Why you should never co-sign for your children

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Flickr / I’m Kelsi


Credit: It looks like you need it for everything these days. This is probably why so many well-meaning parents are co-signatory loans for their children. There are good reasons people decide to co-sign for their children, including helping them buy a car or first home, or build a credit history.

But while you may be aiming to do well with your kids, co-signing can have huge financial consequences – and not just for you. Here’s why you should never co-sign ready for your children.

Your credit, your risk

Here’s how co-signing works: If someone with no credit history needs a loan, the bank may not be able to provide it. This is where the co-signer comes in, who basically vouches for the potential borrower based on their own credit history.

The bank always wants to have someone on the hook in case the loan is not paid off. If you are co-signing a loan, that person is you. This means that if your son or daughter don’t pay, you will be expected to, or be at risk of the impact of a default on your credit score. Also, this loan is considered to be a part of your credit history which means that it can affect how much you will be able to borrow on your own.

Too much risk for the bank means too much risk

Lenders have systems that are reliable enough to assess the likelihood of someone repaying a loan. After all, making money is their business. So if the bank says your child is not ready to take out aautomatic loan, for example, they may be right. Whether your child has poor credit or no credit, both are signs of a lack of experience with To borrow money.

According to the Federal Trade Commission, up to three in four principal borrowers default on a co-signed loan, leaving the co-signer with the bill. If the bank feels the risk is too great, you might want to consider whether this is a risk you should take.

You will have to bail them out

If your goal is to teach your kids how to use credit responsibly, co-signing a loan may not be the answer. If this emergency credit card is used to pay for a trip to Cancun during spring break, you will have no choice but to foot the bill or face the consequences for your credit rating.

There are many risks and few co-signer rights. If you co-sign a loan, what it pays belongs to your child, but it is up to you to pay it. Unfortunately, a scenario where you are forced to rush to the rescue of your kids every time they show bad financial judgment doesn’t really reflect the real world. In the future, they will be expected to redeem their own financial mistakes and debt collectors will hunt them down directly.

Building credit is learning credit

The downside of not co-signing a loan for your children is that it will take longer for them to start building their own credit. This has become a major concern since the credit card law made it much more difficult to open a credit card for those under the age of 21. Unfortunately, the reason this provision of the law was introduced in the first place is that a growing number of young people were racking up thousands of dollars in credit card debt before they even had an income to start paying them off.

Credit can help, but slowing things down here isn’t such a bad thing. After all, it makes a lot more sense for kids to get their first credit card after securing their own source of income. This way, they will learn how credit actually works and what it takes to pay it off. Yes, they will inevitably make bad financial decisions, but this is the best way to learn how credit really works.

No credit, no big deal

It is inevitable that children learn credit; it’s all over the place, which is why parents should do their best to share their own borrowing experiences to help shape the way their own children think about what can be a credit tool or killer.

But the first financial lesson children need to learn is how to live on money. If they can get this under control, they are much less likely to fall into a vicious cycle of debt. Rather than being in a rush to introduce them to the world of borrowing, teach them how to budget and get by with what they have. It is a financial lesson that will serve them better than any credit score and help them develop the skills that will allow them to develop a solid FICO score on their own one day.

What to do instead

If one of your children is facing a difficult financial situation, refusing a request to co-sign a loan does not necessarily mean letting it dry up. One of the best alternatives is to lend money to your child directly. After all, that’s basically what you do when you co-sign, except that a personal loan will protect your credit if the loan goes unpaid.

You can also lend your child $ 500 to help them get a secured credit card, or “seed money” that they can use for their own financial goals. If your child wants a nice car, pay $ 500 for an old car that will get them to work. If debt is already a problem, offer to pay for a visit with a financial planner or debt counselor who can help them learn the skills they need to get out of debt and stay away for good. . Whatever you do, make sure it involves making your kids work for what they want – and feeling the sting of bad financial decisions.

Credit is considered so important that many parents jump on the bandwagon for their children to start building a score. In doing so, they can miss the point. It takes a long time to build a credit score, but helping your kids to do it might not help them learn what it takes to manage credit and, most importantly, how to live without it.

This Publish originally appeared at GoBankingRate.


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