Signing up for a credit card is one of the easiest ways to establish a new credit history when you’re starting from scratch. Getting approved isn’t always easy for college students, however. Thanks to the 2009 CARD Act, young adults under age 21 can’t get a card without demonstrating sufficient income or enlisting the help of a co-signer. Asking a parent for help is usually the logical choice, but co-signing poses certain risks Mom and Dad need to be aware of. Knowing what’s at stake beforehand can help you decide whether helping your child with their credit is a good idea.
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Co-Signers Share Legal Responsibility for the Debt
When you act as a co-signer for a credit card, you’re basically guaranteeing the bank that you’ll pay the debt if the other person skips out. If your child falls behind on their payments, both of you will start receiving collection calls. As long as the debt goes unpaid, the interest and fees will continue to rack up, which means you’ll end up owing even more.
Eventually, the credit card company might decide to get a little more aggressive with their collection tactics by filing a lawsuit against you. If they’re able to show that you’re legally responsible for the debt because you co-signed, you’ll have to pay up. If you don’t, the next step may involve wage garnishment or the seizure of your bank account.
You’re Putting Your Personal Credit on the Line
The only thing worse than being on the hook for a debt you didn’t actually incur is having your credit score negatively affected. When you co-sign, the account shows up on your credit report, so any time there’s a late or missed payment, the credit bureaus make a note of it. If you aren’t aware of whether your child is keeping up with payments, you may not even know there’s a problem until you’re denied credit.
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Even if your child is dutiful about paying the bill on time, however, they could still be causing your credit score to drop. Scores are calculated based in part on the total amount of debt you owe versus your total credit limit, so if they’ve maxed out one or more cards that you co-signed for, it makes it look like you’re the one with the spending problem.
Adding a Child as an Authorized User
Not all credit cards allow young adults to apply with a co-signer, but it’s still possible to help your son or daughter build credit by adding them to your account as an authorized user. They can get a separate card that’s tied to yours and have their own charging privileges. If you’ve got an immaculate credit history, it can also help to bolster their own report.
The downside of letting your child sign on as an authorized user is that since the account is technically only in your name, you’re the one who has to pay if they rack up a load of debt they can’t afford. If you’re planning to go this route, you need to be vigilant about checking your statements to see how much they’re charging.
Consider a Secured Card Instead
Opting to co-sign for a secured card is something to consider if you want to cap how much your child can spend. Unlike traditional credit cards, secured cards require a cash deposit which serves as your credit line. Typically, this can be anywhere from $300 to $500, so you don’t have to worry about them getting in over their head with debt.
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As long as the card issuer reports to the credit bureaus, any purchase or payment activity should show on up your child’s credit. Starting out with a secured card that has a smaller limit is a good way for young adults to learn financial responsibility and establish the foundations for a solid credit history.
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