When your kids are just starting off on their own, they may need some assistance applying for financial aid, buying a car or building up their own credit. Two ways they might turn to you for help? Asking you to cosign on a credit card or a loan (such as a student or auto loan) or having you add them as an authorized user to your credit card account.
These steps could open doors for your young adult children and help them establish their own credit, but there are impacts for you as well. Statistics show that up to 75 percent of cosigners eventually need to make a payment when the primary borrower falls short, and about 28 percent of cosigners experienced a drop in their credit score.1, 2
When teaching your young adult about using credit responsibly, it’s important to know how some of the decisions you make can impact your own financial outlook.
Cosigning on a loan or credit card
When you cosign a loan or credit card for your child, you are liable for the entire amount of the loan. Even if your child is the one who has agreed to make the monthly payments, you are responsible for any payments the primary borrower misses. “Parents should be prepared to make payments, if needed, to protect both their own credit and their child’s,” says Carl Thibodeau, product manager for consumer credit and debit cards at SunTrust Bank. Even if the primary borrower misses just one payment, it could lower the cosigner’s credit score by up to 110 points.3
The cosigned loan will also show up on your credit report, and it will affect your debt utilization ratio. Lenders count cosigned debt among your personal debt, which could impact your ability to borrow in the future.
“It should be up to the parent’s discretion if they think cosigning a loan is right for their child,” says Thibodeau. Thibodeau advises parents to think about the following questions before cosigning:
- Has your child managed money before?
- Do they have the ability to pay you back?
- How do they pay for things currently?
- Are those income streams steady?
Note that not all lenders allow co-signers, so it’s worth checking before you apply.
Granting authorized access
One tactic to help your child build their own credit history is to set them up as an authorized user on your credit card account. As an authorized user, your child gets a card in their own name to use just as you use your card, but the bill still goes to you. The authorized user is not legally responsible to pay the credit card bill or any charges from the card use—that is the responsibility of the primary account holder.
Keep in mind that any late payments made to your account will impact both of your credit scores. If the authorized user isn’t responsible and causes you to miss a payment, or if you just miss a payment on your own, both of your credit scores can dip.
Giving your child this access should come with a conversation about best practices for using a credit card. Think about how ready your child is for the responsibility. “My perspective is, starting younger can be better,” Thibodeau says. “You can watch how your child handles the card while they’re still in your household.”
Be sure to check and see if there are any age restrictions for your card (there are no age restrictions for authorized users on SunTrust credit cards).
Once your child is ready to move on from being an authorized user, another way they can build their credit is with a secured card. Because secured cards are backed by a cash deposit, the approval process can be easier even if the borrower doesn’t have a long credit history. (For SunTrust secured cards the primary account holder must be 21 years old—or they can be 18 if they have a co-signer who is 21.)
Be sure to closely examine your own financial situation before taking on credit responsibility for someone else, even if it is your own young adult child. If the person you’re cosigning for or authorizing isn’t responsible, or if you aren’t financially stable yourself, think twice before moving forward. Saying no might be uncomfortable, but in some cases it could be the better option for everyone.