Thanks to a law called the CARD Act, it’s hard for young people to get a credit card unless they have solid proof of income – or a co-signer. As a result, it is common for parents to be asked by their children – including students – to co-sign for a credit card.
If you are one of the many parents whose children are applying for this type of financial assistance, there are three key questions you need to ask yourself before moving forward.
By asking yourself each of these questions, you can make the choice that is right for you when it comes to co-signing, and I hope that neither you nor your child will regret the decision you have made.
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1. How will your child use the credit card?
The first big question to consider is how your child will use the credit card. When you co-sign the card, you become responsible for all purchases made with it. If your child reaches a balance of $1,000 and does not pay it, the creditor could come after you and try to collect the money directly from you.
If your child wants to use the card for just one small purchase per month to establish a positive payment history and build credit, you really don’t have much to lose by co-signing. At most, you would be responsible for the small amount they charge each month, so the risk to you is minimal.
If your child wants to use it to cover routine expenses, spring break trips, college tuition, or other major expenses, they may end up worsening their financial situation if they go over their heads – and make your own money management efforts more difficult if you’re stuck with the bill.
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2. Do you trust your child to be responsible?
While your child may have the best intentions for the credit card they ask you to co-sign, you’ll want to be 100% confident that they’ll use it responsibly.
If they don’t and end up in a lot of debt or even just paying their bill late, they could end up hurting their own credit and yours as well. The last thing you want is to co-sign only to find out that your child seriously damaged their credit while in school and is now having trouble getting a car loan or mortgage after graduation – not to mention the challenges you could personally encounter while borrowing if your credit takes a hit too.
3. How would your finances be affected?
Finally, you need to think about the impact co-signing might have on your credit report.
You’ll end up with an inquiry into your credit report when co-signing the card, which is enough in itself to potentially affect your credit score temporarily because too many inquiries are seen as negative.
If your child uses more than 30% of the available credit on the card, this can also lower your score. And late payments or defaults can be devastating. You’ll probably want to have good credit as you approach retirement, and you don’t want to jeopardize your own situation if you have to pay off the card or if your credit score drops due to irresponsible borrowing behavior.
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