Should You Be a Co-Signer for an Adult Child?

With his father's help, Daniel Milks got a leg up on his credit when he was just 16.

"I myself received my first credit card when I was 16. My father was the co-signer and actually kept the card in his safe. He would then give it to me briefly and tell me to go purchase gas for the vehicle or something minor and then take it back," says Milks, a Certified Financial Planner and co-founder at Fiduciary Organization in Greenville, South Carolina. "This was to start building my credit history and protect me from being irresponsible."

Getting a co-signed credit card worked out well for Milks.

"Looking back on it, it was a really great move by my parents," he says. "By the time I was a senior in college I had an excellent credit score, and when I applied for my own credit card for the first time, I was approved for a very high credit limit."

"As you may know," he adds, "this comes with some pretty large risks, as younger adults can often be irresponsible with credit cards, so a high credit limit in some cases could be a bad thing. If done correctly, (co-signing) can be a great tool to build credit."

Even though it worked out well for Milks, parents do take on risks when they co-sign for a son or daughter. By co-signing on a debt, whether it is a credit card balance, car loan or mortgage, parents guarantee that they will pay back the balance if their son or daughter cannot do so.

"Co-signing for an adult child can be a big help, but it's not without risks," Milks says. "On the plus side, it can help them qualify for a loan, secure a lower interest rate and build credit. But on the downside, you're fully responsible if they miss payments, and it could hurt your own credit score or borrowing ability."

John Ulzheimer, credit expert and president of The Ulzheimer Group in Atlanta, encourages parents to use caution when it comes to co-signing for an adult child.

"If you're a co-signer you will have to disclose the obligation to future lenders and it will impact your (debt-to-income) ratios," he says. "And it's very likely any loans or credit cards will end up on your credit reports so there's a chance they will adversely impact your credit scores even if the obligation is being paid on time.

"Of course, if the obligation goes delinquent, that will hit your credit reports and scores as well," Ulzheimer says. "Scoring models do not treat co-signers any different than the primary borrower."

If a son or daughter falls behind on the payments of a co-signed account, it will hurt your credit score. So be ready to step in and make payments to get the account current again.

"If you choose to co-sign then you should be ready and comfortable making payments if your adult child cannot or will not make them any longer," Ulzheimer says.

Even a son or daughter simply charging up a co-signed credit card account or taking out a hefty education loan will hurt their parent's credit.

"The loan or credit (card) is listed on your credit report, impacting your credit utilization," explains Maura Attardi, director of financial wellness for Money Management International, a nonprofit financial counseling agency based in Stafford, Texas. "Your credit utilization is an important factor in determining your credit score, and if it is too high, it can negatively impact your score and ability to get loans."

Attardi is also concerned about the impact co-signing would have on the relationship between parent and child.

"Of course, I would be concerned that my own credit score would be affected and that I could be held legally responsible for an outstanding debt that wasn't paid, but I would also be concerned about the potential stress and strain it might put on my relationship with my child," Attardi says.

It is important to remember that the bank required a co-signer for a reason. "It could be a better opportunity to allow your adult child to work on building or improving their own credit through a secured credit card or credit builder product, so they have better borrowing opportunities in the future," Attardi advises.

Now let's consider the pros and cons of co-signing for each of the following: credit card, car loan, private student loan and personal loan for an adult child.

Credit card. A credit card may be the least risky way to co-sign for a son or daughter.

"Co-signing for a credit card might be a little safer because the credit limit may be lower than other loans. A credit card with a modest limit can't get too out of control compared to a much larger type of loan like a mortgage or an automobile," says Melinda Opperman, chief external affairs officer at Credit.org in Riverside, California.

But, as with any co-signing arrangement, there are downsides.

"The downside to co-signing for a credit card is that it's a revolving loan, so you don't know what it will end up being or what the loan is being used for. As a co-signer, you might want more stable and predictable loan payments than the variable nature of credit card bills," Opperman says.

A co-signed credit card may be difficult to get.

"Many lenders won't allow co-signers on credit cards, as they rightly assume anyone who needs a co-signer to get a credit card isn't ready for one," she says.

A better option for a starter credit card is a secured card which requires the user to make a deposit of, say, $200, and limits purchases to that amount. "If you must help your adult child get a credit card, it's safer to loan them the money for a secured card deposit than to co-sign for an open-ended credit card loan," Opperman says.

Car loan. Keep in mind when co-signing a car loan the title will always belong to your son or daughter and not you.

"When you co-sign on an auto loan, your name is not on the title. So even if you are forced to take over the payments, you can't legally take possession of the car or be added to the title," Opperman says. "A co-signer's role is financial, not ownership. Even if you pay off the car completely, the title will be sent to the primary borrower. A co-borrower, on the other hand, shares ownership of the car and is usually listed on the title."

Private student loan. It is not unusual for a parent to co-sign an education loan for a son or daughter.

"If the parents have already committed to funding something for a child . . . having a child being a co-signer can help build up credit for the child and spread out the payments for parents," says Joe Boughan, a Certified Financial Planner at  Parkmount Financial Partners in Boston.

He urges parents to be clear-eyed about a son or daughter's ability to pay back education loans.

"Parents should try to be objective about their child's ability to pay back the loan, and how much the child truly needs a co-signer. Ultimately if things go south with the child paying it down, being on the hook for a large loan payment can potentially encumber the parent's financial situation for retirement," Boughan says.

Personal loan. A fixed payment schedule may make a co-signed personal loan more appealing than other co-signing options.

"With personal loans, the amount owed is fixed, and the payment schedule is spelled out in advance," Opperman says. "This can be helpful to a co-signer, since you'll want to review the primary borrower's budget and make sure they can afford the payments."

"With a personal loan, there is less uncertainty," she adds. "One thing to be extra cautious about is putting up collateral for someone when you co-sign for a loan. Besides your credit being wrecked, your property could be seized if the borrower doesn't repay."

One last piece of advice for parents to consider before becoming a co-signer for an adult child.

"As parents, we want to help our children as much as possible and set them up for financial success," Attardi says. "However, being a co-signer can be very risky."

When you co-sign on a loan, you agree to be fully responsible for another person's debt. "And even though it is your child that you are trying to help," she adds, "there is a chance that your good intentions can backfire and cause not only financial stress, but it has the potential to impact your relationship as well."