Turning 18 and credit cards: legal rights and responsibilities
Tips for new adults and their parents
In one day -- their 18th birthdays -- young people go from being fully shielded from credit cards to fully exposed. Before they turn 18, they can't enter into a contract to get a credit card. They may use cards, but someone else is responsible for the debt. Once they turn 18, however, they can get their own credit cards and charge up a storm and be on the hook for the debt.
It's like going from a swimming pool's shallow end to the deep end. With training and supervision, experts say, the transition can be easy. Without it, the odds increase that a new adult can get in too deep with debt.
Because so many young people have had plastic before becoming adults, turning 18 often brings up credit questions for both the new adults and their parents:
- What's happens to the status of credit card debt when an authorized juvenile user becomes an adult?
- Who bears liability for any new jointly held cards that the parents and their child obtain as co-signers?
- Who's responsible for new cards obtained solely by their adult children?
- What's the best way for new adults to establish a credit history and score?
Here's how the new adult credit card game is played -- for both parents and for young adults.
When children are authorized users on a parent's credit card, nothing changes with an 18th birthday: Parents remain solely liable for any debt incurred. "A credit card company doesn't take into account the income of an authorized user on a credit card application when issuing the card, so the applicant is liable, but not any authorized users," says Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling.
So parents, regardless of whether your children are adults, as authorized users the liability runs one way: You are on the hook for anything they charge, but they are not on the hook for anything, whether you charge it or they charge it.
Jointly held cards
If you and your over-18-year-old child apply for a credit card as joint users, you are both liable for any debts racked up on that card. So, if your kid goes to town and charges thousands of dollars for an Xbox 360, video games and an iPod Touch and can't pay, you are on the hook. In a similar fashion, if you rack up the debt and can't pay, the credit card company can go after your child for the entire debt.
"There are dangers when joint accounts are involved," says Andy Jolls, CEO of Videocreditscore.com, a credit scoring educational site. "If the parents charge something and don't pay for it, the kid is on the hook. What the parent does affects the kids' credit score and vice-versa."
Individually held cards
It used to be that you had to have some kind of income to qualify for a credit card. Not anymore. Credit card companies blanket college campuses with offers. They have tables in student unions offering cards, send card offers to students to their campus mailing addresses and hire students to solicit their friends. So your college-bound child will have access to thousands of dollars in credit. If they take advantage of one or more of these offers, you may not know about it unless they get into trouble.
You aren't legally liable for any debts that your adult children incur on their own, even if they are college students without much, if any, income. However, many parents do end up paying off their kids' debts. "The credit card companies are counting on the fact that most parents will bail their kids out if they get in over their heads with credit card debt," says Cunningham.
These days, so much depends on your credit score.
|-- Gail Cunningham
Spokeswoman, National Foundation for Credit Counseling
"The parent either feels morally responsible or doesn't want their children's credit history and credit score ruined before they graduate," she says. "These days, so much depends on your credit score -- not just in getting loans, but in getting a job, insurance and an apartment." Just as you aren't legally liable for your adult child's debt, your child has no liability for any debts you incur on your card.
Piggybacking lives -- for a while
Parents can give their children a leg up on creating good credit histories by including them as authorized users on their credit cards. The practice, called piggybacking, gives authorized users -- children -- a better credit score because a good payment record by parents shows up on the children's credit report. Because of the commercial use of that practice by unrelated people, the most widely used credit score plans to drop piggybacking later in 2008.
Fair Isaac, the creator of the FICO score, expects a new version of its scoring formula, FICO '08, to launch in September. At that point, the best way for your adult children to establish a credit history and credit score is to get a joint account with you or a single account on their own. "With FICO '08 coming in later this year, authorized users won't be able to gain from the credit cardholders' credit history," says Jolls, a former Fair Isaac vice president, who was in charge of the Myfico.com credit history and credit scoring consumer website.
"For the newly adult, having a credit card is a wonderful opportunity to begin building a positive credit history and credit score," Cunningham says.
By building a solid credit history during college, young adults can demonstrate to prospective employers, landlords and lenders that they are capable of handling credit, giving them a leg up in the future as their credit histories will be taken into account when filling out job, apartment and lending applications. A poor credit history and credit score, which can result from just a few late or missed credit card payments in college, can have a negative impact for years in all areas of a 20-something's life.
What to do
Most parents want their child to build a solid credit score through responsible use of credit cards. The question is how is the best way to do it. Jolls believes new adults should get the best low-interest credit card offer they can find -- on their own. For those with little credit history, that can be in the form of a secured or student credit card.
With secured cards, savings accounts are opened with the card; credit limits equal the size of the deposits. "A secured card is a great way for the new adult to stand on his or her own two feet, take responsibility for themselves, and to do it without getting a parent involved," Jolls says.
Parents may also start out with joint accounts with their young adults. That lets parents keep tabs on a young adult's spending at the outset. After six months or a year of responsible use, children can ask the credit card company for a card in their names, which the issuers likely will grant, providing payments have been made on time. For the credit card company, granting the individual account potentially opens the door to a young adult who will be a customer for life, says Jolls.
Regardless of how you handle it, the time to discuss credit in general and handling credit cards is before your children leave your home for college and before they potentially get in trouble with credit, Cunningham says. Giving your blessing to either a solo account or a joint account before they start college -- provided they have already turned 18 and are legally able to enter into a credit card agreement -- may head off problems down the road.
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