Many parents want to help their children get ahead financially. This is only natural. Additionally, it is important to teach your children about credit cards and about other money matters. However, as you work to teach your child important lessons, don't forget that you might be on the hook for your child's debt.
Authorized User: Letting Your Child Rack Up Debt in Your Name
Many parents feel that their children might be ready for a credit card. If you think that your teen can handle a credit card, you might be willing to add your child as an "authorized used." This means your child gets a card to use, and can swipe it as needed.
If you follow this route, you want to make sure that your teenager understands the rules associated with the credit card use. He or she should pay of his or her own charges each month, and be careful about spending.
It's vital that you are sure that your teen understands the importance of responsible credit card use because you will be on the hook for any charges made. The credit card account is still yours, and that means you are ultimately responsible for any debt that is racked up on that card. You will have to pay it back, and it will affect your credit score.
Co-Signing on a Loan
Perhaps your child is a little bit older. He or she might be the age of majority and able to apply for his or her own loan or credit card. However, without a credit history, getting approved can be difficult. If your child doesn't have the credit score necessary to get the credit card or loan, you can co-sign. Your good credit can help your child get better terms, and keep him or her from having to resort to a secured credit card.
However, as with adding your child as an authorized user, there are risks involved. As a co-signer, you are committing to take on the debt if your child doesn't pay as agreed. This means that the loan will be considered part of your debt load, and could prevent you from getting another loan down the road. Plus, if your child defaults on the loan, the creditor can come after you for payment -- and your credit score can be damaged.
Bottom Line
You may want to help your child by providing him or her access to the credit he or she needs to build a good financial reputation -- or even just to get back on his or her feet. However, you still need to be careful. Look at your own financial situation first, and decide whether or not you can afford to take on the debt risk of your child, on top of your own debts.
Before you co-sign on a loan with anyone, or add anyone as an authorized user, you need to ask yourself whether you trust that someone to make payments on time and behave responsibly.
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