Consider these options before co-signing for a card
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Dear Credit Score Report,
I'm considering becoming a co-signer on my 21-year-old son's credit card. How will co-signing affect my credit score? Is the payment history and credit utilization reported to the credit bureaus for co-signers? -- Lola B.
Since co-signing on a loan puts both your credit score and wallet at risk, you may want to consider safer options to help build your son's credit.
By co-signing on a loan, Lola, you're essentially becoming a joint account holder -- meaning you'll be as responsible for the repayment of the debt as your son, and your credit score will include that shared account. "If you're concerned about your credit, you need to make sure that card gets paid just like your own gets paid," says Barry Paperno, consumer operations manager at myFICO.com. That's because with so much shared responsibility, if you or you son mess up, the other borrower can't easily minimize the damage. That's very different from other options you could use to help your son build credit, such as having him get his own credit card or listing his as an authorized user on your account.
Personal finance experts offer their own warnings. "Parents shouldn't co-sign a credit card unless they will be the ones receiving and paying the bills. Otherwise, they're putting their good credit into someone else's hands -- and it's a rare 21-year-old who has his stuff so together you don't need to worry about him maxing out the card or skipping a payment. The latter can knock about 100 points off your credit scores," says personal finance columnist and author Liz Pulliam Weston. If your son does slip up, the resulting damage to your credit score would mean that the next time you apply for a mortgage, auto loan or new credit card, you could expect to pay more -- if you get approved at all.
Sounds risky, doesn't it? Luckily, there are some safer options for helping your son build his credit:
- Add your son as an authorized user on your credit card.
- Have him apply for his own credit card.
By adding your son as an authorized card user -- known in the business as piggybacking -- your payment history should begin to appear on his credit report. This will happen whether your son ever uses the card or not, and it can easily be undone.
"You can decide whether you want to actually give the child the card; you don't need to if you don't want to, and you can remove the child as an authorized user at any time," Weston says. Alternately, should you ever begin missing payments or otherwise allow your card account to go bad, your son can also have himself removed as an authorized user on the account. Those options mean you can help strengthen his credit report with less danger to both your FICO scores.
To get the process started, contact your card issuer to find out whether authorized account information will be reported to the credit bureaus, since Weston cautions that some banks only share that information for spouses. Assuming your issuer does provide a child's information to Equifax, Experian and TransUnion, go ahead and add your son to the account. "If the issuer cooperates, your good history with the card would be added to the child's file," Weston says.
Another option is for your son to get his own credit card. While new regulations under the Credit CARD Act make it tougher for under-21 borrowers to get credit cards -- by requiring co-signers or proof of income -- your son's age means he can apply as an adult. If his credit history is short or otherwise lacking, he may have the best luck with a card product aimed at borrowers who have limited or poor credit. One of those products is known as a secured card. Those cards protect the lender from any losses by basically establishing a savings account from which they can draw if the borrower fails to make payments.
"A secured card is a good option if you want the kid to build credit on his or her own," says Weston. If your son does decide on a secured card to help him establish a credit history, he'll need to make sure the lender reports payment activity to the major U.S. credit bureaus. Do tell your son to beware of added fees and high interest rates associated with these cards, however. Of course, those are pitfalls that borrowers of any age and experience need to be wary.
In the end, regardless of the approach you both agree on, the most important thing is that you and your son always pay your bills on time, keep any balances low and take on added credit only when necessary.
See related: FICO reveals how common credit mistakes affect scores, Piggybacking is still an option, but proceed with caution, Cardholders' mistakes can bring down authorized users' credit score, Students, credit cards and the new reform law: The fine print
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