Don't let your children ruin the good credit score you've worked hard to build. Here's what you can do to prevent it from happening.
This post comes from Gerri Detweiler at partner site Credit.com.
There’s plenty of information out there on what it costs to raise kids, so we know they can lighten your wallet. But they can also flatten your credit. While paying for kids’ care is part of a parent’s job, letting your credit suffer because of their actions isn’t.
Teaching kids about credit is arguably part of parenting: You’re teaching them what they’ll need to know to navigate the world as adults. You can explain how credit works, show them what credit reports look like and teach them how to interpret them. You can show them how to get a credit score (you can see yours for free on Credit.com), and explain the consequences of having poor credit or of taking on too much debt.
And you can hope for the best. Still, there aren’t guarantees, and you may need to be especially vigilant about your own credit if you have kids.
Here are five ways parents may see their credit scores drop as a result of something their kids did.
It can be very tempting, and it can even be a loving gesture. Sometimes it works out. But the bank, landlord or credit card issuer is asking for a co-signer for a reason: Its years of experience with borrowers with similar profiles suggest that there is a significant risk that the loan won’t be repaid as agreed.
Their solution? Ask someone with good credit to sign. Co-signing isn’t attesting to someone else’s good character; it is agreeing to pay off the loan in the event the primary borrower doesn’t.
If you co-sign, you are legally on the hook for the full amount. This applies to student loans, leases, cars — you name it. At its best, things work out just the way you hoped. The worst case? Your credit could be practically destroyed.
If you co-sign a mortgage to help your son and his young family get a house and then he loses a job, you are responsible for the payments. If you co-signed his mortgage and you decide to buy a condo, you may not be able to, even with excellent credit, because the two mortgages may exceed what you can pay on just your income; a lender will look at your son’s mortgage as your debt if your name is on the loan.
What you can do: Look for alternatives to co-signing. For example, you could give money to your child to help them with a mortgage down payment.
Understand that when you co-sign, you are taking on debt. Also, be sure correspondence about the loan or lease comes to you and/or that you can access the account online to be sure it’s being paid on time. If the worst happens, and your child does not pay, you don’t also want to be stuck paying late fees and such.
2. Online music or games
Want apps or music? Even if what you want is free, you frequently have to enter a credit card number. Kids don’t always realize that downloading their favorite music or a computer game costs money. And adults may not realize just how much their kids are downloading until the bill arrives.
What you can do: If you want to give your child the ability to download apps or music on your dime, you may want to use a credit card with mobile text alerts. You would have to set the alert threshold low — those 99-cent purchases add up fast. So you might want to designate a particular card for this purpose and no other (so that any text alert means someone made a small online purchase).
An alternative would be a prepaid debit card with very little money on it that you could give to your kid.
But the very best thing is to educate your kids. Many don’t notice that they are signing up for something that costs money, and it’s not always obvious. It can be a good lesson in being a careful consumer. Show them how text alerts work. When they are ready for their own cards, they will need to know how they can minimize the risks of unauthorized use.