Question: My college-aged son wants to get a credit card, but can't qualify for one unless I agree to be a co-signer. Is this a good idea to help him build credit?
Answer: This is a question I get frequently from concerned parents. While I commend you for wanting to help your son build good credit, I also have to warn you about the risks involved with co-signing.
This question has become more common since the Credit CARD Act of 2009 went into effect. The CARD Act placed limits on young adults under the age of 21 and this has made it more difficult for young people to qualify for a credit card on their own. For instance, they must be able to show they have enough income to pay back any debt they incur.
When you co-sign for a credit card, this means you are joint account owners with the other individual, which in this case, is your son. As joint account owners, you are both legally responsible for any debt associated with the card.
This is where co-signing becomes a bit of a sticky wicket. I'm sure you'd love to say that your son is mature and can be trusted with a credit card. This may in fact be true, but take an honest look at the situation before you sign on the dotted line. If your son does use the card irresponsibly, it could impact your credit in a negative way.
For instance, if he goes on a shopping spree and runs up the balance on the card, the high utilization ratio could lower your credit score. Likewise, if you use the card irresponsibly, you could damage your son's credit score.
It's essential that you both have a heart-to-heart talk about the rules he must abide by. Be very specific about what he can spend money on and how much he can spend per month. It's also a good idea to openly discuss how irresponsible use could have a negative impact on your family relationship.
So basically, be very sure that your son is ready for a credit card before you risk your own credit. Before you proceed, you need to know that not all credit cards will accept a co-signer, so keep that in mind when you and your son start researching credit cards. You can call the issuer and ask if this is allowed.
If you decide that your son isn't quite ready, that's perfectly fine. Another option to consider is a secured credit card, which is easier to qualify for. This requires a small deposit that "secures" the card. The deposit stays in the bank account and your son would receive a credit card that he would use for purchases. The advantage is that it limits the damage that can be done and protects your credit while he builds credit in his own name.
If you haven't spent time with him explaining how credit cards work, then don't start with his own account. Ease him into plastic as an authorized user on one of your credit cards. This doesn't give quite the credit score oomph of having his own account, but it does help, assuming you have excellent credit. And with most credit cards, you'll be able to set spending limits and monitor the account. When it comes to teaching kids about credit, it's much better to proceed slowly and wait until you both feel comfortable.