Should You Cosign Your Teenager's Credit Card Application?
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It's not easy for teens to establish a credit history. It's not like most teens take out mortgage, auto, or personal loans that they can pay back on time to build a solid credit history.
One way teens can establish a good credit history is to take out a credit card, charge items, and pay off their balances on time and in full every month. The challenge? Many banks won't approve teens for credit cards because these teens don't have any credit history.
This is why your teen might ask you to cosign on a credit card application. With you as a cosigner, banks will be more likely to take a chance on issuing a credit card to your teen. They know that if your teen runs up too much debt and starts missing payments, you'll be there to help cover those missed payments.
So, yes, cosigning a credit card application can help your teen establish a credit history. But before you take this step, be warned: cosigning could send your credit score tumbling.
How Cosigning Works
When you cosign, you are agreeing that you are equally responsible for your teen's credit card debts. This means that if your teen can't or won't make a payment, you'll be responsible for making it.
And if neither you nor your teen makes a payment? Then your FICO credit score will fall. A missed payment by your teen will be reported to the three national credit bureaus, Equifax, Experian, and TransUnion. These bureaus will record the missed payment not only on your teen's credit reports, but on yours, too.
If your teen is at least 30 days late on a payment, expect your credit score to take a hit — often falling by as many as 100 points. This missed payment will remain on your credit reports for seven years.
This will happen even if your teen doesn't tell you about late or missed payments. You must trust that your teen will pay on time if you decide to cosign a credit card application.
To help protect yourself, review the monthly statement of your cosigned credit card every month. Make sure that your teen is making the required payments and that your child isn't charging more than he or she can pay back each month.
What Are Some Potentially Better Options?
Secured Credit Card
Most banks offer what are known as secured credit cards.
These cards operate much like traditional credit cards, but they have a credit limit based on a cash security deposit that consumers must first make with the bank issuing the card. A teen who makes a deposit of, say $500, will have a credit limit of $500. If the cardholder misses payments, the bank can use the security deposit funds to make the payments itself.
The benefit of a secured credit card is that because banks have more protection, they are more willing to pass them out to consumers with little to no credit history. This is why many consumers use secured cards to build a credit score. Banks issuing these cards will report payments to the national credit bureaus. Enough on-time payments, and a teen can slowly but steadily build a solid credit history and score. Once their credit score rises high enough, teens who have been relying on secured credit cards can then apply for a traditional unsecured credit card. (See also: Best Secured Credit Cards)
Your teen then might be able to build a credit history with a secured card without asking you to cosign on an application for a traditional credit card.
Authorized User
Adding your teen as an authorized user on your credit card is another easy way to help boost their credit score using a card you already have, in your name. This should be a card you're already in good standing with. If you're worried about overspending, you can also choose one with a low credit limit, or a card that allows you to set a limit on an authorized user's card. Know that when you add anyone as an authorized user, they will receive their own card in the mail — but you are still on the hook for making all payments. Even if your teen racks up a hefty bill while you weren't looking, the liability is yours. Delinquent payments will leave a ding on both your and your child's credit reports, so make sure your teen clearly understands this before they start spending.
This can also be a great way to establish a sense of responsibility and financial discipline in your young adult child, with you watching over their shoulder as a sort of safety net. You can set certain rules for them, such as they can only use the card in emergencies or must pay you a certain amount each month toward the bill, which will help prepare them for using their own credit card in the near future. You should already be doing this, but having your teen on your credit card account makes it even more important to monitor all activity on the card. Even if your teen is responsible, the risk for identity theft goes up every time there is another card out there.
Once your teen is responsible enough or has enough credit history to apply for a card of their own, you can simply remove their authorized user privileges and have them apply for their credit card.
Have you ever cosigned a credit card?
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