USA TODAY International Edition
Think carefully if co- signing a credit card
Is your child asking you to co- sign on a credit card? Read this before you agree.
Getting access to a first credit card can be difficult for many young people, thanks in part to consumer protection laws such as the Credit CARD Act that prohibits giving a credit card to consumers under 21 without a cosigner or proof of sufficient income.
Because of the challenges in getting a first card, it’s common for parents to be asked to co- sign for their offspring. If your kids come to you and ask you to cosign on a card, saying yes may seem like the right thing to do – but it in fact isn’t always a good idea. Co- signing can expose parents to significant risk and may not even teach the right lessons in the end.
When you co- sign, you share full legal responsibility for the debt your son or daughter takes on. Before you agree to this, ask yourself these questions.
What alternatives are there to you co- signing for a card?
Co- signing may be the easiest way for your son or daughter to get a credit card, but chances are that it’s not the only way. Your child probably will be able to get a secured card on his or her own even if you don’t co- sign.
If this is a possibility, it can be a better approach because your child will have to put money on the line to get a secured card. The cash deposit your son or daughter makes will act as collateral, eliminating the risk to the creditor and enabling easy approval. Your child has some skin in the game and is forced to save if he or she wants the card badly enough – and you don’t put your credit at risk.
How responsible is your son or daughter with money?
If your child has always been responsible with money, saving his or her allowance and never overspending, the risk in co- signing is far lower for you. In fact, you may decide to help your child get a card as a reward for this track record of financial responsibility.
But if your offspring constantly begs for money or asks for allowance advances, chances are good he or she isn’t ready for credit. You could be setting both you and your child up for disaster if you co- sign and your kid gets into debt he or she can’t afford to pay back.
What are the benefits to co- signing?
When you co- sign, your child may be able to get a rewards card or a better card than he or she could qualify for independently. This could make it possible for your child to be rewarded for everyday spending, while many secured cards offer minimal or no rewards and often charge high fees.
Your willingness to co- sign could mean your child can start to build credit earlier. A longer credit history can be a big boost to a credit score and your child can start establishing a positive payment record, the most important component of a credit score.
You may decide it’s worth co- signing to provide your child with these advantages – especially if your offspring has a track record of financial responsibility.
Do you fully understand the risks?
You also need to consider the downsides. If your child doesn’t pay – or becomes unable to pay because of death or disability – you could get stuck repaying the entire balance due on the card.
Your credit could be damaged if your child charges too much on the card or starts missing payments. And you could enable your irresponsible son or daughter to damage his or her own credit.
If your child charges up a card and doesn’t pay, not only could this hurt your financial situation, but your relationship could also be damaged. This is often the biggest risk parents face, as your relationship with your kids is much more important than money.
Don’t co- sign without careful consideration
Asking yourself these questions will help you decide if co- signing on a card is the right course of action for you and your kids. Remember that co- signing is a big decision, so don’t take it lightly. Take the time to consider the pros and cons – and to talk with your kids – before you make a promise to creditors that may be hard to keep.
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