“Authorized user” info may not be enough

Dear Liz: You recently answered a question about a young man who was turned down for a car loan because he graduated from college debt free and had no credit history. This is the same scenario my daughter encountered this past year.

Despite having a solid job for three years at a good salary, plenty of money in the bank (more than $10,000) and no expenses to speak of, she was turned down repeatedly for credit cards because of “no credit history.” She had been an “authorized user” of our cards for several years. (We have excellent credit scores.) She was told that she needed to be a responsible party on the cards for them to be counted in her application.

I would tell parents to have their child obtain a credit card through the bank or credit union that has her college checking account. That’s what we did with our youngest, who is just completing college and now has a credit history.

Answer: You bring up an excellent point. Although authorized user information can enhance someone’s credit scores, lenders usually have additional criteria they want applicants to meet, such as minimum income levels, job stability and a certain “thickness” to their credit files (which might include other types of credit accounts besides authorized-user accounts).

New credit regulations make it somewhat more difficult than it used to be to qualify for a credit card while in college, but it still can be easier to get a card while in school than afterward.

How young ‘uns can build credit scores

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 had paid some college expenses and he had basketball 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 almost always paid off early, we have had no other debt. We encouraged our children to live the same way.

Did we give them bad advice? What advice can we give our daughter so she does not wind up in the same circumstances? Through a combination of work, academic merit scholarships and our savings, she is on track to graduate in 2013 without any student loans. Should she take one out in her name 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 jump-start 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. You may have heard that some credit-scoring formulas ignore authorized user information, but the formula used by most lenders, the FICO, still 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 the same amount. A secured card that reports to all three credit bureaus can help build credit scores over time. A number of websites highlight secured-card offers, including 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 decide to 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 have none of those attributes.

Don’t count on plastic to cover big expenses

Dear Liz: I’m 27 and have no consumer debt, a decent salary and a boatload of student loans. I use my credit cards for most of my expenses to earn rewards points and generally pay off my cards each month. I also take advantage of the 0% introductory rate offered by many credit card companies. This grace period gives me a security blanket so that I can spread large expenses such as insurance or car repairs over several months without derailing my saving plans. Can I apply for these offers without wrecking my excellent scores?

Answer: Occasionally applying for a new card won’t affect your scores much. Typically such applications ding your scores by five points or less.

You should be budgeting and saving for large expenses, however, rather than leaning on your cards. (Car repairs, in particular, aren’t really “emergency” costs — if you have a car, you know they’re coming, and calculators like Edmunds.com’s “True Cost to Own” feature can give you a good idea of what they’re likely to be.) Those 0% offers often come with balance transfer fees or other charges that make the deals a lot less attractive than they seem at first glance.

Also, you should be in the habit of always paying your cards in full — always. “Generally” isn’t good enough, since you could easily be enticed into spending beyond your means, especially as you chase rewards points. Rewards cards are a good deal only if you don’t carry a balance. Otherwise, you can pay frighteningly high interest rates that offset any benefit you may earn.

Restoring credit scores after bankruptcy

Dear Liz: I had credit scores over 800 with no late payments ever. Unfortunately, a medical issue required me to charge $24,500 to a credit card. That led to a bankruptcy, which was discharged in July 2011. My scores dropped to 672, and they’re currently around 680. I’m paying two unsecured credit cards in full each month plus an auto loan that was reaffirmed in bankruptcy. I would like to continue rehabilitating my scores by applying for another loan. When a company requests my credit scores, does it also see my bankruptcy, and would that prevent me from getting credit?

Answer: Some lenders look just at credit scores, while others request credit reports along with your scores. Your bankruptcy or your scores could cause lenders to charge a higher interest rate or refuse to give you credit.

It’s not clear that the scores you’re seeing are FICO scores, however. A bankruptcy would have dropped your FICOs into the 500s, and it’s unlikely they would return to the high 600s in less than a year. What you may be seeing are VantageScores, which have a different score range: 500 to 990, compared with FICO’s 300 to 850.

If you want to see your FICO scores, which are the ones most lenders use, you can buy them for about $20 each at MyFico.com. Scores offered at other sites typically aren’t FICO scores but may be VantageScores or “consumer education scores” that aren’t widely used by lenders.

You’re doing the right things by using a mix of credit (credit cards and an installment loan) and paying your bills on time. You should know, though, that there’s no way to quickly restore your scores to their old levels. It typically takes seven to 10 years for FICOs to recover from a bankruptcy.

But let’s back up a minute. You almost certainly made a mistake by charging your medical care to a credit card. You may have been able to qualify for a discount on your care if you hadn’t. Many medical providers offer charity programs that cut or eliminate the bill for people making up to 400% of the federal poverty line. A single person could make up to $44,680 and still qualify for a break under many providers’ programs.

If you make too much to qualify for financial aid, you could still have negotiated a discount by asking the provider to charge you the same rate that its largest insurer pays. The uninsured are often charged a much higher “sticker price” for medical care than what insurers pay, but if asked, many providers are willing to provide the same discounts.

If nothing else, you probably could have qualified for an interest-free payment program. Once you charged the bill to your card, however, you lost all your leverage to get a discount.

Our credit cards worked in Europe. Mostly.

We just returned from 10 days in Italy, with a plane change in Zurich. After writing about the troubles some U.S. travelers faced using their credit cards overseas, I’m happy to report that we were able to use ours in most places with no problem at all.

Of course, we visited tourist-centric locales (Venice and Florence) where the merchants are used to seeing our old-fashioned magnetic stripe credit cards. Our U.S.-style cards are less secure than the “chip and PIN” model embraced by other countries, but restaurant staffs and shop clerks accepted them without a fuss.

There were a few exceptions:

  • We were out of luck when it came to the automated kiosks at most vaporetto (water bus) stops. As I wrote in my column, such kiosks require the more secure cards. We brought our British Airways card, which is a “chip and signature card,” but that proved useless. Without a PIN, the card wouldn’t work at automated kiosks. (U.S. debit cards wouldn’t work, either.)
  • A few merchants insisted on cash. I ended up withdrawing more money than I expected from ATMs, and ran into a glitch there—turns out the 250 euros I kept trying to withdraw equaled more than my daily limit. Once I got the currency math right, I was able to get cash when I needed it at a decent exchange rate—which was somewhat offset by the $5-a-pop transaction fee.
  • The bad guys in Europe were quick to exploit our less-secure technology. Two days after we returned, somebody used our Capital One card to make three fraudulent charges of $442.58 each in the Netherlands. Fortunately, users aren’t responsible for fraud on their credit cards. For exactly that reason, I wouldn’t use our less-secure debit cards anywhere but an ATM attached to a bank branch. I don’t want to give the scamsters access to my bank account.

For our next trip, I might arrange to get a true chip-and-PIN card, like the one Diners Club now offers its members. Another option is the prepaid Cash Passport card. Or maybe, by then, U.S. issuers will get with the program and make true chip-and-PIN cards available here. I can dream, can’t I?

How to find the right rewards card

Dear Liz: Should we get a rewards card? We have excellent credit scores. I’m a stay-at-home mom and my husband has a good, steady job. We spend about $6,000 a month with our debit card or automatic drafts from our checking account. I think our family should have a rewards card. My husband disagrees and says that for the amount we spend each month, we wouldn’t rack up any points. Is he right? If we should get a card, how do we pick the right one?

Answer: If you’re positive you’ll pay your credit card bill in full every month, you would be great candidates for a rewards card.

Right now, you’re passing up at least $720 in rewards annually. That assumes you’d be getting a card that rebates 1% of your purchases. With excellent credit scores, you could qualify for even richer rewards cards, since those are reserved for people with the best credit.

The simplest rewards cards are the cash-back cards, which rebate a portion of the purchases you make. Card comparison site NerdWallet recently named the Chase Freedom card as the best cash-back card with no annual fee. The card gives you a $200 sign-up bonus if you spend $500 in the first three months. All your purchases earn 1%, and you can earn a 5% rebate on certain categories of spending that change every three months.

NerdWallet also recommends American Express Blue Cash Preferred, which offers a $100 bonus if you spend $500 in the first two months. Supermarket purchases earn 6% cash back, and spending at gas stations and department stores earn 3%. Everything else earns 1%. “There is an annual fee of $75,” NerdWallet.com notes, “but your rewards easily offset the cost. In fact, $25 in groceries every week is enough to make up the difference.”

There are other types of rewards cards that earn points or miles for travel, or discounts on gas. You can learn more about these cards and shop for offers at NerdWallet or one of the other card comparison sites, including CardRatings.com, CreditCards.com and LowCards.com.

It’s important, once you get the card, to keep track of your spending so you never accumulate a balance you can’t pay in full. Always pay your account on time, since a single skipped payment can knock up to 110 points off those excellent scores.

Could son’s unpaid bills harm parents’ credit? Maybe

Dear Liz: Our 24-year-old son lives with us. He failed out of college, has been fired from two restaurant jobs and is working part time at a grocery warehouse. He has neglected to pay his credit card for several months. He also waits until his cellphone carrier threatens to turn off his phone before he pays half of that bill. We are concerned that his poor payment history may start to reflect on our good credit histories. We are retired and may want to build a new house. His bills are sent to our address, and creditors call our home phone number looking for him.

Answer: His debts shouldn’t affect your credit reports and scores unless you cosigned loans or other credit accounts or added him as a joint user to your credit cards.

Note the word “shouldn’t.” It’s possible that an unethical collection agency would try to get you to pay these bills by posting the overdue accounts on your credit reports. That could negatively affect your scores. Check your credit reports at least once a year at http://www.annualcreditreport.com. You also may want to consider ongoing credit monitoring, which can alert you if any collections or other suspicious activity shows up on your reports.

Speaking of unethical actions, you need to consider the possibility that your son could steal your financial identity. He probably has access to the information he would need to open new accounts in your name, including your Social Security numbers. His failure to pay his bills, even though it appears he can, indicates some moral shortcomings. He may not be low enough to rip off his parents, but if you have any suspicions about his trustworthiness, consider putting a credit freeze (also known as a security freeze) on your credit reports. This freeze should prevent anyone from opening credit accounts in your name.

Finally, you can write letters to creditors telling them to stop contacting you. You run the risk that such a letter could lead a creditor to sue your son. But his creditors may sue him anyway if he doesn’t respond to their requests for payment.

5 debit card don’ts

ShopSmart, the excellent magazine from the publishers of Consumer Reports, just came out with a list of ways you shouldn’t use your debit card. Among them:

1. Don’t use your debit card for big purchases or when you shop online. Credit cards can serve as a middleman in disputes, so you’re typically not out any money if there’s a problem.

2.  Don’t take your debit card on trips. Credit cards often have travel insurance; debit cards don’t.

3.   Don’t use a debit card if you’re worried about getting ripped off. You have more protections under federal law with a credit card. You’re only responsible for up to $50 in unauthorized purchases, and credit cards typically waive that small amount. “With a debit card, you can be out $500 if you don’t report the theft or loss of your card or PIN within two business days of discovering the problem,” the magazine noted.

4.      Don’t rely on a debit card if you want to raise your credit score. Debit cards don’t build credit history. Credit cards do.

5.      Don’t use your debit card if you want to earn money on purchases. Banks have eliminated or reduced most debit card reward programs, while many credit card issuers have enhanced theirs.

Want to save money on gas? Check out these cards

Credit card comparison site NerdWallet took a close look at gas cards offered by Gulf, BP, Chevron, ExxonMobil and Shell and compared them to 10 cards that offered rewards at any gas stations. Nerdwallet’s conclusion: it doesn’t pay to be loyal to one brand of gas.

NerdWallet found the station-branded cards offered lower rewards and higher interest rates, plus they rarely had sign-up bonuses.

From the study:

There’s a popular misconception that station-branded gas cards will give you better rewards in exchange for limiting your fill-up options. But when you step back and actually compare, the numbers just don’t add up.

So what should consumers do who want gas credit cards?

Consider these no-fee, non-branded gas cards:

  • Pentagon Federal Platinum Rewards: unlimited 5 points per $1 on gas and $250 signup bonus
  • Chase Freedom: 5% cash back on gas for half the year and $200 signup bonus

Prepaid cards aren’t a great choice for travel

Dear Liz: I have been granted a Chapter 7 bankruptcy discharge of all my debts. I’m now debt free and plan to stay that way. I’ve been saving like crazy and have enough to afford a cross-country driving trip to attend my son’s wedding. I’d like your advice on using prepaid debit cards to cover expenses such as fuel, food and lodging. My plan is to load each of three cards with an amount of money to cover each category of expense, based on my best research estimates, as a means of controlling how much I spend. If you feel this is a good plan, which would be the best brand of card to use?

Answer: Your determination to stay out of debt is admirable, but prepaid cards are problematic. You don’t have the same federally mandated consumer protections you have with a debit or a credit card, so merchant disputes or a lost or stolen card can wind up costing you big time.

Furthermore, these cards can be expensive. You often pay to activate the card, to load it with cash and to access the cash in transactions. Card comparison site NerdWallet.com studied 40 popular prepaid debit cards and found that the average card cost nearly $300 annually in basic fees. Monthly fees of up to $14.95 took the biggest toll, but $1 to $2 fees per transaction and for ATM use could easily cost a typical user more than $20 a month.

If you’re convinced prepaid cards are the best money-management tool for your situation, though, you might want to choose the American Express Bluebird, which was dramatically less expensive than its competitors in the NerdWallet study. The Amex card charges no monthly or per-transaction fees and allows for direct deposit. ATM withdrawals cost $2 apiece and cash reloads are just a buck, compared with an average of $4.50 with other cards.

Eventually you may want to look into getting a secured credit card to help you rebuild your credit scores, since prepaid cards won’t help with that. A secured card is one in which you make a deposit at the issuing bank, usually between $200 and $1,000, and get a card with credit limit equal to your deposit. You don’t need to carry a balance on these cards, but you do need to have and use credit if you want to rehabilitate your battered credit. NerdWallet recommends the secured cards issued by Orchard Bank and Capital One.