Is It Smart To Co-Sign for Your Child?

I imagine, from a parent’s perspective, the prospect of co-signing for a son/daughter’s credit card stirs up a number of emotions and thoughts. There could be number of reasons why a young adult might want/need a credit card, from paying their tuition, to purchasing a big ticket item like a second hand car or perhaps to even start a business. Part of the reason a number of parents eventually give in to their son/daughter’s request is because they love them and cannot say no. But reasons such as pursuing an education or starting a business can be very hard to say no to, simply because education and entrepreneurship are skills and traits that almost all parents want for their children.  These and similar justifications run through the minds of parents all the time but financial experts caution strongly against parents co-signing loans/credit cards for their children.

While there are many youth who know how to be frugal and may be understanding of how credit cards work, many more will be likely to overextend their limits, miss payments, and leave mom and dad ultimately on the hook for both the payments and the dent in credit scores.

High Costs of Co-Signing

As a co-signor you are essentially agreeing to be fully responsible for payments on charges made on the card. It will not take long for a few bad financial moves on the part of your kid to ruin your own credit history. Lenders now want perfect credit before they would consider a loan to anyone. If parents are still in the market for another house or line of credit for other reasons, any mistakes on their child’s part regarding credit cards can end up costing parents much more than they anticipated. Additionally, poor payment histories or collections will remain on a credit report for years and lenders do not give one iota of thought to who is actually responsible for overdue accounts.

Teaching a Bad Lesson

Many also believe that parents who sign on a credit card for their child are setting a bad example. Kids who have mom and dad do everything for them will never learn to be self-sufficient. They may also be more careless about their credit card spending, especially during the unsupervised college years. If a child knows parents will foot the bill no matter what, they will likely not learn the necessary basics of personal finance. Parents should be working with their kids to teach them how credit works and how important it is later in life. Children who grow into adulthood understanding that credit is a privilege and not a life entitlement may grow into the most financially responsible adults.

Alternative Options

Some parents will still co-sign for a child’s credit card and hope that a strict set of spending rules and consequences will help the child to make the right choices. That is certainly an option for different families. For others, alternative plans may be in order.

Here are some options beyond plastic:

Debt Cards – Many can still be used as a credit card for purchases but there is a lesser chance that balances will be overdrawn because the money comes directly from the account. To add extra responsibility to the mix, parents can require that kids put their own money into the joint account from part time jobs and summer jobs so parents are not relied on totally for financial support.

Secured Credit Cards – Secured credit cards are essentially a prepaid credit card where all charges made are deducted from a deposited balance. Many kids can get secured cards before regular credit cards and still build up a good foundation for credit history and score since these types of cards still report back to the credit bureaus. Money must be fronted to activate the card and replenished when funds run low.

Authorized User – On a parent’s credit card account, children can be added as an authorized user. Parents are still ultimately responsible for the credit card payments but the move can help build a credit history for a young adult. If limits are crossed, authorized users can be removed fairly quickly. Some credit card companies will even allow specific restrictions on the authorized user card’s spending.

This post was written by Arjun Rudra, the founder and editor of Investing Thesis: Credits Towards Financial Freedom For more investing insights, interviews with portfolio managers and trading strategies, please consider subscribing to his feed.

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Ed Rempel
8 years ago

Arjun,

I have seen quite a few cases of parents co-signing for children. Usually it as not a credit card, but a mortgage, car loan or debt consolidation loan (when the child has gone through a bad time).

It can be very difficult for parents to stand by and watch their kids suffer or struggle, but that is they way they can learn.

When parents always step in to save their kids, they deprive their kids of the chance to learn valuable financial lessons.

What parents need to know is that if you co-sign a loan or mortgage, that loan or mortgage shows up on your credit report as well. If you apply for any mortgage or loan yourself after that, you have to prove that you could pay all your debts and your child’s debt, as well as the new loan/mortgage in order to qualify.

In short, your child’s loan or mortgage payment is part of your TDSR now. I have seen parents unable to qualify for a mortgage because they co-signed a car loan for their child.

I have also seen a child default on a loan, which means the parent must pay the full amount or have their own credit ruined.

Also, once you have co-signed, it can be very difficult to get your name off. Banks are usually very hesitant to take your name off. Your child will have to apply to take over the loan on their own.

In the end, you have to know your kid. It can be okay for a responsible kid that you want to help temporarily. However, most of the time it is a bad idea to co-sign for your child.

Ed

Connie Solidad
8 years ago

I think that it can be a good thing to co-sign with your child as long as you’ve taught them financial responsibility growing up. If they’re constantly spending every dollar they receive without saving anything, that would be a red flag. Don’t co-sign on anything too big or that would stretch their budget. Start with smaller items.

ParisGirl111
11 years ago

I believe adding the child as an authorized user is the best way to start off regarding managing credit correctly. This way, you can monitor the child’s spending and payments,and still have control to remove them before they place a dent on your credit. When the child seems like they get the financial responsibility of the credit card, then they can go out on their own and apply for one.

MyFinancialObjectives
11 years ago

Debit cards are great for children because their limit is what is in their bank account. Give yourself the ability to add and take money from their account, and you can help them in times of need.

Arjun Rudra @ InvestingThesis.com
11 years ago

Hi MDJ readers,

I agree that the article does pre-suppose that young adults will misuse a credit card co-signed by parents. The reason I used that as a frame of reference as I knew of at least a dozen friends in university who held true to this assumption. Sure, not everyone is like this, but I simply wanted to highlight one side of the story.

There are clearly multiple sides to this story and a number of you have touched on them.

Just wanted to say that all of you have made outstanding points and thank you for all the comments.

Ms Save Money
11 years ago

My parents never co-signed or put my name under anything they purchased.

I know a lot of my friends had their parents help them build their credit and got a head start – but I’m glad my parents didn’t because I feel good that I built everything on my own.

And that goes with purchasing my own car and paying my way through college.

So I think in the end – the best way to go about this with your children is to support them – but let them be responsible for their own finances.

Caitlin
11 years ago

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Caitlin
11 years ago

I’d say it depends on the parents and children and the situation. When I turned 18, I got a credit card with a low ($500) limit. The point was to start building credit, and my parents had taught me for years that I should only charge something to a credit card if I could go home and pay it off that day. (not that I had to actually pay it off the same day, the point was merely not to buy something on credit if you couldn’t buy it with cash).

I have a student loan that was co-signed by my mom, because I didn’t have enough credit at the time to qualify on my own. Due to how I was raised, it never occurred to me that this meant I could skip out on payments and she’d be responsible for it (in my mind, that situation cannot exist) – all it meant was a way to encourage the bank to let me borrow the money. I make every payment on that loan, because it’s my loan. Not a complicated issue.

No Debt Guy
11 years ago

I would never co-sign for a child. If you want something and don’t have the money for it then time to work more. I have no issues helping out with the necessities of life and education as long at they are being responsible with the money they have.

My attitude likely comes from my teen years when my parents did not have the financial means to co-sign for anything. I worked, I saved and I did not use credit to purchase anything until my first home at 27 years old and a new vehicle at 32 years old.

Maybe I am just bitter and jealous. :)

Matt @ Dividend Monk
11 years ago

Depends on the type of co-sign. When I went to college, my father co-signed my educational loans so that I could go to college. He co-signed for a credit card as well so that I could build some credit, but only because he knew I was more frugal than him even. I hardly used it, though.

I think a parent has to make the judgment call based on the child’s personality.