It’s that time of year when parents wonder if their college-age kids need a credit card. After all, they’ll be away from home and, surely, emergencies will happen. And if your child doesn’t have any credit yet, then maybe it’s your responsibility to co-sign on a credit card.
Let me put your mind at ease right now. You can still be a good parent and never co-sign on a credit card or a car loan for your kid. There are many ways to help your child build credit that don’t involve jeopardizing your own credit score, not to mention your relationship with your child.
Let’s take a close look at what co-signing really means and, if you’re determined to do this, how to proceed without wrecking your credit.
What Does It Mean to Co-Sign on a Credit Card?
Simply put, when you co-sign on a credit card account, it means you agree to pay the bill if the account owner does not. This is a big deal, so don’t take this decision lightly.
In this situation, there’s a primary credit card account owner (your child) and a co-signer (you). When someone doesn’t have enough credit to open an account on their own, that’s when a co-signer with awesome credit can swoop in and save the day.
[Read: The Best Student Credit Cards of 2018.]
Credit card companies truly hate taking a risk on someone with limited credit. So when you agree to co-sign, their risk almost disappears. The company knows that if the primary account owner doesn’t pay, you’re legally liable to pay the balance.
Now, there are many major issuers that don’t allow a co-signer. So if you still want to go ahead with this, do your research upfront and identify which credit cards to target.
What Could Go Wrong?
Plenty can go wrong. Let’s say your child goes off to college and while studying one night, gets carried away with the power of credit — which he or she isn’t ready for — and treats the dorm to pizza.
Once there’s been a purchase like this, it can’t be undone. You cannot return pizza. So if your kid’s part-time job isn’t sufficient to cover the cost, then the balance will be paid by you.
But wait, there’s more! Treating the dorm to pizza — oh, and beer is thrown in here, too — ran up the credit utilization ratio on this credit card to 50 percent. This ratio needs to be at least under 30 percent. Credit utilization is 30 percent of your FICO score, so now your kid’s credit score — and yours — will probably go down because you’re connected via this account.
[Read: The Best Secured Credit Cards of 2018.]
Credit-Building Options With Less Risk
Before you jump into a co-signing situation, take a look at a few other ways to help your kid build credit.
Authorized user. Add your child to one of your credit card accounts as an authorized user. This way, your child builds some credit by being on your account.
You can approach this two ways. You can decide not to give your child the actual card, but this defeats the purpose of helping your kid build credit. This is a fantastic opportunity to teach your child about managing a credit card. Give your child a monthly spending limit.
Just a few issuers allow spending limits on authorized users. But several issuers do allow push notifications to let you know when purchases are made on your card. In any case, if things start going downhill, you can remove your kid from your account.
Any damage to your score is temporary, but you are legally responsible for any debt that piles up.
Secured credit cards. This is a great way to build credit as long as you choose the right secured card. You put a deposit with the issuer to “secure” the card. Then your kid gets a credit card to use. It’s kind of like a credit card with training wheels.
The credit limit is usually the deposit amount, which is about $300 to $500, so the risk is low. Note that it’s possible to have a limit of more than $1,000 with some cards, but for now, you want to minimize your risk.
This option carries no risk for your credit because your child is the account owner. But you still need to pay attention so you can help your child build a good credit history.
Student credit cards. Some issuers offer student credit cards designed to help young adults build credit. While in college, my daughter got a student credit card, and when she graduated and started her first job, the issuer bumped her up to the regular unsecured credit card it offered.
[Read: The Best Starter Cards for Building Your Credit.]
Some student credit cards have rewards, so be sure you explain the rewards program to your kid. Also make sure you convey that earning rewards is a bonus and not something to actively pursue.
Make It Official
If your child is exceptionally mature and understands the consequences of misusing credit, then it’s OK to consider co-signing. But doing that means you need to engage in hands-on parenting before and after your kid gets a credit card.
It’s the “after” part where many parents fail to engage, and that’s when debt happens. A 2014 Financial Wellness Study by Ohio State University showed that only about 47 percent of college students paid their full balance every month. You need to make sure your child understands why it’s important to pay the balance in full every single month.
If you do decide to be a co-signer, take a businesslike approach. Write down the monthly spending limit and what happens if this amount is exceeded. You sign it and have your child sign it.
It may not prevent something bad from happening, but at least you’ve stressed that getting a credit card is serious business. Now, you just need to hope there isn’t a pizza party you have to pay for.
More from U.S. News
5 Reasons You Need a Credit Score
The Best Ways to Build Credit Without a Credit Card
Credit Cards 101 for College Students
Should I Co-Sign on My Kid’s Credit Card? originally appeared on usnews.com
