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Lesson learned: Your family's bad credit isn't yours

 
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February 25, 2014
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QHi Erica,

Ever since I can remember, my family has been financially a disaster. We were evicted twice when I was in elementary school. My dad left when I was 10. I know we were on welfare for a while, but my mom didn't talk about it. We got calls all the time from people wanting money. Now I'm in college on a scholarship, and I'm also working. No loan. My final goal is to graduate and get a career-based job and be a success. To start that out I should have a credit card, right? My aunt, who I am very close to, is very smart and said she would co-sign for me. I don't want to hurt her or get into debt myself. Do you think I should do it? I guess you can say I'm scared I will screw up like my parents. –Robin

ADear Robin,

Thankfully, poor financial skills are not hereditary. Even better, because of your background, you may possess a greater motivation to get things right from the start than someone who hasn't experienced the same hardships.

Establishing a good credit history now will help you launch your post-college life. And responsible credit card use is part of building good credit.

Why do you need good credit? You may need to rent an apartment someday, and most landlords will look at your credit reports to see if you've been responsible with money, as will some employers. You may even want to become an entrepreneur, and need a loan to get your idea off the ground. Lenders will certainly assess your past borrowing and repayment patterns to determine if you're a good or bad risk.Ask Erica

So how do you start? If you are under the age of 21, it can be challenging to get a credit card in just your name. To qualify, you'd need to show that your income can support the credit line, and even then, it can be tough without a proven and positive credit history.

A co-signer can help bridge that gap. That person guarantees that if you don't pay, they will.

Your aunt made you an extremely generous offer, and it's worth entertaining. You'd have a credit card, and if you were the primary account holder, the bills would come to you to manage. The account information would be listed on both your and her credit reports. Keep the balance under 30 percent of your credit limit and consistently pay the bills on time.

Falter, though, and both your reports and scores would be negatively impacted. Worse, if you don't pay at all, your aunt would be stuck with the bill. That could lead to legal troubles. Not just your credit, but your valued relationship could be hurt.

A safer alternative: Your aunt adds you to one of her existing card accounts as an authorized user. You'd bear no legal liability, but would have charging rights, and the account activity would be included on both reports. She could also remove you as a user any time. I suggest that you propose this option instead.

Whichever way your aunt helps you get a card, create excellent habits immediately. Only charge what you will pay in full by that all-important due date. Make this your mantra: “If I can't afford to pay with cash, I can't afford to pay with a credit card.” Repeat that phrase each time you consider using your card. As you're working on building your credit, build a savings account, too. It will act as a safety net in case you're hit with an unexpected expense.

After a year of excellent charging (and you've reached the age requirement for getting your own plastic), apply for a personal account. Review current offers here. You may still have to start with one that's secured by a cash deposit, but that's OK. Eventually, you'll qualify for an unsecured credit card.

When you have an account that is all yours, talk to your aunt about exiting from her financial life. If you're an authorized user, she can just call the issuer to revoke privileges, but if she co-signed, it can be trickier. They may agree to grant you sole ownership and take her off the account, but more likely, that account will have to be closed.

Finally, know that the past does not dictate the future. You — like everyone — can choose to treat money and credit advantageously.

Got a question for Erica? Send her an email.


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