Planning Your Future
Co-Signing For Your Kids: Do You, or Don't You?
Do You Step In, or Step Back?
Many parents would do anything to help their children get "on their feet." But how do you determine when you're helping too much? Do you say "yes" or "no" when your son or daughter asks you to cosign on a credit card, apartment or other loan as they set off for college or embark on their own?
"In some instances, parents want their young-adult children to be able to focus on attaining their undergraduate or postgraduate degrees without the pressure of holding down a full-time job," says Daniel Grote, certified financial planner with Latitude Financial Group in Denver. "With healthy expectations and follow-through in place, this kind of support can help propel the young-adult into the real world where they are capable of standing on their own two feet without outside assistance."
In some cases, co-signing provides a jump-start to the child's credit history while granting access to better financial terms based on the parents' history.
But some parents worry that such assistance, if handed out freely and not handled carefully, may become a crutch that prevents the child from learning to live and manage money independently.
It's Not All About Your Kids
When considering whether to co-sign for a child, parents should consider both the child's financial situation and their own, says Davon Barrett, a junior analyst with Francis Financial in New York. For instance, "if you need a loan shortly after you've co-signed, you may have to deal with higher interest rates, or even rejection," Barrett says.
Even if your child pays on time, cautions Ara Oghoorian, a Chartered Financial Analyst and Certified Financial Planner at ACap Asset Management in Encino, California, the loan you co-signed for will still show up on your credit report. "It may lower your credit score if your credit utilization rate is high," he says.
And if your child can't pay the debt, remember that you're on the hook, says Ashley Feinstein Gerstley, a former investment banker who's now a personal-finance writer and owner of the website Knowing Your Worth, "In a scenario where he or she cannot pay rent or their credit card bill, are you prepared and able to take on those expenses?"
A co-signing parent may also end up involved in any legal or other proceedings that arise, such as a landlord suing for unpaid rent.
Before Co-Signing, Become Co-Planners
One step that some parents take before co-signing is to add a child as an authorized user on a parent's credit card. That way, the child can learn to use and manage a card while the parent keeps close watch on the spending. In some cases, being an authorized user can also help the child start to build a credit history.
If you do decide to co-sign a credit card or apartment for your child, come up with a plan that lays out who will be responsible for paying for what in as much detail as possible, says Gerstley. "The more specific and transparent you are with how either the credit card or the apartment expenses will work, the less stress and confusion you'll have to deal with later."
Grote suggests drawing up a contract that makes clear whether you're giving the child a loan and/or a gift, and whether or when you might be willing to provide assistance again in the future. Put in writing a system of communication and checks and balances, he says, then determine in advance when there will be "meetings" to discuss the status of the arrangement.
"If it's cosigning on an apartment, have a brief meeting on the 15th of each month to check up on the cash position, remaining expenses for the month and anticipated income to prevent problems and keep a healthy dialogue going."
And be strident if you have to. Establishing that the request for a co-signer is utilizing a "once-every-3-years" opportunity to ask for help can be helpful, says Grote. "It may be just enough information for them to decide whether they want to use that card now or hold onto it until a later date."
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Photo: Jack Hollingsworth/Getty Images | Gina LaGuardia is a freelance journalist whose work has appeared in BELLA Magazine, ReadersDigest.com, iVillage, Huffington Post, and other publications. She also owns a content and social media consulting firm.