If you’ve ever struggled with credit or debt problems in the past, you probably want to help your child avoid repeating your mistakes. On the other hand, if you’ve managed your credit soundly and understand the benefits of doing so, that’s a life-skill you’d probably like to pass on to your children.
Regardless of your motivation, parents want good things for their children, and helping your child to establish good credit certainly falls into that category. Just make sure you don’t hurt your own credit in the process.
Why You Should Never Co-Sign
Credit cards can be great tools to help your child establish a solid credit history, provided the accounts are managed properly. Once your child turns 18, they may be legally eligible to open a credit card in their own name. The catch, however, is that for people under the age of 21, there are certain restrictions.
Thanks to the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or the CARD Act, credit card issuers are no longer permitted to open accounts for people under 21 years of age unless (a) they have the ability to pay their debts or (b) they have someone over 21 who is willing to co-sign.
As a parent who wants the best for your child, you may be tempted to co-sign in order to help establish a credit card account in your kid’s name. Co-signing, however, can be a huge mistake that can put your own personal credit health at risk if you depend on your kid to use the card wisely and to make timely, consistent payments.
Any mismanagement of the account will impact both signers, not just the primary user of the account. Thankfully, there are better methods.
The Authorized User Method
Instead of co-signing for a new credit card account, you may consider adding your child to one or more of your existing credit cards accounts as an “authorized user.” By adding your child onto your credit card, you may be able to help them establish credit if the card issuer reports to the three credit bureaus, without putting your own credit in jeopardy.
An authorized user account is essentially a credit card with training wheels.
When you add your child onto the account, you’ll receive an extra credit card with your child’s name imprinted on it. You’ll still receive the bills and, while your child can help pay for anything they purchase, you will ultimately be responsible for the payments, including any debts your child racks up with the newly issued card.
If your child doesn’t manage the credit card as he or she should, you can call your card issuer to remove their authorization to use your account.
Additionally, an authorized user account can protect your child’s credit in the event of unforeseen problems in the future. For example, if you ever fall behind on payments or experience a default on the account due to job loss, illness, or other setbacks, your child wouldn’t be liable for the debt and could ask to be removed from the account, thus erasing any potential blemishes from their credit reports.
Educating Your Child About Credit
The most important thing you can do as a parent to help your child have a head start in the credit department is to educate them.
Your child should know about the importance of on-time payments, the benefit of never charging more than they can afford to pay off in a given month, and the necessity of monitoring their credit reports for errors.
Proper credit management habits can be learned at a young age. Poor credit management habits can also be learned at a young age, and they are hard to unlearn.
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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.
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