≡ Menu

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.

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

About the author: This is a guest post. You can read more about the author in the biography above.

{ 30 comments… add one }
  • used tires March 4, 2010, 10:35 am

    When I was growing up, my parents gave me a credit card and thankfully, I didn’t betray their trust in me the whole time I had it. I’d seldom even make a purchase with it without checking in with them. Still, just to be precautious, they used an account with not too much money in deposit, so in case something did go wrong, we wouldn’t lose too much money.

    Ultimately, as a parent, it’s a tricky situation and probably always will be.

    Till then,

    Jean

  • Scott March 4, 2010, 10:42 am

    There are student visa’s specifically for this purpose. Parents or anyone for that matter should never need to cosign for a credit card.

  • Kyle C. March 4, 2010, 10:59 am

    In some cases it pays to not have your parents co-sign. I tried to get a loan with my parents cosigning and was worse off than trying to get the loan on my own. I ended up having to lease a car to build enough “credit” to get a loan through Ford.

    Cosigning for anyone is risky, even for your children. You have to be willing and able to take that payment over at the drop of a hat.

  • Mike 4P March 4, 2010, 11:05 am

    Hard to say – my parents never co-signed for me so I’m not sure how necessary it is.

    If I did something like that then I would probably do a credit card with a very, very low limit. :)

  • Houska March 4, 2010, 11:25 am

    With the greatest respect to the author of this post, it presupposes that there is a trust or irresponsibility issue lurking. I maintain the best approach is one where by the time a child would want or need a credit card, they have already learnt financial responsibility by being part of the family’s overall financial discussions and planning.

    Our family was quite financially challenged when I was growing up, but from early high school age I was involved in all major spending and other financial decisions. I was added as an authorized user of my parents’ credit card as soon as it was allowed by the bank (not quite sure of the age) and was by then already filling in my parents’ tax returns as my contribution to the “management chores”. My parents did cosign for my own card when I went to university, but by the time the situation arose, it would have been hard for me to be irresponsible with finances since I was already brought up to be responsible :)

    Now each family’s situation is different, but to be slightly provocative, I think if you’re unsure whether you can trust your kid with a co-signed credit card, then you should re-frame the question as “how can I catch up on teaching my kid financial responsibility since we’re behind on that”.

  • YYC27 March 4, 2010, 11:30 am

    Your description of how a secured card works isn’t correct at all. A secured card does ~not~ operate the same way that a prepaid card does.

    A secured card operates exactly the same way a regular card does, except they have a deposit on hand in case you default. You must make payments every month, and you’ll be charged interest if you don’t pay in full. You will only get your deposit back once you close the account (or if the lender agrees to convert the account to unsecured).

  • robb_stark March 4, 2010, 12:28 pm

    As a staunch LBYM-DINK, this is likely something that will never be an issue.

  • Mike March 4, 2010, 12:57 pm

    When I got my first CC, I had a very low limit on it ~$500. It was enough for any type of purchase I could want it for, but low enough that I wouldn’t get myself into trouble (I never missed a payment, but I wanted to make sure).

  • Jon March 4, 2010, 12:58 pm

    Money (business) and family never mix. There is always feelings of regret on both sides.

    When I was 18, I applied for a mastercard and was given a $500 limit. At the time, this was sufficient to by concert tickets via ticketmaster. Then when I went to school, I asked for and was given a limit increase to $2000. This helped me pay for tuition and other bills, computer, etc. Even when I had a big ticket item to buy, I would pre-pay the card so my limit was not reached.

    The card was always paid in full at the end of each month. I was taught that if you don’t have the money now (or at the very least in the next month), you cannot charge it on a credit card. The 20% interest charges are usurious and there is no reason for you to give up your hard earned money to a credit card company, when they are making a percentage off every charge you make from the retailer anyway.

    There is no need for kids below the age of 18 to have a credit card for their own personal use, if needed for online usage, then a pre-paid credit card should be fine. Maybe a consideration could be made for sending your kids out to the grocery store to buy some milk, but really, you could just as well give them cash or “loan” them your debit card and trust them with your pin.

    If kids are given everything, then they will never be self-sufficient and will always rely on the parents to bail them out. This is why it’s not uncommon to see 30 year-old adults still living with their parents.

  • Carolyn March 4, 2010, 12:59 pm

    My spouse and I have not co-signed a credit card for either of our children but we have co-signed leases on their apartments. One child had a credit card and one did not but her spouse did.. In both cases landlords refused to rent without a co-signor (& without checking credit history first) as they were under the age of 25. We were reluctant to do so but really felt we needed to give them a leg up. The requirements for housing, credit cards etc are much tougher now and it is extremely difficult to establish a credit history. I like the secured credit card as I think it helps people to establish their credit history.

  • Lillie March 4, 2010, 1:09 pm

    The most important factor is to teach children about the importance of managing their personal finances. Co-signing may be an option, if necessary, but careful monitoring should be an option. Many college students and young adults have found themselves in lots of debt simply because it was easier to get credit cards in the past. With the implementation of the Credit CARD Act 2009, students under 21 will find themselves having to play by different rules with the co-signature of a parent as an option. Most parents will probably be in a position to know if the child is responsible enough to have a card. Even with the debit card as an option, it’s important to know the importance of monitoring and keeping track of each transaction.

  • Krista March 4, 2010, 1:17 pm

    I just thought I’d point out a wee error about authorized users. Only the account holder accrues credit history (good or bad) from that credit card. You used to be able to get someone a history by adding them to your card, but not any more.

    It is important to know because I know many couples (especially older) where the wife thinks she had excellent credit because “they’ve” had cards in good standing for years. Sadly, only her husband gets the credit, so to speak.

  • Astin March 4, 2010, 1:20 pm

    Well, I had a brilliant and insightful comment, but your auto-spam detection didn’t like it. Might want to get that tweaked if you’re writing about credit cards.

    The summation of it: Proper parenting – teaching some SIMPLE lessons about credit (don’t buy what you can’t pay for with cash NOW, and don’t carry a balance), limiting access to credit ($500 limit), seetting rules (this is for gas, emergencies, or if you don ‘t enough cash ON HAND), and monitoring spending (looking at the bill every month) can alleviate most of the concerns about credit cards for kids. And debit cards can be more dangerous by far.

  • Cam Birch March 4, 2010, 1:51 pm

    As YYC27 said your description of a secured credit card is incorrect. The initial deposit is held in trust and not returned unless you close the account or the lender is willing to convert to an unsecured card. Depending upon your history a secured card can require a deposit of between 100% – 500% of the available “credit” limit. 100% is very common, more is less common but can be requested if the risk is deemed high.

    Also authorized users do not build credit. Check your credit report, you will see quite obviously that the primary account holder has a credit card listed and the authorized user does not. This is a very common misconception and can sometimes be very dangerous. Should anything happen to the primary credit holder (often the primary wage earner) the other people have not built up credit and are often in trouble.

    Prepaid credit cards are incredibly hard to use online. Many actually prohibit online use. Due to the whole billing address verification done online it is terribly difficult to use. Some prepaid cards have the option to register them for online use but that is a hassle (plus maybe receiving more junk mail). If you are regularly purchasing online (or your child) a proper credit card does reduce the hassles.

    Depending upon the bank or credit card issuer a co-signed card won’t build the child any credit either. This is important to check and verify after you sign up. The sales person will say any number of things that may be completely wrong. 6 months after signing up and using the card, pull your child’s credit history (free once a year) and confirm that the credit card is listed. If not then credit is not being built and the co-signed card is not helping at all.

    Also, by law you can give your credit card to your child to go to the grocery store for you (temporary authorized user). They should sign using their own signature though (although technically you can authorize them to forge your signature, I don’t think that is a road that should be traveled though). This sort of thing wouldn’t be accepted by an electronics store and many others confirm, but most grocery stores are not so strict on their credit card policies.

  • JK March 4, 2010, 3:45 pm

    If kids need their parents to co-sign their credit card, then there must be a reason why credit wasn’t granted in the first place (i.e. they are not ready for a credit card!)

    This is a part of growing up and kids need to do it on their own.

  • Roshawn @ Watson Inc March 4, 2010, 4:03 pm

    I agree. I do not believe it is wise to co-sign for your child. It only sets the child up for a very weird or unhealthy relationship with their parents. For example, if you cannot get approved for a loan on your own, there may be something really wrong with your finances that you need to address.

  • Bryce March 4, 2010, 5:24 pm

    The summer after I started university I got my first credit card. A student card with a $500 limit. All of my friends who applied for a card received one as well, all for $500. The commonailty was we had jobs. If you have a job and are able to pay your card, they’ll give you one on your own.

  • Trevor March 4, 2010, 6:12 pm

    I don’t think the issue is trust – everyone trusts their children, or at leasts enters into transactions with them in good faith until that trust is broken. If you don’t then you probably shouldn’t have had children…! The issue is that many young people do not understand how money works, because they didn’t earn it. When I was young, I took my parents money for granted, as most young people do. Everything was technically “free” since there was no cost to my consumption and I demanded merrily away to my hearts content. Had my parents bestowed me with a co-signed credit card, why would I have treated this shiny piece of plastic that represents my parents purchasing power any differently than I treated my parents themselves? Unless parents teach their children that for each dollar you spend, there is a commensurate cost of effort required to earn that dollar, you should not expect your children to act any differently around money than they would if you were in the room paying for their purchase yourself. One would never hand over the keys to a car without ensuring a child had the appropriate training and a licence because up to that point, most of a childs experience is “costless” chaufferred rides and video game crashes. If a childs experience with money has been similarly costless, training is required before “handing over the keys” to a credit card.

  • JFG March 5, 2010, 12:06 am

    I didn’t you could co-sign for a credit card? Which one does it?

  • Charles in Vancouver March 5, 2010, 12:31 am

    I went with a hybrid solution. At age 19 while working a job between high school and university TD accepted me for a low credit limit Visa card with no co-sign. Meanwhile my parents also gave me an authorized user card with the understanding I would use it for agreed upon purposes and emergencies, and nothing else, otherwise I’d lose the privilege. I built up both parental trust and credit history. I always paid my card on time and over the years my bank gladly upped my credit limit considerably.

  • Matt @ Dividend Monk March 5, 2010, 12:37 am

    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.

  • No Debt Guy March 5, 2010, 11:55 am

    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. :)

  • Caitlin March 5, 2010, 12:35 pm

    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.

  • Caitlin March 5, 2010, 12:37 pm

    Also, when I tried to post my comment, I got this error. I have Javascript and cookies, so I hit back, refreshed, and it then accepted my comment without a problem.

    Sorry, there was an error. JavaScript and Cookies are required in order to post a comment.

    Please be sure JavaScript and Cookies are enabled in your browser. Then, please hit the back button on your browser, and try posting your comment again. (You may need to reload the page)

    If you feel you have received this message in error (for example if JavaScript and Cookies are in fact enabled and you have tried to post several times), there is most likely a technical problem (could be a plugin conflict or misconfiguration). Please contact the author of this blog, and let them know they need to look into it.

  • Ms Save Money March 5, 2010, 11:12 pm

    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.

  • Arjun Rudra @ InvestingThesis.com March 6, 2010, 4:18 pm

    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.

  • MyFinancialObjectives March 8, 2010, 11:04 pm

    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.

  • ParisGirl111 March 18, 2010, 11:37 am

    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.

  • Connie Solidad November 29, 2012, 2:01 pm

    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.

  • Ed Rempel November 30, 2012, 11:06 am

    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

Leave a Comment