Should You Cosign for Your College Student's Credit Card?
Know the facts behind the myths about how marriage may impact your credit history and your FICO® Scores.
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A credit card can be a helpful tool for responsible college students. It's a convenient payment method that offers robust fraud protections. Perhaps best of all, credit cards have the potential to help establish credit.
Yet younger college students may face obstacles when it comes to opening a credit card account. Thanks to federal law, your college-aged student might not be able to open a credit card alone. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (or Credit CARD Act) requires anyone under the age of 21 to either (a) show proof that they can repay their credit card debt independently or (b) have an adult cosigner.
As a parent, it's normal to want to do anything you can to help your child. But cosigning for a credit card can expose you to some serious risks. If you're trying to decide whether to fill out a joint application for your child's credit card account, there are several factors you should consider first.
1. Cosigners are responsible for the debt.
It's not unusual for people to be confused where cosigning is concerned. You might believe that you're simply lending your good credit rating to your friend or family member so they can qualify for financing or a better interest rate. Yet the truth is that when you cosign, you're promising to repay the debt if the primary borrower fails to do so as promised.
By cosigning for your child's credit card, you are just as responsible for the debt as the primary cardholder. Even if you don't personally make a single charge on the account, you're still liable for those purchases and any interest fees the card issuer assesses.
2. When you cosign, the credit card will appear on your credit reports.
As a cosigner on your child's credit card, there's a good chance the account will be reported on your credit reports (Equifax, TransUnion, and Experian). If this happens, you're taking two big risks.
-Your FICO® Scores could be impacted. There are several reasons why cosigning for a credit card might hurt your FICO Scores. The biggest potential issue, of course, occurs if the primary cardholder pays the credit card bill late.
Your score might also be impacted negatively if the card has a large balance that causes a high credit utilization rate. The hard inquiry that occurs when the new card was applied for might affect your score too. Finally, the reporting of the new account could lower your length of credit history, and potentially move your FICO Scores along with it.
-Your debt-to-income (DTI) ratio may increase. DTI ratio is another factor that lenders may consider when you apply for new financing. It can impact your approval odds and how much you can borrow.
Lenders calculate your DTI ratio by dividing your monthly debt payments by your gross monthly income. The lower the ratio, the better. If the credit card you cosigned for shows a balance, the monthly payment could cause your DTI to go up.
Due to the factors above, deciding to cosign could make it harder for you to borrow money. If your credit score drops or your DTI increases enough, lenders might deny your future financing applications. On the other hand, you might still be able to qualify for credit, but with less attractive terms or higher interest rates.
3. There are other options.
As a parent, it's normal to want to help your child succeed. And there's nothing wrong with wanting to give your college student a payment method to use in emergency situations if you can afford to do so. The good news is that cosigning for a credit card isn't the only way to accomplish these goals.
Instead of cosigning, you might consider adding your child as an authorized user onto your existing credit card account. If the card issuer reports account history to the credit bureaus for authorized users (as many do), this move might help your child establish credit. (And if you're looking for other ways to help your child build credit, a credit builder loan might also help.)
When you add your child as an authorized user, the card issuer will send you a card in their name that's tied to your account. With some credit cards you can even set separate spending limits on authorized user cards. This safeguard gives you greater control over how much of your credit line an authorized user can access.
There is still some risk involved with the authorized user approach. Namely, any transactions an authorized user charges on your account are your responsibility. You might have a verbal agreement that your child will pay for their own charges or only spend a certain amount. However, if your child doesn't honor the agreement, you'll be on the hook for the bill with the credit card company.
Cosigning for a credit card is a significant risk, even if you trust your child to be responsible with the account. Cosigning could damage your FICO® Scores and may affect your ability to open new loans or credit cards in the future.
Deciding not to cosign for a credit card doesn't mean that you don't care about your child. There are simply safer ways to help your college student establish credit so that, when they're older, they'll be in a better position to qualify for credit cards on their own.