Dangers of Co-signing – It Becomes Your Debt!

Have you ever co-signed any credit cards? (especially for your kids). Or even a student loan? Well, if you are thinking of co-signing either a credit card or student loan for your kid, make sure you teach them the importance of paying their interest payment on time. This is because if they do not pay their bills on time, your credit will be affected.

Remember, when you co-sign a loan or credit card, you are essentially guaranteeing their debt.

Here is a story of someone I know : This person has a mortgage, a home equity loan, credit card debt and has co-signed his son’s student loan. Unfortunately, his son has always been inconsistent in paying his monthly interest on the loan. It was only much later that my friend realized that his son’s habits has hurt his credit score!

It was when my friend tried to refinance his mortgage a few years ago that he found out that his credit score had taken a nose dive. He could not refinance and is still paying a relatively high interest rate.

Right now, he faces some risk that credit card issuers may actually increase his rate (the price of having bad credit).

Remedy – My friend has since spoken to his son about this. This was his solution. He pays off the interest every month and his son then pays him. This way, he ensures that the monthly interest will be paid on time. His credit score gradually improved.

Moral of the story – Be very careful if you co-sign a loan or credit card, because it means you are also responsible for it. It should also give you a couple of incentives to :

1. Save for your kids college education – It’s better to save and not having to saddle your kid with debt before they even start work. It may also save you the hassle that my friend went through with a ding to his credit score.

2. Educate your kid on the importance of paying on time and the responsibilities when you are a debtor. I think very few parents actually do this. If you do co-sign a credit card, you’d better teach them about this.