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The dangers of being a co-signer

Posted by Cheryl Costa  March 1, 2012 09:43 AM

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Recent changes in credit card laws have made it more difficult for children under age 21 to qualify for credit cards. As a result, many kids are now asking their parents to be co-signers on their applications. But should you do it?

My vote is no. Co-signing helps the child of course, but the impact on your credit can be very negative. You need to remember that any late payments could show up on your credit history. Also, even if your child pays in full every month, the amount of outstanding debt will still impact your credit score. Too much debt and/or a card that has nearly all of its credit line in use can reduce your credit score pretty easily. And, of course, the biggest drawback of all is that you would be fully responsible for paying off the debt if your child does not or can not make the payments. Many people think an easy way to reduce the risk associated with that situation is to co-sign only for a card with a very low credit limit. However, what many people don't realize is that once a child turns 21, the credit limit on the card can be raised (perhaps substantially) and the co-signer receives no notification of the increase. So what started as a $500 potential liability on a card the child took out when they were 20 could turn into a $10,000 liability just a few years later.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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