Why you should never co-sign a credit card for your college kid
As August begins, parents start to plan the logistics of shipping their kids off to college. One question that often pops up: Should your child have a credit card?
In fact, nowadays this issue comes up even earlier. I should know: I have a teenage daughter who tells me her friends would kill to swipe that precious piece of plastic. And it’s clear more teens are swiping, since the average college senior graduates with $4,100 in credit card debt.
Here’s my one piece of advice: If your teen is nudging you for a card, say no to co-signing.
Under the new CARD (Credit Card Accountability, Responsibility and Disclosure) Act, applicants under age 21 must either show proof of income or have an adult co-sign in order to be approved. For your kid, no co-signee might mean no card.
But let’s get realistic. Mom, Dad: While it’s natural to worry about your child having access to funds in an emergency, that card will likely visit the mall more often than the ER. By co-signing, you and your child are equally responsible for payments—meaning his or her slipup can mess up your credit score for years.
Your credit score—basically your financial GPA—has a huge impact on your financial life. It determines how high the interest will be on your credit cards and loans. The higher your score, the lower the interest you’ll pay. But it’s easy to hurt your score by missing payments, paying late, or keeping a balance on your card. If your kid’s account has any of these problems, it hurts both his and your credit scores equally—a double whammy.
It depends on your credit history, but often times just one “oops” could cost you tens of thousands of dollars. For example, let’s say a consumer has a very good FICO credit score of 780 (highest FICO score is 850), an auto loan, and four credit cards (one being the co-signed card). If she (or her child) misses one credit card payment, her score could plummet to around 650.
If one missed payment can knock down your credit score by about 130 points, that would be the difference between an average 30-year fixed mortgage rate of 4.21% (for 780 score) and an average rate of 5.26% (for 650 score). Over the course of a 30-year $200,000 home loan, that single late payment could wind up costing about $45,518 in added interest. Yikes!
And, c’mon. If your child really wants spending power, he can get something called…a job.