Helping a child establish credit in the 'post-piggyback' era
Once-easy path to new credit eliminated; creativity needed now
Editor's note: See more recent story, FICO gives clemency to piggybacking
All good things come to an end. That includes "piggybacking."
This controversial credit practice gained steam a few years ago as a foolproof way for people with bad credit to significantly boost their credit scores, sometimes by hundreds of points in just weeks. They simply paid a fee to a company that arranged to add them as an authorized user to the credit report of a person with stellar credit, and voila! Instant good credit.
Today, piggybacking's days are numbered. The three major credit bureaus -- Experian, Equifax and TransUnion -- decided early in 2007 to phase out the practice because it was being exploited.
Creditors, who viewed piggybacking as a near-fraudulent method of gaming the lending system, lauded the decision. Many other financial experts agree. "It keeps the playing field level," says Jan Dahlin Geiger, a financial planner and author of "Get Your Assets in Gear! Smart Money Strategies."
But it came with a price: It hurt the ability of parents to give their children an early boost in establishing their credit. Parents have typically signed their children on as authorized users of the parents' long-established accounts. The children would get the credit-score benefit of their parents' good behavior.
In the wake of the banishment of piggybacking, however, alternatives do exist for parents who want to help their kids establish good credit and keep it.
Many financial experts feel that doing away with piggybacking is a good decision.
"Having their own account is a good independent learning experience for kids," adds Linda Y. Leitz, a certified financial planner and author of "The Ultimate Parenting Map to Money Smart Kids."
New credit now takes more work
At the same time, a little extra work is now necessary to help a child initially establish a good credit history.The easiest way is to open a joint credit card or co-sign a car loan with your child. The good news is that while any form of joint credit account can raise both scores, the bad news is that both borrowers are responsible for the entire loan.
"The worst thing would probably be adding your kid as a joint user without thinking through what that really means," says Liz Pulliam Weston, a syndicated financial columnist and author of "Your Credit Score: How to Fix, Protect and Improve the 3-Digit Number that Shapes Your Financial Future." "The kid now has equal access to your account and equal responsibility for paying the bill." While that might be fine for some families, it could turn out to be a disaster for those who are financially insecure. Just as children's credit scores benefit from parents' on-time payments, all would be penalized for late payments or defaults.
Another option is to sign your child up for a card from a department store or gasoline company with a low credit limit. "They will often open accounts for people without a credit history," says Leitz. "Having a small limit that's used for regular purchases and paid off each month is also a good exercise in budgeting while building credit."
Think outside the box, inside the cell
Peter Bielagus, a licensed financial adviser and author of "Getting Loaded: Make A Million While You're Still Young Enough To Enjoy It," suggests contacting small banks and credit unions, because they often have a sympathetic ear for people with no credit. "Some banks will give a $500 loan that's secured by a $500 bank CD," he says. In addition, he says, many utility companies submit payment information to credit bureaus, so it's a good idea to call the electric company, cable and phone companies to add a child's name to the account.
And the next time you complain that your teens have cell phones permanently attached to their ears, consider it an opportunity. "It's a good idea for the child to have a mobile phone account in his own name, so he can begin to establish credit with this account as well," says Geiger.
Lessons for the long haul
Once a child is responsible for a credit card or loan, all experts agree the best education is to pay off the balance every month. Parents should then monitor the account online to make sure their child is complying.
"Some parents want their kids to just say no to credit, but more than 80 percent of college students already have their own credit cards," says Weston, who believes the time to start teaching kids about credit is while they're still under your roof. "Ignorance is not bliss," she says. "If they're losing control of their credit, it could affect their future for years to come."
Indeed, many parents are still in the dark about how credit works. "Few adults have received formal training in money management, which makes it difficult to educate youth on the financial skills necessary to make sound decisions," says Thomas Fox of Cambridge Credit Counseling Corp., and author of "The Cambridge Guide to Credit, Debt and Personal Finance." He recommends that parents contact their local credit-counseling agency and schedule a meeting with credit counselor with their child.
Having a credit card -- whether in their own name or a joint account -- is an important first step in building a lifelong credit history, but it is by no means the only one. Liz Weston suggests children also sign up for checking and savings accounts. "Checking and savings accounts don't typically show up on a credit history," she says, "but they do help demonstrate stability to future lenders when a child is old enough to apply for credit on his own."
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