Brother needs credit. What advice can I give him?

[moneymatters]

Hello all,

It's been awhile since I posted here in the forums, but let me tell ya that my finances have improved dramatically in the past couple years, thanks to all of the wonderful advice I've received from you guys and gals! Honestly, I wish there was more I could do for each and everyone who assisted me in getting my personal finances back on track.

Now, I've been teaching my younger brother about spending smart and saving more, so he can avoid the silly financial mistakes I've made at his age. Surprisingly, Mr. Know It All has taken my advice pretty well lately, as we hardly ever agree on anything. LOL!

Anyway, he has been asking me questions about applying for credit and which credit cards to apply for, and such. He has no credit history as all of the current loans he pay (phone, car, student loans) are in our parent's name. Next year, he plans to get his own place but fears it will be a very difficult process because he has not established credit (yet). There has been many changes in applying for loans since I got my first credit card, so I'm not really sure what to tell him exactly.

Can he apply for a credit card and get one with a low interest rate if he has no credit?

Should he take out a small loan with the bank or credit union?

Again, your advice is greatly appreciated.

[Runaway Finances]

It doesn't matter what the interest rate is on a credit card IF you always pay of the balance each month. Sure he can apply, but the real question is will they give him one. Tell him to check with his bank. See if they offer credit cards. That would be a place to start especially if it is a smaller bank where he knows someone. Taking a loan out with the bank will only help if they report the loan (positively) to the credit bureaus. Tell him to go talk to the bank and tell them he wants to establish credit and ask for their advice on what he should do.

Tell him to try to get some of his loans switched to his name. Even if your parents cosign on them, it does go on his credit report. I did this with my kids while they were in college. I had them put apartments and utility bills in their names. At first I had to sign on them as a guarantor, but it was in their name so they built up some credit. Now they can get utilities turned on without me and without a deposit. She also rented a house without me her last semester of college.

[moneymatters]

Good advice, RF. I wasn't really sure if it mattered whether or not he got a cc with a high interest rate. However, he's been advised to pay his cc loans on time like he does with his student loans, so he's been warned.

Now, he has an account with BofA and we've been on their website recently to research what type of CCs they offer for students but their interest's rates are pretty high (I believe) and variable, instead of fixed. I've been advised to stay away from variable % rates because the % rate change at any time. Please correct me if I'm wrong.

We will go to the bank this weekend and see what options they can give him in getting a loan.

[disneysteve]

Now, he has an account with BofA and we've been on their website recently to research what type of CCs they offer for students but their interest's rates are pretty high (I believe) and variable, instead of fixed. I've been advised to stay away from variable % rates because the % rate change at any time. Please correct me if I'm wrong.

You're wrong . Here's why. The interest rate on a credit card doesn't matter at all because you should NEVER use it if you can't afford to pay the bill in full each month. We charge about $40,000/year to our credit cards and I have no idea what the rates are on any of them. It is just a non-issue because we pay the bill in full. The rate could be 200% and it wouldn't matter a bit.

Your brother needs to be prepared to use a CC properly. That means charging only purchases that he would be making anyway regardless of the payment method and paying the bill in full every month and on time. If he isn't ready to do that, he isn't ready to own a credit card.

[maat55]

He should start with a gas card and only use it to purchase gas. Once he has proven he can do this for a year, he could move up to a regular visa, then pay it in full, slowly increasing his limit to accommodate his regular normal purchases.

Not making a payment in full, he should stop using the card until it is paid in full. He should not exceed 50% utilization of the cards.

This will build credit without paying interest, while slowly adjusting to the PIF rule. He should be very cautious in doing this.

[Hypersion]

Get a student credit card.

[tmvijai]

OR you can get a credit card from CU's which are limited to $500 to start and bound to their checking account. THey can't go overboard with it.

[disneysteve]

OR you can get a credit card from CU's which are limited to $500 to start and bound to their checking account. THey can't go overboard with it.

One thing to remember, though, is that you shouldn't charge more than 30% of your credit limit. Charging more, especially more than 50%, can result in your credit score dropping. So a card with a $500 limit means you shouldn't charge more than about $175 or so.

[reptile411]

I started my credit building by getting a CC. I had about 27 collections on my report and got one from HSBC. I had to pay a $35 application fee and a $70 annual fee right off the top and got a card with a $300 limit on it. When the card arrived it already had the annual fee charged to it. I still have and use this card today.

[FrugalFish]

DH and I started our credit history moons ago by getting a secured card through a major bank. Not sure how readily available they are now, or if they work the same way as they did back then, but at that time you opened a 1 year CD account and deposited the amount of money you wanted for your credit limit (up to $50K). We started with a low limit and charged minimal things here and there, paying it in full each month. It didn't take long to get a few store cards and then a few major unsecured cards. It was a great way to build credit, but I agree with what's already been said about using it responsibly and paying the balance in full each month.

[disneysteve]

I started my credit building by getting a CC. I had about 27 collections on my report and got one from HSBC. I had to pay a $35 application fee and a $70 annual fee right off the top and got a card with a $300 limit on it. When the card arrived it already had the annual fee charged to it. I still have and use this card today.

Are you still paying a $70 annual fee? If so, you should get rid of that card and get one that has no fee. Unless they are giving you something worth $70 in exchange for that fee, it makes no sense to keep paying it.

[moneymatters]

Thanks again for all of your replies. Now, I feel a bit more confident about advising my bro what to do about applying for credit.

He really does not want a credit card and likes to pay cash for all of his purchases. I had the same mindset before I got my first cc but managed to rack up almost $5000 in debt three years later. Hmm.. Go figure. So I've been really stressing to him if he does get one, to use the card(s) responsibily and pay his bills on time as he does with other bills.

Also, I was wondering. His car, which is leased until 1/2010, is in my father's name. He has been making payments on time since 7/2006. Would this loan show on his credit report?

[disneysteve]

His car, which is leased until 1/2010, is in my father's name. He has been making payments on time since 7/2006. Would this loan show on his credit report?

No. If the lease is in your father's name, it shows on your father's credit report.

Be sure to drill into your brother's head to never, ever lease a car again. Buy a car. Borrow if necessary but never lease.

[moneymatters]

Got it, disneysteve. My father realized the mistake shortly after he made the purchase and told him not to lease his next car. My bro plans on keeping this one for a while before buying another one.

Another question on the lease. From 7/2006-1/2010, my brother will have paid approx. $22,000 for his car. The total price of the car was I think a little over $17k when he got it. Yes, I know it's a lot for a 20 year old to pay. Even warned him about it before getting it. Yet, as I said earlier, he's Mr. Know It All. It's what he wanted. However, he's gotten better at taking my advice on finances, amongst other things, over the past couple years.

Does anyone know what happens after the lease on the car ends? Will the car be paid in full?

[disneysteve]

Does anyone know what happens after the lease on the car ends? Will the car be paid in full?

Nope. That's part of the problem with leases. Think of a lease as a long-term rental. When the rental period is over, you have to give back the car and have nothing to show for it. So when his lease ends, he has 2 choices. He can return the car and be done with it or he can buy the car for the agreed upon residual value price. The dealer may be willing to negotiate that price so it can't hurt to try but they don't have to budge. They could stick to the residual stated in the original lease agreement.