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. But 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 if your credit is excellent — 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 gift money to you 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.
3. Abusing Authorized User Privileges
If you think your child is ready to use a credit card responsibly, you can make him or her an authorized user on one of your cards. This can help them build a good credit history. The hope is that they will prove themselves responsible, and you’ll be assured they’re prepared to use credit wisely. It’s a good idea for you to check that account daily (identity theft experts recommend doing this anyway). By giving your child charge privileges, you are also giving them access to your entire line of credit. Your limit is their limit, but you alone are responsible for the bill. What if you’re wrong about their readiness? (Besides, there’s a learning curve; most of us have made mistakes with credit.)
What you can do: Be vigilant about checking the account online. Make sure your child knows you can and will cancel the card if it is abused, but also understand your child is learning and may make mistakes. A card that is “for emergencies only” may just get used at a one-day sale or to fill up a friend’s tank for a road trip. (One person’s emergency is another person’s impulse purchase.) You might also choose a card with a relatively low limit. This may be the one case in which a low limit is your friend; it limits the amount of damage that a child who lacks restraint could do.
4. Lending Them Your Card
Have you ever handed your teen a card with instructions about what to buy? (“Yes, you may buy the jeans.”) And then maybe your daughter saw something else, and paying couldn’t have been easier. Or you may have given your teen a card when she went to pick up a few groceries for you. You forgot to ask for it back, and now she’s at the store (or online) and she sees something she’d really, really like to have. And the plastic can make it happen. Now.
I was guilty of this many years ago. My mother lent me her department store card to get a dress and I walked out with the dress, along with jewelry and a handbag.
What you can do: Train yourself to ask for the card. Or find a different way to pay. You can also set up mobile text alerts to let you know when the card is being used. If you see it’s being used, and you realize it’s not in your wallet, you need to quickly find out if it’s your child or if your child lost the card and it is being used fraudulently.
5. ‘Borrowing’ Your Card
You left it on your desk after ordering something online. And when friends were going to the movies, they decided to “borrow” the needed funds and tell you and repay you later.
What you can do: As with a card you handed your child, text alerts can let you know if your “borrowed” card was used. Let your kids know that you have set up mobile text alerts, and if the card is used without your knowledge, you will assume it’s fraud and report it. Knowing that you get real-time text alerts and that you will report it as fraud should be a significant deterrent.
More on Credit Reports and Credit Scores:
- How to Get Your Free Annual Credit Report
- What’s a Bad Credit Score?
- How Credit Impacts Your Day-to-Day Life
Image: Ingram Publishing