Thinking About Cosigning a Credit Card for Your Kid? Ask These Questions First

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  • Many young people need a cosigner to obtain a credit card.
  • Parents are often asked to be cosigners.
  • Making the decision to cosign could result in damage to a parent's finances.

You don't want to make a decision you come to regret.

Thanks to a law called the CARD Act, it's difficult for young people to get a credit card unless they have solid proof of income -- or a cosigner. As a result, it's common for parents to be asked by their children -- including college students -- to cosign for a credit card.

If you're one of the many parents whose children request this type of financial assistance, there are three key questions you should ask before you move forward.

1. How will your kid use the credit card?

The first big question to consider is how your child will use the credit card. When you cosign for the card, you become responsible for any and all purchases made on it. If your child runs up a $1,000 balance and doesn't pay it, the creditor could come after you and try to collect the money from you directly.

If your kid wants to use the card to make just one small purchase a month in order to establish a positive payment history and build credit, then you don't really have much to lose by cosigning. At most, you'd be on the hook for the small sum they've charged each month so the risk to you is minimal.

If your kid wants to use it to cover routine spending, spring break trips, college costs, or other large expenses, though, then they may end up worsening their financial situation if they get in over their heads -- and making your own money management efforts harder if you get stuck with the bill.

2. Do you trust your kid to be responsible?

While your child may have the best of intentions when it comes to the credit card they ask you to cosign for, you'll want to be 100% confident they will use it responsibly.

If they don't, and end up with a lot of debt or even if they simply pay their bill late, they could end up hurting their own credit and yours as well. The last thing you want is to cosign only to find out your child damaged their credit badly while in school and now has difficulty getting an auto loan or mortgage upon graduation -- not to mention the challenges you could personally face with borrowing if your credit takes a hit as well.

3. How badly would your finances be impacted?

Finally, you need to think about the impact cosigning could have on your credit record.

You'll end up with an inquiry on your credit report when cosigning for the card, which is enough by itself to potentially cause a temporary hit to your credit score as too many inquiries is viewed as a negative.

If your kid uses more than 30% of the credit available on the card, it can also reduce your score. And late payments or default can be devastating. You'll likely want to have good credit upon approaching retirement, and you don't want to jeopardize your own situation if you have to pay the card off or if your credit score plummets due to irresponsible borrowing behavior.

By asking yourself each of these questions, you can make the choice that's right for you about cosigning and hopefully neither you nor your kid will regret the decision you made.

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