With the current economic turmoil, parents must weigh risks before co-signing their card credit card.
Even amid a crisis, you (the guardian) must decide whether their college kid requires a credit card. And for kids without a credit background, a parent/guardian must co-sign on the card.
Though this may seem like your responsibility to your son or daughter, parents must understand that there are other ways to help a child establish credit without putting at risk your credit ratings or disappointing your kid.
So, what happens during co-signing?
Co-signing simply means promising to pay the debt on a credit card if the account owner (your kid) is unable to pay. Taking liability for someone else's spending is a tough decision for a parent.
In such arrangements, the credit card has a primary account owner (your kid) and a co-signer (the parent). This often happens when the primary account owner does not have sufficient credit to set up their account, and someone (a co-signer) must chip in to help them.
It's a strategy by credit card firms to avoid the liabilities tied to a client without credit. When a co-signer comes in, he/she covers the risk— because they will pay if the primary account owner fails.
The Dangers of Co-signing
A lot is at stake. For instance, when your child overspends on a credit card to treat their friends. Such purchases cannot be reversed. And if your child's side-hustle cannot sort the debt, you will certainly have to pay it.
What's more, the risk increases if the spending pushes the card's credit utilization ratio to 50 percent, when it should never go beyond 30%. Careful cardholders keep the ratio at 10%.
Credit utilization covers 30 percent of your credit card score. That means you and your kid's FICO will almost certainly deteriorate thanks to your connection to their account.
Helping Your Kid Build Credit in a Reduced-Risk Environment
You can still help your son build credit through low-risk strategies. Below are some ideas to try.
- Authorized user. This method involves including your kid as an authorized user in your credit card accounts. This way, you can monitor spending and train your child to manage credit. And though it has temporary effects on the credit score, the parent still clears all bills on the card.
- Secured credit cards. This involves putting a deposit with a card provider who then offers your child a card. The deposit amount serves as the credit cap to help control spending. While your credit remains unaffected because your son owns the account, parents must still monitor to help their kids maintain a desirable score.
- Student credit cards. These cards are built to help students grow their credit. Some issuers even have rewards for students who meet specific requirements. These student-owned cards have less-strict terms and will obviously not affect the parent's FICO.
Helping your son to establish their credit doesn't necessarily mean suffering for their financial mistakes. Parents must follow a better strategy to protect their bottom line while training their kids.
Author Bio: Michael Hollis is a Detroit native who has helped hundreds of business owners with their