Should you co-sign for your kid’s credit card?
Credit is a privilege to be earned, not an entitlement.
Much has been made about new restrictions on credit cards for those under 21 when most provisions of the Credit CARD Act take effect Feb. 22. (Too much, in fact, according to our buddy Frank Curmudgeon at Bad Money Advice.)
It remains to be seen whether people under age 21 will have a more difficult time getting a credit card as a result of the new law. But just in case your child applies and is turned down because of insufficient income, should you co-sign for that first credit card?
Our answer: No, absolutely not. Not even if it were the last card on earth, flat-screen TVs were 60% off, and your birthday was four days away. (Particularly not then.)
Can you tell we feel strongly about this? Here’s why:
In general, we think co-signing for any personal loan is a very bad idea. But Janet Bodnar pointed out three reasons specific to teens and credit cards in a Kiplinger’s Personal Finance post last summer:
- Your kid has to learn to stand on his or her own two feet. “As long as kids have Mom or Dad to fall back on, they're unlikely to take full responsibility for using a credit card,” she wrote.
- Your child’s irresponsibility -- late or no payments, over-limit charges -- could hurt your credit score and your bank account. The credit bureaus won’t care that it was the kid who messed up. You’re on the hook.
- Your child doesn’t need a credit card. There are alternatives, which we’ll address below.
We’ll add another reason: Co-signing for a credit card sends the wrong message. Bodnar points out that “credit is a privilege, not an entitlement.”
We even think that asking someone to co-sign for your card is a selfish act. If you can’t get credit on your own, there’s likely a good reason. Act like an adult, be financially responsible and build a good credit score.
For a good general horror story about co-signing loans, check out this post from Mr. Credit Card. “PT” at PT Money explains what often happens when a college kid gets a credit card. This stuff isn't pretty.
Of course, not everyone agrees with us. Bill Hardekopf, the CEO of credit card comparison site LowCards.com, told MSN Money’s Liz Pulliam Weston that he co-signed for credit cards for his three kids when they were still in high school. Note: They were still living at home and not on some distant campus.
If you don’t co-sign and you want your child to have plastic, you have options. Among them:
- Let your child piggyback as an authorized user on your credit card. If the card issuer agrees, your child will begin building a good credit history if you pay the bills on time. And if the arrangement isn’t working out, it can be undone quickly.
- Have your child apply for a secured credit card. The credit limit is generally equal to money prepaid on the card, so it’s difficult to screw it up. Watch for fees on such cards, and shop around for the best deals.
- Get your child a debit card. Curtis Arnold, the founder of CardRatings.com, told Liz he considers a debit card as training wheels for a credit card. (When his son mismanaged the debit card, the son was busted down to an ATM card.) Sure, most debit cards won’t help your child build a FICO score, but student loans paid on time are good for that. Years ago, we got our first car loan on the basis of our on-time student loan payments, and we still didn’t have a credit card. We did things the old-fashioned way: wrote checks and used cash.
Speaking of student loans, many young people will face a large burden of debt when they get out of school, even without a credit card. Yet, according to Sallie Mae, 82% of students with a credit card carry a balance, and the average balance is several thousand dollars. How stupid is that?
What are your thoughts? If your child asks you to co-sign for a credit card, how will you respond?
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