How to help someone else rebuild credit

PM Images/DigitalVision/Getty Images

PM Images/DigitalVision/Getty Images

When a loved one confesses credit problems to you, it can be hard not to help.

But how much help is too much? Read on for some ways to help with varying degrees of risk.

“It’s always going to come down to comfort level, control and the personalities of the people involved,” says Doug Minor, credit expert, legal consultant and co-author of “Anatomy of credit scores.”

If you’re willing to put your own credit on the line

Risk level: High

There are two options that allow you to prop up someone else’s credit with your own:

1. Add the person as an authorized user on one of your cards
Often called piggybacking, this involves asking your bank to give someone permission to use your card. Assuming the issuer reports authorized user information to the credit bureaus, paying the card’s balances on time will boost the authorized user’s credit.

However, as the main account holder, you are responsible for payments. If the authorized user runs up high charges you can’t pay, it will cost you either lots of money or your good credit.

To limit your risk, Minor recommends adding your loved one to a card with a low limit if you decide to go this route.

“If you do put them on a card with a $20,000 limit, you’re subjecting yourself to a lot of potential abuse,” he says.

Simply cutting up the authorized user’s card might seem like a good way to dodge the risks. However, if they’re not using a card, they’re not learning the important lessons that will sustain their credit health in the future without your help, warns Amy Fidelis, marketing and education director with mpowered, a non-profit credit counseling organization based in Colorado. By giving someone a free ride, you’re not encouraging them to pay bills on time, for example, or get practice keeping their credit utilization low.

“If you’re trying to help someone build credit, the best thing you can do is help them learn how to use it,” Fidelis says. “You want a scenario where they’re accessing and using it and understanding these important concepts.”

So, if you do add someone as an authorized user, Minor suggests encouraging them to get a secured card on their own as well. For one thing, two accounts with a positive payment history will provide a bigger credit boost. Plus, when you do kick the authorized user off the account, they’ll have the skills necessary to go it alone.

2. Co-sign a loan
Your good credit standing may help your loved one get a personal or auto loan, which can be an excellent start to credit building. However, while the bills may not come to you, you’re still responsible, and if the loan becomes delinquent, both parties’ credit will suffer. That could leave you in the unfortunate position of deciding between coughing up the loan payments or sacrificing your credit.

“That’s a great deal of responsibility, and we usually don’t recommend that because the risks are so big,” Fidelis says. “If for whatever reason they can’t make those payments, you have to take over.”

The old advice about loaning money applies here, Minor says: Before co-signing a loan for $10,000, ask yourself if you’d be willing to part with $10,000.

“If you ask yourself that question, it makes it easier to decide whether to help,” Minor says. “Are you willing to make all the payments on this loan if this person loses their job?”

The bottom line:
Authorized user and co-signer relationships can and do work, but first acknowledge that these tactics could cost you money and your good credit – or even more.

“The emotional and relationship consequences can also be great,” Fidelis says. “You expected your family member to make on-time payments, and now your credit is in bad shape and you have to deal with the fallout.”

If you’re willing to put some money on the line

Risk level: Low

If you don’t want to risk a single dent or scratch to your credit but are comfortable financially, you might consider giving your loved one seed money for a secured card.

Secured credit cards, which are designed for people with poor credit, require a deposit to secure the credit line. If your loved one can’t afford that deposit, you might step in and spot them a few hundred dollars.

You may never see that money again. But because the card is in your loved one’s name only, there’s no risk to your credit.

“You’re giving them the responsibility, and your risk is capped at whatever amount you give them,” Minor says.

If you’d rather cheer from the sidelines

Risk level: None

Not willing to put money or your credit on the line? That’s completely understandable.

“I see people want to do these things for people, but they’re not in a good enough position themselves,” Minor says.

Luckily, there are ways to offer support that will cost you nothing but time:

  • Help them get started: “You can help them choose the right product to build their own credit,” Fidelis says.

    You might suggest looking into secured cards, for example. Another option: credit builder-loans, which are offered by some credit unions and non-profit organizations to those rejected by major financial institutions. Retail cards, although they often have high APRs, can also be easier for those with questionable credit histories to get approved for.

  • Keep them on track: It’s the details that often trip up those who struggle with credit.

    “You can help them understand how to manage money in general, since that’s a big part of managing credit wisely,” Fidelis says “You can help them be organized so that they’re making their payments on time.”

  • Keep them motivated: While some people get a kick out of watching their credit score rise, for others credit building alone isn’t that much fun. So help your loved one “understand what their goals are and why they’re using credit in the first place,” Fidelis says, whether that’s qualifying for a mortgage or getting a new car with a low interest rate.

    You can also become your loved one’s accountability partner, Minor suggests. That entails following up regularly (once a week or month, for example), agreeing on tasks that need to be accomplished by the next meeting and then following up. You might even give your loved one a copy of your favorite personal finance book and later ask what they’ve learned from it.

    “People who end up in these situations can become pessimistic quickly,” Minor says. “And that encouragement shows them that there’s a way out.”

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