Should You Co-Sign on Your Kid’s Credit Card Application?

Since the new laws of the CARD Act have changed the way credit cards work, young adults under the age of 21 are no longer allowed to apply for a credit card on their own. The only way they can secure a card is if they have verifiable proof of sufficient income to cover credit obligations or if they have a parent co-sign the credit card application. While it seems like an easy resolution to a situation, a parent who considers co-signing for their child should think twice.

Consequences to a Co-Signor

If a parent elects to co-sign on a credit card application for a teen under the age of 21, they are essentially committing to be legally obligated for all debts accrued on the card. If payments are not received on time, the co-signor will be obliged for the entire debt. That means if your kid isn’t paying, you are.

While it is unfair to say that every teen is irresponsible with finances, there is good reason to believe that acting as a co-signor for your child or anyone can be a risky proposition. A teen that is not equipped with basic financial lessons will likely spend unwisely on credit and end up with a mountain of debt the can not pay.

Making It Work

Parents who feel they can entrust a young adult with the responsibilities of having a credit card can use the opportunity for teaching good financial management. In many cases, a credit card comes into play when a child leaves home for college. It is used as an emergency back up. But whatever the reason a co-sign situation is developed there are ways to make it a successful endeavor.

Here are a few tips for making a credit card with a co-signing parent work:

Teach Age Appropriate Finances

Even long before credit cards come into play, parents should be teaching basic financial lessons including the importance of saving money. With older teens and young adults, lessons should entail basic checking and savings account management, how credit works, discuss interest rates, and payment responsibilities. Young adults should also understand how their credit score and history impacts them over the long-term.

Set Ground Rules

Parents and kids need to sit down once again and set ground rules for spending. Since every family is different, some of the rules that can be discussed should pertain to what a reasonable purchase it, what a spending limit is, and how is footing the monthly bill. It is also important to put the rules in writing so both parent and child has access to the agreement. If the agreement is not abided by, the credit card should be revoked.

Get A Job

Teens that want a credit card should be at least partially responsible for the debt they create. A part time job can be a great lesson in responsibility to show young adults what it takes to be able to spend. A portion of their income should be dedicated to taking care of financial responsibilities such as payments towards car loans, insurance, and credit card balances.

Parents and kids can effectively get involved together for creating a better financial future for the family. A credit card can be an ideal teaching tool but one that must be monitored and controlled to prevent mounting debts. Use the lessons to teach a young adult about the real world long before they have to enter it on their own.