My adult son went thru bankruptcy 4 years ago. Now trying to get a car loan. I’m perfectly willing and able to cosign or even lend him the money. But I think it’s important for him to start getting his history rebuilt.
What’s the best way to get his name on a loan so his credit profile can be rebuilt? Lenders are reluctant to say the least. I’m assuming that as a cosigner my name and social would show up on an inquiry rather than his.
Suggestions?
If you’re a co-signer, the loan is also in his name and will improve his credit score over time. The most desirable features of a credit history are length, size, and quality. The rules for getting there are “borrow little, borrow often, and always, always pay on time.”
In my opinion, the best course is to get a new credit card as soon as possible, and use it. This will almost certainly be a high-interest card with an annual fee and a low credit limit, but the interest doesn’t matter if the payments are on time, and the limit will go up if you ask nicely, and sometimes even if you don’t ask at all. Years of good behavior will create a more reassuring history.
Credit utilization is one of the biggest factors in determining credit score, and ideally it should be about 10% (that is, of the credit available to him, about 10% should actually be used; for instance, if he gets a card with a $300 limit, he should use it to maybe buy one tank of gas a month). Using all of the credit available to you is a red flag, but not using any is at least a yellow one.
The auto loan will initially hit the score hard - his utilization will be close to 100% - but as the loan is paid off, this will decline, and offer greater opportunity to hit the mark in both utilization and the other huge factor, payment history.
Another thing that raises the credit score is having a good credit history before the bankruptcy, as that actually determines most of the credit score, but that’s too late now. If he hasn’t already closed existing lines of credit, that’s a big DON’T. Anything he has managed to maintain from before the bankruptcy - like a credit card with no balance - will add to the length and quality of the credit history.
This, of course, presupposes that he actually has good credit habits and fell afoul of something too big to absorb. If he’s actually not financially responsible, that auto loan will not help him much unless you watch it like a hawk, and it will hit your credit score too.
If he has $1000 he doesn’t need to use for a while have him put it in a passbook savings account. Then apply for a 1k personal loan at the same bank. The savings account is his collateral. They’ll freeze it while he pays off the loan. take the 1K loan check to another bank and do it all over again. Do it 10 times.
Pay off all the loans in 90 days. It will cost a bit, but interest rates are low so the credit he gains will be worth it. He’ll have 10 banks on his credit report saying he paid off 10k in loans in 3 months. Payment history is important on a credit rating.
And in the end he get’s his original $1000 back from the first bank.
I had each of my 3 kids do this with 10k I gave them on their 18th birthday. By the time they were 20 they had 100K worth of loan repayment on their credit reports.
I forgot to add, while you are paying off the loans banks unfreeze an equal amount in the collateral savings account. As money is unfrozen from each account it can be used to make payment to the loans and so on. Make sure that is written into the loan agreement. otherwise the borrow would have to come up with money to make the loan payments at each bank.
I said an untruth in the post above - an auto loan will not do a thing for the utilization rate, which only applies to credit cards. For secured loans like auto loans, the important thing is payment history. When applying for such a loan, extensive lines of credit are a negative, especially if they’re heavily drawn.
There are tons of “We Carry Our Own Loans!” “No credit? Poor credit? NO PROBLEM!”
Chap 7 OK! car dealers who specialize in such borrowers.
His first CC is likely a “Secured Card” - you sent the $500 (and another $100 or so in processing fees) and they issue you a credit card - with a $500 limit.
It’s a start…
Are you certain these loans were actually on the reports like that? Considering how valuable a good credit score can be, I would assume that the reporting agencies have policies in place to prevent exactly that from happening - people articifially boosting their scores by taking out loans just for that purpose. It would seem to be in the agency’s interest to prevent such a scenario, since, after all, the carousel that you set up doesn’t really say anything about your sons’ effective ability to service 100K of debt; it was essentially the same money that they kept rotating. My guess would be that the agencies would prefer not having the informative value of their reports decreased through such schemes, and considering the data they get from banks, they could surely detect something like that.
Even if it worked, it would not last for very long. It is a credit history and relates to the medium term history of borrowing and paying back. They want to see an ongoing record not just a flurry of activity and then nothing.
Yep. Be careful though - some of the cards offered to people who’ve been in recent trouble are scandalously bad - as in you’d pay 250 dollars a year for the use of a 300 dollar credit limit.
An article at bankrate.com has some useful information.
Perhaps, but if that flurry of history then results in a car loan or mortgage, then you build from those.
If he’s not having luck getting a car loan he’s not looking very hard.
Lenders love post discharge bankruptcies, ESPECIALLY for collateralized loans. If he defaults they can repo the car, sell it at auction for nothing, and they have many options to recover the difference with NO chance of him filling bankruptcy until 7 years has passed.
As far as building credit, he could get a few low-limit no annual fee cards and set a different utility (phone, cable, electricity) to autopay on each card, then set each card to autopay the full balance every month. He’s not spending any extra money to buy anything extra to build credit and he’ll get a few on time payments each month and add to his average length of credit history as well as report some level of revolving credit utilization. He’ll get an initial hit to his score for hard credit inquiries when he applies for the cards, but if he applies for several at the same time they won’t affect each other and they’ll all age off his credit report at the same time.
Has he not been working on his credit for the last four years?
Good god, I got carpet bombed with car loan offers immediately after my bankruptcy 4-5 years ago.
When I couldn’t get a bank account in the wake of the bankruptcy, I got a pre-paid Visa card from the money store and occasionally put money on it to spend, just to get the ball rolling. Once I got a bank account, I got a real credit card, even if it started with a pretty low ($350 I think) limit. Never took more than 2 months to pay anything off. I got a Best Buy card offering 18 months interest free when I bought my first iPad. Paid it off in less than a year. Used it twice more (computer, second iPad).
Still got the big black mark there, but my credit score is approaching ‘Excellent’ again.