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Chris Farrell Mar 7, 2012

Question: My son, who is in his mid 30s and is married with two children, has almost no reportable income. He manages an apartment complex in Los Angeles, for which he receives something like $500/month and the use of a three-bedroom apartment. He also picks up web development jobs that are usually transacted in cash. His wife has her beautician’s license and provides services out of the apartment for cash or barter. A few years ago, my son defaulted on an old educational loan and it was written off by the university.

As you might imagine, they have no credit anywhere and circumstances appear bleak they will ever get it with no reportable income or work history that would fit on a credit application. They have almost no savings and often barely scrape by. Recently, an unexpected refrigerator repair was nearly too much for them. I worry that they wouldn’t be able to rent another apartment if they wanted or had to move from their present apartment. Do you have any suggestions on how he might begin to work on his credit rating, given his current situation? Craig, Fairbanks, AK

Answer: Your son and wife are smart to get a place to live at an affordable price in L.A. Before I get to your credit score question, I want to raise what I think is a far more important issue than their credit report and score: boosting their incomes. 

For example, his wife is a licensed beautician, which is great. Yet a big problem with running her business on barter and cash is she isn’t getting credit with Social Security, a key pillar for her eventual retirement. It looks like the same story holds for your son with his web development projects. I know it’s easy to write and hard to do, but I would focus on encouraging both of them to take their skills and get jobs that come with a W-2 or a 1099. They clearly have the skills. 

Of course, there is a lot more to this conversation about job prospects and career opportunities, but I think the point still holds. The real worry is their incomes.

The defaulted student loan is also an important issue. It will appear on his credit history for as many as 7 years after the default claim. So, depending on how long ago he defaulted, it will be difficult for him to get even a credit card. Finaid has a good discussion — with helpful links — on how to deal with defaulted student loans. 

Aside from dealing with his student loan, when it comes to building up a credit history without getting into financial trouble, a time-tested approach is to get a secured credit card. They’ll open up a special savings account with a small amount of money at a bank or credit union. Their credit limit is equal to or somewhat less than the amount on deposit. It pays to shop around, since the minimum requirements and other terms vary a lot. I would focus on credit unions, which tend to have lower fees. 

Eventually, after they’ve used the secured credit card and paid the bill on time and over time — that’s the real key to this strategy — they’ll build up a better credit history and a credit score. Done right, time is an ally. They’ll probably qualify later for a traditional lower-cost (unsecured) credit card.  

In essence, I would use this time to build up their incomes and shore up their finances. 

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