Kids and Credit Scores

Question: I was wondering if you don't use any credit cards, how did you establish your credit history?  My son is 17 years old and I would like to tell him to only get an American Express (which he has to pay off each month) when he becomes an adult so he can establish a credit history.  Then, when he decides to purchase a house, he can do so with a lower interest loan that comes with good credit (now they are stipulating a FICO score of over 700 or 720). However, if there is a way for him to avoid getting a credit or charge cards altogether and he would still be able to get a mortgage, I would obviously prefer this method.  Could you please advise?

Answer: You pose an excellent question.

We never had a credit card and had no problem borrowing money for a home. We put 15% down and borrowed much less than the bank would have let us borrow. Later when we went to refinance, it still was no issue. You don’t need a long credit history to borrow responsibly.

That was good enough for us, but we’ve decided to do something a little different for our kids.

We’ve helped them establish credit by getting a student credit card (we don’t like the idea, but we know how the credit score system works). You need to know the rules and play by the system, but you don’t need to get totally sucked into the debt-laden lifestyle. Most banks offer a free credit card (no annual fee). Daughter Becky only uses it for her gas purchases and has it automatically paid out of her checking account each month.

Credit scores are based on numerous things including: length of time the line of credit has been open, payment history and percent of the credit you are using (if you go over 50% of the available amount it is not a good thing).

Becky hasn’t applied for a home loan yet, but her goal is to have enough cash to put down that her credit score will be of little consequence.

There is a new FICO Expanded score which takes into account bill payment and cash payments. Read more here:  
http://www.americascheapestfamily.com/newsletters/08/5/fico-fair

Here are a couple of other articles that might be helpful
http://www.fico.com/en/Products/Scoring/Pages/FICO-Expansion-Score.aspx

http://www.fico.com/en/FIResourcesLibrary/Lenders_Success_2249CS.pdf