Monday, November 24th 2014

The Parent Trap

by Jason Steele

It seems like the way things work in the world is when the parents are responsible, and it is their kids who are rebellious and prone to poor decision making.    In that world, it would be the adult children who would beg their parents to co-sign a loan for them on a new car or that loft downtown to impress their friends.

One unusual aspect of today’s current financial crisis is that it is severely affecting the credit of all Americans, even older ones.   One of the ramifications of this is that it is often parents who are asking their adult children to co-sign a loan, according to the Denver Post .

Like conventional loans, credit card holders also face the challenge of having family members ask them for a card on their account, the equivalent of a co-signed loan.   Like the loans discussed in the article, joint credit card account holders are each responsible for the balance.

Should You Do It?

It is very rare that this arrangement makes sense, outside of a married couple or a parent and a minor child.   When you give someone a credit card on your account or a joint account, you are going to be responsible for paying all charges.    For a married couple that manages their finances jointly, this make perfect sense.   As a teenager, I always had a credit card on my parent’s account.   I was only to use it in emergencies or for purchases that they approved of in advance.   It would be very difficult for me to think of another  situation where I would have a card in another person’s name.

If I wished to help someone out financially, I would much rather extend them a personal loan then to give them an authorized credit card or worse, a joint account.   I have always organized my finances around the principle that I will pay off each balance in full and on time, every month.   To do so, I keep track of my spending so that I know that I will be able to pay it back at the end of the month.   Giving a credit card on my account to another person means giving up the direct control of my spending.

The article points out how it is difficult to say no to a parent in the situation where they are asking for you to co-sign a loan.   I suspect it would be no less difficult to turn down a parent’s request for a credit card.

On Loans To Friends And Family

This is a hugely tricky subject.   A good friend is worth more than money, and the same is true of a strong relationship with a family member.   I once read that when a good friend or a family member is in financial trouble, it is better to offer a gift than a loan.   A gift, of course, does not carry the requirement that it is paid back.   If you are unable to gift the money necessary, you should not be loaning it.    By gifting it, you ensure that you will retain the same relationship whether or not the person is ever able to return the money.

I know this is a blog about credit cards and personal finance.  I am not a psychologist, a family counselor, or even a relationship advice columnist.  Nevertheless, almost everyone knows someone who is in financial trouble these days and you should consider the long term effects on your credit and your relationship before entangling your credit with your friends or family.

One Response to “The Parent Trap”

  1. Bret @ Hope to Prosper Says:

    I read recently that 75% of co-signed loans default back to the co-signer.

    The banks have a pretty good handle on statistics and if they won’t lend someone money, they are usually right. I think it’s way better to gift a little money to someone who is irresponsible, than to entangle them with your finances.

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