Building Credit 101

This is like the chicken and egg dilemma, mused Chaim Shapiro. The yungerman needed to build credit to eventually qualify for a mortgage. But Chaim had never gotten involved in any credit card shtick or car rentals as a bachur, so his credit file was virtually nonexistent. Banks like to know whom they’re dealing with before lending them money, he was told. But how does anyone begin building their credit in the first place?

If it takes credit to build credit, how does the first lender’s leap of faith occur?

Very Doable

This question reminds me of a gemara in Pesachin 54a which asks, “How was the first pair of metal tongs created? You need tongs to make tongs.” One explanation is that Hashem Himself must have made the original tool! Building credit is much easier since there are multiple ways to get to first base, lending-wise. One path is using some credibility from another person’s established profile. It’s also possible to get small bits of credit from providers that are willing to take some tiny risks with the vast multitudes of newbie borrowers. Virtually all Americans end up with credit files, and Chaim can too.

Become an Authorized User

For years, the tried and tested way to quickly get on the credit map was becoming an authorized user: someone with an existing credit card authorized another person to spend money on their account. The company then issued a separate card to the authorized user to use as they saw fit—the lender didn’t care who did the spending, it was only concerned with who did the paying! With an authorized card, the legal obligation for repayment remains with whoever opened the account. Even so, this option traditionally allowed the user to build some credit history.

Joint or Co-Signed Accounts

If you follow the logic, however, it’s a bit strained. How does having Daddy (for example) handing out additional cards show any responsibility on the authorized child’s part? Indeed, on the DansDeals credit card forum, some say that being an authorized user doesn’t do much to build credit anymore. A similar option that can work is becoming a joint account holder or opening your own account but with a co-signer. Since the legal obligation to pay is on both parties, credit will be built as long as the card is used responsibly. Each card issuer has its own policies pertaining to whether and how they open such accounts.

Eager Lenders

While most lenders require a credit score, there are exceptions. For example, department stores and clothing store chains often issue credit cards even to those without credit scores. Student and auto loans are also often based on factors besides existing credit files. It’s possible to build a track record of repayments using these avenues.

Secured Cards and Loans

The problem of getting a lender to trust you on your first loan can also be solved by putting up security or collateral for the loan. With a secured card or loan, the bank or card company takes a deposit of cash and lends you only up to that amount. This way it’s never at risk, but since there is a live loan ongoing, it can report that favorably to credit agencies. You’ll need to poke around a bit to find the right solution—perhaps check out Chime’s credit builder card and search for credit unions’ secured loan options.

Reporting Rent or Utilities

A final avenue to consider is using a track record of paying rent and utility bills to prove credit worthiness. A number of services facilitate this by forwarding rental payments from tenants to landlords. (Examples include Experian’s Boost and LevelCredit.) There is a small fee involved, but these services then report these transactions to a credit bureau. Paying to build basic credit seems like overkill to me, but to each their own. Also, not every landlord will be interested in the bit of paperwork these services require. The other suggestions above are tried and tested strategies.

Conclusion

It’s a bit ironic sometimes how eager young people are to build their ability to get into debt. While some use their debt responsibly to grow wealth, there is a huge problem of people falling into credit card debt. Be that as it may, getting a credit score rolling is actually quite easy, for better or for worse.

Just by the Way: Pitfalls of Sharing Credit

It may seem kind to allow others to use your credit to help them build credit, but it’s important to be aware of significant pitfalls if the other party does not pay on time. It’s up to the account owner or co-signer to make good on the debt; otherwise their own credit will be ruined. A simple rule of thumb is to not give credit card access to anyone you would not give a similar amount of cash to.

It’s also important to remember that there can be ribbis issues when allowing others to use your credit. An account owner paying interest for an outstanding balance that is to be reimbursed by another person is generally forbidden. Ask relevant she’eilos before the case arises.

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