What to know before sharing credit accounts with a parent
TV personality and best-selling author Teresa Strasser says she can’t get a credit card approved, or take out a car loan or mortgage. Her credit is “trashed,” as she describes it, even though she has always paid her bills on time. The reason? She says it has to do with her father.
Strasser says when her father’s house was foreclosed on, her credit took a hit because she co-signed for the mortgage. “My dad wasn’t letting me know he wasn’t paying the mortgage exactly. By the time I heard about it, I couldn’t fix it, ”she says.
She feels the fallout almost every day. When she applied for a credit card from the Nordstrom store to get free jeans made, she was turned down. When she applied for a new job, she was so worried that her bad credit history would hurt her chances of writing a letter to human resources explaining what happened.
Co-signing any type of credit account with someone else, even if it’s your parents, can lead to this type of situation. According to the credit reporting agency Experian, 18.7% of credit cards are shared with family members, whether as joint account holders, authorized users, or co-signers. The best way to protect yourself is to avoid account sharing altogether, says Rod Griffin, director of public education at Experian.
“If you co-sign for someone or add them as an authorized user or joint account holder, you are responsible for the debt they incur,” he adds.
Here’s what you need to know before trying to help a parent this way.
Share credit accounts only as a last resort
If you share a credit card and your parent spends so much on the card that he or she – or you – can’t pay it off, it can become difficult to make even the minimum payments, warns John Heath, managing attorney at Lexington Law. , a consumer law firm in Salt Lake City.
Eventually, this can lead to late payments, interest and fees, and the account can go into collection. Then your credit score could take a hard hit, affecting the interest rates you can get on home and auto loans. “It might even prevent a child [who has co-signed for a parent] to have a home, ”adds Heath.
If you’re going to share a credit card, protect yourself
If sharing a credit card still seems like the best way for you to help your parent, choose one with a low credit limit to minimize potential damage. In this situation, Richard Bolger, a bankruptcy attorney in Fairfax, Virginia, recommends being the primary account holder and adding your parent as an authorized user. This way, you can carefully monitor account activity, control payments, and remove the parent from the account if needed. It also suggests setting up alerts so that you receive a notification if the account is approaching its credit limit.
Reviewing purchases made with the card at least once a week is also a smart practice, says Ira Rheingold, executive director of the National Association of Consumer Advocates.
“If you are [sharing a card] because your parents need access to health care or medication, you still need to be able to see the bills if your name is associated with them, ”he says.
As parents age, it’s even more important to keep a close eye on their spending, as seniors can be particularly vulnerable to retail scams and marketing fraud, he adds.
Sometimes parents steal the identity of their children
The idea of a parent deliberately stealing a child’s identity for financial gain seems particularly disturbing. But Ken Meiser, vice president of ID Analytics, a credit and fraud risk management company, says it isn’t always done with bad intentions.
“In some cases, they were making financial decisions that made sense to them at the time,” he says.
For example, if a parent is in financial trouble and has poor credit, it may seem like the only way to pay for utilities or school supplies is to open a new credit card in a young child’s name. This child might not learn that their social security number has been used by the parent until they are an adult, applying for a loan for the first time.
“The only way to remove it from your story is to say vehemently, ‘I didn’t do that. I was not of legal age, ”Meiser says. The credit card issuer will likely open a fraud case and the family member who opened the account could face legal consequences.
Instead, look for other ways to help
If your parents are struggling financially, there are other ways to help besides sharing a credit account. First, explain to them how they got into trouble, suggests Heath. Maybe they could use the help of a credit counselor or a bankruptcy lawyer. If they are in desperate need of something specific like utilities, a phone, or a car, pay for it or buy it for them if you can afford it. This offers a way to help without putting your credit history and financial future at risk.
You can also deposit a cash deposit for them to take out a secured credit card.
“It’s low risk and helps them build their credit if they use it to make small purchases and then pay off the balance in full each month,” says Heather Battison, vice president of the rating agency. of TransUnion credit. You could lose money if the card is not paid off, but your credit score will not suffer since the card is in your parents’ name, not yours.
While problems resulting from shared credit accounts can strain relationships, Strasser has found that families can emerge stronger as well.
“Yes, I am deeply sad, but I don’t want to lose my father because of this,” she said. “I only have one dad and had to learn to focus on the things I love about him.” He may have missed his mortgage payments, she says, but he never misses his son’s Little League games.
This article was written by NerdWallet and was originally published by Forbes.