My 20 year old son will soon need to buy a car but he has
no credit. What's the best way for him to establish credit?
I don't know of any stores that will let him pay off a purchase
without first checking his credit. Are there still credit
cards that will let him put some money on hold in order to
back any purchases he might make? How do I find them?
son is about to take one of the big steps to adulthood - establishing
credit. And it's important that he get off to a good start.
The record that he builds now will follow him throughout his
life. And it will effect how much he pays when he borrows
good first step is to open a checking or savings account.
It's an easy way to demonstrate that he's able to handle money
responsibly. Just making regular transactions without overdrawing
the account will begin to build a good record.
next step is to get a credit card. To qualify he'll need to
be 18 years old and have either a steady source of income
or a savings account. It's easiest to qualify for a department
store or gasoline card.
you're a full-time student you won't need to prove your income
to qualify for a card with a low credit limit. Most card issuers
are anxious to sign up college students. Even for major credit
it's harder to get a first credit card after graduation. The
card issuers figure that parents will bail out students but
son shouldn't apply for a bunch of cards. That will hurt his
credit rating. It's much better to get one card and pay it
faithfully for a year. Then apply for a second card. That
will demonstrate that he's managing his credit responsibly.
time cardholders will not get the lowest rates. But if he
pays the entire balance each month it won't make any difference.
And paying bills on time is very important.
Margie's son has trouble getting a card, he'll need to use
the strategy that she mentioned and apply for a "secured
card" first. Money is deposited with a bank which acts
as security for your card. If you don't pay the bill, your
money will be taken from the bank account.
enough competition now so that you can find a number of secured
cards that don't require an application fee. Rates run from
about 10% to 20% and annual fees range between $18 and $45.
Margie's son can ask his bank or check out Bankrate Monitor
to find a card issuer.
you use a secured card properly it's possible that you'll
get a better reception on a non-secured card after 12 to 18
son needs to manage his use of the cards. The best (and cheapest)
plan is to pay the entire bill each month and not carry a
balance. Unfortunately, that's not what most first time cardholders
say that monthly installment debt should not total more than
20% of your monthly take home pay. Even that level could be
too high. For instance, that much money committed to installment
debt could make it very hard to afford a house later.
we move on to the specific goal that Margie had - a car loan.
It's likely that there won't be enough time for her son to
build up a good credit history before he wants the car. He
should apply for a loan at the bank or credit union where
he keeps his checking or savings account. Hopefully his reputation
there is good.
also possible that he'll be able to arrange credit through
the dealer where he buys his car. Sometimes they'll make loans
trying to attract younger buyers for their brand of car. If
he does go through the dealer he'll probably pay a higher
rate of interest.
if no one will give him a car loan, he can get a co-signer.
Margie could agree to be responsible if he defaults on the
loan. But that's a step that should only be taken after careful
thought. Remember, the banks are saying that he's not a good
credit risk. When you co-sign a loan, in effect you're saying
that you know more than the bank. And you're willing to put
your own money behind your beliefs. If anything happens she'd
be responsible to make the payments.
that we've seen how Margie's son can establish credit, let's
ask a different question. Is a car loan really the best way
to go? Is it wise to borrow to buy a car?
to illustrate, let's assume that Margie's son borrows $10,000
to buy the car. He takes out a 4 year loan at the current
rate of 8.8%. He'll be paying $347.90 per month or a total
of $11,947 in payments. In effect, he's paid 20% more for
the car than if he had paid cash.
he's created a pattern that could last a lifetime. If he's
making car payments it will be hard to save up for his second
car. So he'll be borrowing again. And again with the third.
It's as if he's agreed to pay 20% more for every car he buys
as long as he lives.
he probably can't afford to pay cash for the car he wants
now. But by sacrificing with a cheaper, affordable car now,
he could save himself tens of thousands of dollars over the
Foreman is a former Certified Financial Planner who currently
edits The Dollar Stretcher website www.stretcher.com
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