College student wants grandma to co-sign on a credit card

Signs that indicate if your co-signee is a good credit risk

By Alan Klayman

Maturing Loans

Alan Klayman, creator of MyIncomeStrategy.com, is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues. Ask a question.

Dear Maturing Loans,
My grandchild wants me to co-sign her credit card application. She's going to college in the fall, and I'm worried she might go over budget. What liability do I have if she decides to take a trip to Paris mid-term? -- Tilda

Dear Tilda,
My first question to you, as a co-signer, would be: How is your grandchild going to repay her credit card? Is she working? Has she handled credit before?

Putting your name on her card could impact your credit score if she runs up a balance and doesn't pay on time.

If your granddaughter has handled credit responsibly before, then I would say give it a try. To further satisfy your concerns, however, you need to find out about her money management skills from her parents or guardian. For example, you can find out if she has had a credit card or a debit card before, and how she handled it.

Does your granddaughter have a car? If so, was she in any way responsible for helping pay off any portion of the loan? Does she have any other experience with other types of loans or installment payment plans? Does she have a savings or checking account?

The more experience she has had with loans and credit thus far, the better the chances of her being responsible to carry a card to college. If she is working, then that is another good indicator that she will be responsible with her money. If she has had a job for some time and a bank account, then your odds are improving that she will be able to handle a card on her own.

If your granddaughter doesn't have a job or just got one, which may be a negative indicator of her ability to handle a card on her own, but everyone is different. Talk to her parents or her guardian to see what they think. They may have some insights that you may not have explored -- positive or negative.

Other indicators of how responsible she is could be her driving record. If she has racked up speeding tickets or has had multiple accidents is a mark of irresponsibility. Going too fast with the car indicates recklessness, which may translate to being reckless with a credit card.  

If you are not comfortable co-signing a credit card right away, here are some other ideas for you and your granddaughter:

If your granddaughter is going to be working while in college, open up a savings account for her that is tied to a debit card. Many colleges and universities are affiliated with a credit union, which typically are great places to open a student account. When she starts working, have her deposit her wages into the new account you have established. Then see if she spends only what she can afford. If she can control her spending, then you have a good chance that she can control her credit.

If she is not going to be working while in college, I still vote for the debit card, but this time you are putting the money in, and you will see how responsible she is with her (in this case, your) money.

Another idea is to get her a pre-paid card or gift cards, and watch her spending habits. These types of cards are only good for as long as there is money left on each individual card. If she wants that trip to Paris, and you want to help her go, get her a travel card like the Visa TravelMoney  or the Prepaid Travel Card Mastercard or traditional AmEx Travelers Cheques. With these types of instruments, you will get replacement protection in the event of loss or theft.

To review, before you co-sign, check the following:

• Does she have experience with a credit or debit card?
• Has she ever paid off a loan or an installment plan?
• Does she have a bank account?
• How are her driving habits?

The bottom line: If you are uncomfortable co-signing a credit card application, look into alternative money sources for your granddaughter, such as:

• Debit cards
• Pre-paid cards
• Gift cards
• Travel money cards
• Amex Travelers' Cheques

Thanks for the question, see you back here again next week.

Ask a question.

Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration.
 

Published: June 11, 2008