Parents’ legal responsibilities on kids’ credit card debt
Your teen had a great time using his credit card on holiday shopping sprees, so much so that he spent to the max and now can’t pay the tab that is due.
This is a reality check right to the wallet for mom and dad. That’s because the legal fine print in most of these types of situations says the parents will be responsible for repaying the debt, along with interest and late fees, if their child can’t repay it.
There are three common ways that children generally under age 21 can get a credit card, and two of them come with “buyer bewares” for parents.
Cosigning
Cosigning for your child allows him or her to start building their credit history with their own card, while reassuring the lender that they’ll get repaid because the account is technically in your name.
In other words, the parents are legally responsible for the debt if their child doesn’t pay it back. When you cosign, the account shows up on your credit report, where it is tracked by the credit bureaus. If you aren’t aware of whether your child is keeping up with payments, you may not know there’s a problem until you are denied credit because of a huge ding in your credit history. The good news is that while cosigning arrangements were once commonplace, most major credit card issuers no longer offer them.
Authorized users
While most card issuers have shifted away from cosigning situations, they do allow parents to add their child as an authorized user on the parent’s own account. This is how I got my start with plastic while in college.
But regardless of the authorized user’s age, they are not legally responsible for the balance they rack up on that card, says Matt Schulz, LendingTree’s chief credit analyst. Instead, the primary account holder is legally responsible. That’s all you need to remember.
“That is why it is so important to be very cautious when making someone an authorized user,” Schulz says. “Have open and honest discussions about the expectations around usage of the card and the consequences if something goes awry.”
Some credit card issuers allow primary account holders to set spending limits on their authorized users. For example, American Express will set spending limits that can be as low as $200.
Ted Rossman, Bankrate’s credit card analyst, likes this approach because “it limits the downside for parents, but your child can still get the benefits of the authorized user arrangement of piggybacking off the credit history (of parents) and getting access to a card for some spending.”
Secured cards
A better approach to giving junior plastic? Consider a secured credit card, which caps how much your child can spend.
Unlike a traditional card, secured cards require a cash deposit, which services as a credit line. Typically, according to the Equifax credit bureau, this can range from $300 to $500, lessening the odds of a child getting in over their head with debt.
The bottom line
With holiday shopping behind us, millions of borrowers now face the reality of not being able to cover their spending sprees. The average debt taken on this holiday season by all borrowers reached $1,549, according to LendingTree’s latest holiday spending report. That’s up 24% from a year earlier and is the highest level since LendingTree began tracking the data in 2015.
It is also safe to assume that younger adults will be among the credit card casualties. Buyer beware.