever carried a balance on.

Interestingly, my son just turned 18 last week and I was shocked his credit score was 740 already (which is basically A+). This is just from being an authorized user on one of our credit cards. I was too lazy to go the secured credit card route and so just added him to a new bonus credit card. He treated it like his own credit card, age 16-18, keeping track of it and making all of the payments on time. Now that he is 18 he is applying for his own card.

I did google a bit yesterday when I saw his credit score and I did see that some (most?) lenders do count "authorized user" credit differently. Though I think his bigger limitation at this point is probably income. You need good credit and some real income to actually apply for credit. Anyway, my motivation for his own credit card was to just get it out of my hair and to make him more independent, but it sounds like it will also be a good stepping stone in building his own credit.

Edit to add: Oh yeah, the credit card I opened when my son was 16 and added him, never showed up on his credit report. Authorized user reporting is hit and miss apparently. But I at some point added him to my Target card so he could get 5% off when picking up his own toiletries and stuff like that. *That* is why he has a 740 score. I've had the card for 11 years. I am sure you can google and track down which cards will show up on authorized user's credit reports but it's hard to know for sure until your kid turns 18 and their credit is more easily accessible.

[Jluke]

I had a $500 credit card when I went to college. I used that to pay for books and then paid it off.

I guess that helped but my dad still co-signed my car loan when I graduated

[ua_guy]

Same here. I opened a $500 credit card in college and paid it off every month. Bought a car a few months after graduation and was able to secure a good rate, but not perfect, because of "limited" credit history.

Insurance was another story. I was a 24 year old male driving a Camaro Z28. There was no way that was going to be cheap. Under my parent's policy, insurance was about $700/year for my previous vehicle. Under my own policy, it was about $1800/year with lower limits. I bundled it with renter's insurance and enrolled in a "safe driver" program and it came down a little. It remained high for several years no matter what I drove.

[scfr]

I wonder how much longer good credit history/score will matter?
In my state, it's no longer allowed for insurance companies to use credit scores when setting rates. As a result, our insurance premiums skyrocketed 21%.

[srblanco7]

One of the first things we did when DD turned 18 was put her savings and retirement accounts into her name instead of custodial accounts and have her get her own credit card.

You can also make her an authorized user on one of your cards.

She also had a couple of small student loans in her name.

She’s now 25 and her credit score is just under 800.

Thanks DisneySteve. She has savings/checking accounts and a recently opened Roth IRA. We'll get her a credit card this week and she have a couple of student loans when she graduates (though I'm wondering if I'll have to co-sign even with her income from her summer internship).

Admittedly, I struggle a bit with some of these decisions. Student loan and car loan debt are not consistent with our financial "values" - but at this point, I can wrap my head around the decision as we're using these as tools to realize a discount (in the case of the car loan) and to assist with cash flow management (in the case of the student loans). And, if they help DD to build a credit score then they have a secondary purpose.

[srblanco7]

I personally wouldn't do a car loan (or carry a balance) to build credit. But that's me. You can build credit with credit cards paid off monthly. That is how we built our own credit (starting age 16) and had decent credit when we bought our first home in our early 20s. We never had any other loans. Except for the mortgage, that is the only loan we have ever carried a balance on.

Interestingly, my son just turned 18 last week and I was shocked his credit score was 740 already (which is basically A+). This is just from being an authorized user on one of our credit cards. I was too lazy to go the secured credit card route and so just added him to a new bonus credit card. He treated it like his own credit card, age 16-18, keeping track of it and making all of the payments on time. Now that he is 18 he is applying for his own card.

I did google a bit yesterday when I saw his credit score and I did see that some (most?) lenders do count "authorized user" credit differently. Though I think his bigger limitation at this point is probably income. You need good credit and some real income to actually apply for credit. Anyway, my motivation for his own credit card was to just get it out of my hair and to make him more independent, but it sounds like it will also be a good stepping stone in building his own credit.

Edit to add: Oh yeah, the credit card I opened when my son was 16 and added him, never showed up on his credit report. Authorized user reporting is hit and miss apparently. But I at some point added him to my Target card so he could get 5% off when picking up his own toiletries and stuff like that. *That* is why he has a 740 score. I've had the card for 11 years. I am sure you can google and track down which cards will show up on authorized user's credit reports but it's hard to know for sure until your kid turns 18 and their credit is more easily accessible.

Thanks MonkeyMama. We waffled a bit with the car loan decision - but given the discount in a "hot" used car market and want to build her credit - we decided to proceed. Completely understand the want to avoid all types of debt other than a mortgage loan. We'll get her launched in a few more years - debt free and with a sold start on her financial future.

[srblanco7]

I wonder how much longer good credit history/score will matter?
In my state, it's no longer allowed for insurance companies to use credit scores when setting rates. As a result, our insurance premiums skyrocketed 21%.

I do note that several states have similar laws in place - though a 21% increase is a pretty lousy outcome of that legislation.

[myrdale]

Keep in mind, an account only adds to your credit history so long as it is open. Once the account is closed, the effects it has on your credit score fade (I am not sure how quickly).

Personally I am a fan of in-store credit cards. I have one through HomeDepot. I can't use it any where else, and it is a place I shop on some frequency.

I am curious what sort of interest rate you carried for the first 6 months for the car loan. I question if you didn't pay more than $750 interest in that time. If I took that deal, I think I'd pay the loan down to leave only 5 payments left after the first payment.

[srblanco7]

Keep in mind, an account only adds to your credit history so long as it is open. Once the account is closed, the effects it has on your credit score fade (I am not sure how quickly).

Personally I am a fan of in-store credit cards. I have one through HomeDepot. I can't use it any where else, and it is a place I shop on some frequency.

I am curious what sort of interest rate you carried for the first 6 months for the car loan. I question if you didn't pay more than $750 interest in that time. If I took that deal, I think I'd pay the loan down to leave only 5 payments left after the first payment.

Car load was at 2.99% with $7,500 principal (minimum allowable). Paid of in 6 months that’ll be something in the neighborhood of $65 in interest paid as an offset to the $750 discount.

[james.hendrickson]

One of the first things we did when DD turned 18 was put her savings and retirement accounts into her name instead of custodial accounts and have her get her own credit card.

You can also make her an authorized user on one of your cards.

She also had a couple of small student loans in her name.

She’s now 25 and her credit score is just under 800.

Disneysteve - does having an investing account build credit? I'm scratching my head a bit on that one.

[disneysteve]

Disneysteve - does having an investing account build credit? I'm scratching my head a bit on that one.

No it doesn’t. I was just giving an overview of everything. It was the credit card and student loans that impacted the credit score.

[Manjit Virdi]

As already mentioned by DisneySteve it would be a good idea to add her as an authorized followed by the other 2 factors which would gradually help in improving the credit score.