6 ways to help rebuild son's or daughter's credit rating
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Dear Opening Credits,
My daughter's credit rating is down the tubes. She is setting up her life now, but is being denied credit cards everyplace. Where can she get a credit card? Who are the companies that provide credit cards but won't take advantage of her situation? That way, she can start building her credit history. -- Gurinder
Wouldn't it be wonderful to cure all your daughter's credit ailments? Unfortunately, you can't. As a parent, there is only so much you can do. I presume that she is over the age of 18, which makes her an adult (legally, at least). Therefore, your real power lies in providing guidance, information and encouragement.
You say that her credit rating is "down the tubes," and I'm going to make the leap that somewhere along the line she did something to take it there. Perhaps she opened a retail account at her favorite store, shopped, overcharged and then failed to pay on time or at all. This is certainly a typical scenario, especially for young, overzealous cardholders. Whatever the case, because your intention should be to inspire positive change, avoid dwelling on past indiscretions. Tempting as it may be, scolding is rarely effective. Instead, concentrate on what she can do today. Here are her first three steps:
- Obtain copies of her credit report. She can access her credit reports from each of the three credit reporting bureaus safely and for free once a year from AnnualCreditReport.com. Once she has them, she'll be able to see what she's done and needs to do. She can also check for errors.
- Pay down balances. If there is an outstanding debt that needs attention, she should pay it off as soon as possible. Even if the account is delinquent or has landed in a collection agency, a zero balance looks a lot better than one that is still lingering.
- Stop applying for credit "every place"! Inquiries are a relatively minor factor in a credit score, but too many applications will definitely have a detrimental effect.
As she's taking the preceding actions, both of you should learn a few things about credit reporting regulations and the law. While credit bureaus can only report derogatory data such as late payments and defaults for seven years from the date of last activity, state law may allow a creditor to file a lawsuit years after the debt is off the report. Check out this interactive tool that breaks down the statutes of limitation on credit card debt in all 50 states. Also, the National Association of Attorneys General publishes a list of attorneys general for each state, and they can provide you more detailed information for their states.
Next, let's discuss "setting up her life" and getting credit. I am a big fan of secured credit cards. These products are backed by funds (a few hundred dollars or so) she puts in a deposit account. The credit limit is usually the same amount as the security deposit. Qualification is fairly easy because the financial institution assumes little risk -- they can simply claim the money if she defaults. Almost all banks and credit unions offer them, so point her in the direction of where she has her checking and savings accounts, or you can help her search online for the best available offers.
She can avoid being "taken advantage of" by reading the applications carefully before applying. While your daughter may be ineligible for the lowest interest rates due to her past credit problems, she does not have to accept patently poor terms, such as a 15-day grace period, application charges and fees for not using the account.
Now, when it comes to assisting your daughter in creating a fantastic credit history, remember this: it sounds like she has already had a taste of what not to do, so review the reverse:
- Make money and credit management a priority. She must dedicate time to setting up an organized system and monitoring her finances regularly. This includes developing a comprehensive budget so she doesn't overspend, signing up for automatic bill-pay with her bank and establishing a private place in the home for her financial affairs.
- Borrow and repay, borrow and repay ... As your daughter demonstrates that she can make good on her accounts every month, on time and in full, she is creating a credit history that anyone who pulls her report can "ooh and aah" about.
- Expand her credit categories. After she proves her prowess with the secured credit card for at least a year, she may apply for an unsecured card and use it just as responsibly. Then, perhaps a vehicle loan or a charge card. Why? Because "types of credit used" is yet another scoring factor, and the more varieties she uses responsibly, the better.
Can you do all this for your child, Gurinder? Absolutely not. Giving her accurate directions and constructive, forward-thinking support can certainly prompt a healthy new start in the world of credit -- but after that, she's on her own.
See related: Statutes of limitation for credit card debt, all 50 states, Credit Card Help: 10 things you must know about credit reports and scores, Credit Card Help: 10 worst credit card mistakes, Credit Card Help: 8 things you must know about credit card debt
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