'Renting' credit: a bad idea that's going away
Just when I think I've got credit scoring figured out, some new wrinkle comes along.
By Helen Huntley, Times Personal Finance Editor
Published July 15, 2007
Just when I think I've got credit scoring figured out, some new wrinkle comes along.
Credit-repair companies have been paying people to rent out their good credit, something I'd never imagined was possible. In exchange for $100 to $125 a month, someone with good credit can add a client of the company as an "authorized user" on an existing account for a few months.
Clients, who pay the company as much as $900, can't actually charge anything to the card. However, the account shows up on their credit records, improving their scores and allowing them to borrow money at better rates. It can make a big difference if you're applying for a mortgage.
In response to this sham, Fair Isaac Corp., which developed the FICO score, plans to roll out a new scoring formula starting in September. "Authorized user" accounts will no longer be considered in calculating a score.
The silver lining in this is that the abusers and Fair Isaac have called our attention to a way those of us with good credit legitimately can help our children and other loved ones establish theirs.
However, instead of signing them up as "authorized users," they'll need to be joint account holders to boost their credit records. That means this is a privilege that should be granted only in situations of mutual trust.
Each joint account holder is responsible for everything charged to the card, while authorized users are not. Joint account holders also have more rights; the bank might not allow you to remove them unless you close the account.
If you have good credit, adding the name of someone else probably will not have any impact on approval of the card. Banks are most concerned about the credit of the primary applicant, said Regions Bank spokeswoman Pat Martin. She noted, however, that a joint applicant must be at least 18.
When my daughter was in high school, I opened a credit card in both our names to make it easy for her to run errands to the grocery store. I also knew it would help her establish credit, which can be a plus when applying for car insurance or a job as well as a loan.
However, if I knew then what I know now, I would have added her to one of my older accounts instead of opening a new one. The older the credit history, the better the impact on a credit score.
"If a parent is going to do this, the rule should be that this is a card that has to be paid off every month," said Greg McBride, senior financial analyst for Bankrate.com. "Building a history is important, but alongside that is learning the responsible use of credit. You want to get them in the habit of using a card to their advantage as opposed to using it to buy something they can't afford."
Mismanagement of the account by either of you will hurt both credit scores. McBride also notes that new credit applications lower your score, so don't apply for any joint cards if you plan to apply for a car loan or mortgage any time soon. You don't want to hurt yourself while you're trying to help your child.
Your questions
Q. Do you have to cash in a savings bond when it stops paying interest or can you wait until you're in a better tax bracket?
A. Technically the tax is due when the bond matures, but no 1099 will be issued until you cash the bond. Talk to your tax preparer or financial adviser before concluding any tax savings due to waiting will be worth the interest you forfeit.
Helen Huntley writes about investing and markets for the Times. If you have a question write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money