Question: My 25 year old son, Jason, has always bought everything with cash and now finds himself unable to get a credit card even from his own bank (Chase) and unable to get a loan to buy a car. He has a $46K/yr income, a frugal lifestyle, but no credit. Chase recommends two options:
Jason and I co-own a credit card account for 6 months and then drop me as an owner.
Jason take out a "secured loan" whereby he puts an amount on deposit and receives a "loan" of the same amount which he repays over 1-6 years at 10%/yr interest and then gets his deposit back.
I know you discourage cosigning loans with one's children. Does "buying" a credit history with a secured loan make any sense? Thank you. Robert, Zionsville, IN
Answer: You're absolutely right. I do discourage cosigning on credit cards and other loans. Every few weeks we get an email describing a financial nightmare caused with one borrower stopped paying the bills and the cosigner is now on the hook for the payments.
That said, my don't cosign rule isn't absolute.
There are exceptions, and this looks to be one. From your description, your son lives frugally and he makes a good salary. And 6 months is not that long an exposure to his credit habits. So, you know your son. If you're comfortable being potentially on the financial hook with him over the next 6 months then by all means go ahead and cosign. Just make sure that you both follow through and get your name off the card 6 months from now.
To pay 10% on a loan he doesn't really need simply to build a credit history doesn't make sense to me. It's an expensive route to go.
I'll run through a couple of other options. For instance, a classic technique for getting a first credit card is to apply for a gas company card. It's usually easier to get approved for one than a traditional unsecured card. Problem is, they are high fee, high interest rate cards. The basic idea would be for him to use it for a brief time to establish a credit history. He should then qualify for a no-fee (or at least a low-fee) card and dump the gas card.
Another well known technique is for him to take out a "secured" credit card. He would open up a special savings account with a bank that issues the card. His credit limit is equal to or somewhat less than the amount on deposit. He'll make some interest off her security deposit. Eventually, after showing a pattern of paying off his bills on time, he'll switch to a traditional unsecured card.
But in your case the cosigning route may be the simplest.