Why You Shouldn't Cosign Your Child's Credit Card

In the early 1990s, I cosigned for a credit card for my son, who was then a college student. The credit card had a limit of $500. Recently, my credit report showed a substantial balance on the card. I called the bank, which informed me that it is an active account for my son. I am now appealing to get off the card, which has been frustrating. It seems wrong that the bank would increase a balance limit from $500 to $20,000 without informing the cosigner. What do you think?

You've just discovered a big downside to cosigning for a card: Activity associated with a cosigned account appears on your credit record, but you may receive no notice of late payments or other problems with the card.

It can be difficult to untangle your fortunes, too. In most cases, the only way to get the cosigner off the account is by paying the balance and closing the card; generally either you or your son can do it. (Your son will then have to apply on his own for a new card.) "These are the very reasons I always advise against cosigning," says John Ulzheimer, president of consumer education for SmartCredit.com.

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The CARD Act (the credit card law that took effect in 2010) does little to address this problem, although it does provide one extra protection for cosigners: Lenders may no longer raise the credit limit for children younger than 21 without the cosigner's written permission. But that notification isn't required after the child turns 21.

Many parents are considering cosigning for the kids' credit cards now that the CARD Act makes it more difficult for children under age 21 to get cards on their own. But before you sign up, be aware of the long-term risks to your credit. Any late payments could hurt your credit record. And your credit score -- and ability to take out new loans -- could suffer even if your child never misses a deadline.

"You are fully responsible for all debt on that account," says Maxine Sweet, vice-president of public education for credit bureau Experian. The balance on the card affects your credit utilization ratio -- the amount of available credit that you have used -- which has a big impact on your credit score. And potential lenders will also include the card balance in your debt-to-income ratio when deciding whether you can afford to take on new loans.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.