Early start to building good credit
Dear Liz: Our son was recently turned down for a car loan even though my wife and I were willing to co-sign and we have excellent credit scores. The reason for the denial was “no credit history.” Because we paid some expenses and he had athletic scholarships, our son graduated from college debt free.
My wife and I have always tried to live within our means. Other than a mortgage and the occasional car loan that we usually paid off early, we have had no debt. We encouraged our children to live the same way.
Did we give them bad advice? How can our daughter avoid the same problem? Through a combination of work, academic scholarships and our savings, she is on track to graduate in 2013 without any student loans. Should she take one out just so she can pay it back and have a credit history?
Answer: Your children don’t need to take on debt to build their credit histories. A couple of credit cards, used lightly but regularly and paid off in full every month, will do the job.
You may be able to give their credit histories a jumpstart by adding them as authorized users to your credit cards, if you have any. Find out first whether the credit card issuer is willing to export your good history with the card to the children’s credit reports, because not all issuers will do this transfer. Some creditscoring formulas ignore authorized user information, but the FICO, used by most lenders, would incorporate this data in calculating your children’s scores.
Another option is for your kids to apply for secured credit cards. They would make a deposit to the issuing bank and get a credit line in that amount. A secured card that reports to all three credit bureaus can help build credit scores over time. Websites that highlight secured-card offers include CreditCards.com, CardRatings.com and NerdWallet.
Tell the kids to charge no more than 30% of their credit limits (10% or less is even better), and certainly no more than they can afford to pay off in full each month.
If your daughter wants to build up her scores faster, she might want to consider a small installment loan. Having both installment and revolving accounts can lead to higher scores. Installment loans include auto loans, mortgages, personal loans and, yes, student loans.
If she does apply for a small student loan, make sure she fills out the Free Application for Federal Student Aid and takes out federal student loans only. Federal student loans have fixed interest rates, flexible repayment terms and plenty of consumer protections. Private student loans don’t.
Social Security for spouses
Dear Liz: My wife has never worked outside the home and therefore has no Social Security credits. My understanding is that as a nonworking spouse, she is entitled to 50% of my benefit, assuming she is 66 years old and I have started receiving benefits. Is that correct? Answer: You’ve got the right general idea. But spousal benefits are also available to working spouses, your wife has the right to start benefits earlier (at a discounted rate), and you don’t have to actually receive checks for her to get this benefit.
Your wife is eligible for a spousal benefit based on your “primary insurance amount.” That’s the amount you would receive at your normal retirement age, no matter whether you’ve actually attained that age or started benefits. Normal retirement age is currently 66; it will rise to 67 for people born after 1959. If she waits until her own full retirement age to start benefits, then she can qualify for a benefit equal to half your primary insurance amount. If she starts earlier, the benefit is permanently reduced.
If your wife had worked and qualified for her own retirement benefit, the Social Security Administration would give her whichever benefit paid the most — her own, or one equal to a portion of yours.
Because you’re still married, your wife won’t be able to start spousal benefits until you claim your own benefit. However, if you’ve reached your full retirement age, you have the option to “file and suspend.” That means you’d file for benefits but immediately suspend your claim. That way, your benefit could continue to grow while she could begin receiving her payments.
If you were divorced but had been married at least 10 years, she could begin her benefits without waiting for you to file for your own. That exception was put into place so people wouldn’t have to seek their exes’ cooperation.