As the mother of four small kids, I’m just not here, yet. However, I can safely say that I honestly don’t know how I might actually react should one of my littles one day ask me to co-sign a loan or a credit card application for him or her. I’d like to say I will not do it because I know better, but these are my kids and so far we’ve done a stellar job raising intelligent, kind, respectful children who I never believe would do a poor job with their own finances. However, the twins are only 2, our middle is 5 and our oldest won’t even be 8 until July; so what do I know about what kind of teens they might be?
Friends of our have teenagers, and this is a subject that they’ve been discussing lately; should they co-sign a car loan for their new college freshmen? She’s got a great job, she’s smart and she’s responsible. However, she’s not happy with the car they bought her when she was 16. She wants something that’s more her taste, and she wants her parents to co-sign a loan on her behalf. They are thinking about it, and it made me do a little research on the dangers of co-signing any kind of financial application or loan for a child of your own – or anyone else, for that matter.
Your Credit is On the Line
The problem with co-signing is that it’s often not something you really think much about. Let’s say you decide to get that car for your daughter by co-signing her loan and she decides she no longer wants to pay for it when spring break comes along and she thinks a trip to Cancun sounds like a more fun way to spend her car payment this month.
Now your credit is on the line. She’s not making the payment, but someone has to. Now that she’s forgone the payment, it will become your responsibility. If you don’t make that payment for her, your credit is affected. What so many people forget is that a co-signer is still legally and financially bound to that item and to make the payments for it when the person actually driving the car or using the credit card begins to forgo payments. Remember – your credit is on the line, too.
There is one thing to consider, though; you will not take a hit on your credit report until you forgo making that payment. Your teen will take the credit hit first. Once the company begins to contact you for payment and you fail to make it; you are the one who ends up paying it or taking a credit hit, too. Are you willing to do that for your child?
Instead of co-signing a loan for your teen, why not consider something a little more practical? When it comes to a car, that might be a different story, but we have plenty of options when it comes to credit cards. For one, your child might be able to buy his or her own car if he or she has a credit history. That’s why we love that you can help your child sign up for a secured credit card that will report to the major credit bureaus.
This works by allowing your teen to open up a card with a limit only as much as the amount of money he or she uses as a deposit. If your student decides to offer $300 to the card company, that’s the limit that will go onto the card. Most companies do this to help kids build credit and make a positive credit history. After a year or so, that card might be changed to an unsecured card and now your child has a positive credit history.
Another option is to allow your child to become an authorized user on your credit card. One way to ensure your teens are using the card responsibly and not leaving you with a huge bill at the end of the month is to choose a card with a low limit or to add a limit amount to that particular card. Your teen will build some credit history with this, and that means that he or she will eventually be able to sign for their own loans and car notes; and your credit is not on the line as a result of their behavior.
The best way to ensure your teens are using their money responsibly is to teach them to do so. However, at the end of the day it’s never a good financial move to co-sign a loan for a teenager for a car or even for a credit card. There are too many risks that take years to fix if anything should go wrong. They say you should not do business with family, and that’s probably a good line to use when it comes to something like this, too.
Photo by Getty Images