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Rebuilding fiancee’s credit one small monthly charge at a time

Summary

In his debut column, former FICO executive Barry Paperno endorses a one-small-monthly-payment plan for an engaged couple.

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Question

Dear Speaking of Credit,
I want to help my fiancee rebuild her credit. If we were to get a joint credit card account, and put one small monthly charge on it and pay off the balance in full each month, would that help rebuild her credit? — Matt

Expert answerHello Matt,
I can’t think of a better way to begin establishing a good financial foundation for your future than by helping your fiancee rebuild her credit. This will not only save money and eliminate stress for you both, it’s something you can work on together — sort of like gardening, but with an even better crop of greens.

Since you said “rebuilding” and not “building,” I take it your fiancee has had some past financial difficulties reflected on her credit report and in her credit score. Whether she is rebuilding or has not used credit in the past and wants to establish a credit rating for the first time, the plan of action should be the same: Develop a consistently on-time track record, starting with one or two positive accounts reported monthly to the credit bureaus, and increasing the number of good accounts as time goes on.

So, yes, your plan to get a joint credit card, make small monthly charges and pay off the balance monthly is a good one. Credit scorers like to see regular activity, small balances and, above all, on-time monthly payments, since this demonstrates the ability to manage credit in such a way that if extended additional credit, she’ll be able to handle it.

My only concern with your plan is that if she’s truly rebuilding and has some negative items on her credit report, applying jointly for a card where her credit history along with yours will be considered for approval may result in the application being denied.

Instead, since you appear to be the one with good credit, you may want to apply for a new card individually and then add your fiance as an authorized user once it’s been approved. Or simply add her as an authorized user to one of your existing cards. Or do both.

Why an authorized user?

First, what is an authorized user? Traditionally, this has been someone granted access to the account by the primary account holder, with a common example being a child provided with a card on the parents’ account, but not held legally responsible for the debt. Another, and perhaps the most common example of an authorized user is where a spouse is given a card on which the other spouse is the primary cardholder.

As to the why, when adding an authorized user, not only does the card’s entire history appear on the primary account holder’s credit report, but it also appears on the authorized user’s report and, most importantly, for building or rebuilding purposes, is included in the authorized user’s credit score.

This means that when your fiancee is added to one of your accounts as an authorized user, the history of that card is now blended with her own credit, and assuming the history of the authorized user card is positive (otherwise, don’t add the authorized user to it), the addition of your positive credit should begin to establish or raise your fiancee’s score, starting from the moment it appears on her credit report.

Another way to build or rebuild credit is via a secured credit card. This is a card that can be established despite bad or nonexistent prior credit, and where a security deposit in the amount of the credit limit is required from the user to protect the lender in case of default.

A secured credit card can be used just like unsecured cards, and it will appear on a credit report and be treated just like an unsecured card by most credit-scoring models. The only potential downside to these cards is that the credit limit is likely to be lower than for an unsecured card on which she’s an authorized user, which could limit her ability to charge major purchases, such as airline tickets and major car repairs. But if the main purpose here is to build or rebuild credit, charging large amounts may make it harder to repay on time, which could jeopardize her rebuilding efforts.

So, whether building credit for the first time or rebuilding following a financial setback, either going the authorized user route on a new or existing card, obtaining a secured card, or all of the above can contribute positively to rebuilding your fiancee’s credit.

Hope this helps! Best of luck to you both!

See related:On-time payments cure the stinkiest credit

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