Parent has bad credit? Don't become an authorized user

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
My mom doesn't have good credit, so would it be a good idea if she added me to her account to get me a credit card to build my credit? – Savannah

Answer

Dear Savannah,
Love and cherish your mother, but don’t take on her credit troubles. Instead, forge ahead independently.

If you become an authorized user on one of her card accounts, then the payment history associated with that card will transfer to your credit file. If she hasn’t been paying her credit card bills faithfully, then that bad history will not help you one bit.

However, if you’re over the age of 18 and have a steady job, you can probably qualify for a secured credit card on your own. These products don’t require established credit histories. You would just need to offer a cash deposit of a couple hundred dollars, which will serve as your credit line (the amount you can charge to the card). If you handle the card well by charging small items and paying the bills on time, you will be on your way to establishing a healthy credit score. Check out the secured card deals at CreditCards.com, read over the terms and benefits, then apply for one that makes sense for your situation. Note that most secured cards come with high interest rates (APRs). The way to avoid getting socked with interest charges is to only charge what you can afford to pay off at the end of the month. Once you start carrying over a balance from month to month, you'll notice how much more expensive it is to carry debt.

Assuming you’re approved, you will submit the requested deposit, and the issuer will hold it in a special savings account. You’ll be granted a credit line that’s at least equal to what you put down as collateral. In the event you rack up a debt that you don’t pay, the credit issuer has the right to take what’s owed from the funds held in the deposit account. Pay as agreed and the money will remain intact until you close the account, and then will be refunded to you. Also, some secured cards will “graduate” you to a regular, unsecured card after a certain period of time if you've exhibited good repayment behavior.

Secured cards are great because they give people like you the opportunity to start off in the world of credit without the assistance of a parent or other creditworthy adult. As long as you keep the account in good standing, you’ll begin to develop a solid credit score. The credit issuer will send the credit reporting agencies – TransUnion, Experian and Equifax – a monthly report about your account activity. Credit scores, like FICO and VantageScore, are based on the information on your credit reports. They start at 300 and top out at 850. Scores in the mid-700s and above are considered excellent, and to achieve them you'll have to have a history of using a variety of credit cards and loans that you always pay on time and in full.

With this one secured credit card, though, you can create a score high enough (at least in the mid-600s) to become eligible for a regular, unsecured credit card. After a year of charging and repaying, and when you feel ready for the responsibility of two accounts, you should consider adding one.

Card options for minors
However, if you’re still a minor, you can’t sign for any credit product on your own. You can be added as an authorized user on someone else’s credit card and then that account will show up on your report, but as I said above, the primary account owner would have to sustain a good credit rating to make it beneficial to you. For this reason, waiting it out is preferable.

If you’re working, but still under 18, sock away as much money as you can and practice budgeting. Money management skills are essential to credit management. Save for emergencies and for fun. See how long you can make cash last by becoming a savvy consumer. By the time you can qualify for a credit card in just your name, you’ll be less apt to go wild and spend more than you can afford to repay because you know the value of the dollar.

Regarding your mom, her credit problems could stem from a variety of reasons. Some people have more than their fair share of bad luck. They could have lost their jobs and can’t secure a replacement, so charge necessary expenses. That can turn into overwhelming balances. If they had debt already, they might not be able to meet the payments, and fall behind. Lawsuits or bankruptcy can follow. Sometimes people are hit with huge and unexpected medical bills or need to care for a relative, and end up relying on credit cards. If any of this sounds familiar, I hope you can be compassionate toward your mom. On the other hand, if her bad credit is due to irresponsible choices, make a conscious decision to not follow in mom’s financial footsteps. Maybe she can even learn from you one day.

See related: 5 questions every authorized user should ask, Being authorized user on a maxed-out card: Does it help or hurt score?

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Updated: 11-23-2017