What to Know Before Sharing Credit Accounts With a Parent
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Teresa Strasser, a television personality and best-selling author, says she can’t get approved for a credit card, nor can she take out an auto loan or a 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 that when her dad’s home went into foreclosure, her credit took a big hit because she had co-signed for the mortgage. “My dad wasn’t letting me know that he wasn’t exactly paying the mortgage. By the time I got wind of it, I couldn’t fix it,” she says.
She feels the fallout almost every day. When she applied for a Nordstrom store credit card to get free tailoring for jeans, she was turned down. When she was applying for a new job, she was so worried that her poor credit history would hurt her chances that she wrote a letter to human resources explaining what happened.
Co-signing any kind of credit account with someone else — even if it’s your parent — can lead to this type of predicament. According to credit reporting agency Experian, 18.7% of credit cards are shared with family members, either 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 anyone or add them as an authorized user or joint account holder, you are responsible for the debt they attain,” he adds.
Here’s what you need to know before attempting 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 hard to make even the minimum payments, warns John Heath, directing attorney at Lexington Law, a consumer law firm in Salt Lake City.
Eventually, that can lead to late payments, interest and fees, and the account can go into collections. Then your credit score could take a big 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] from getting a house,” Heath adds.
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 the 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. That way, you can monitor account activity carefully, control the payments and remove the parent from the account if necessary. He also suggests setting up alerts so you get 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’re [sharing a card] because your parents need access to health care or medicine, you still need to be able to see the bills if your name is associated with it,” he says.
As parents age, keeping close track of their spending is even more important, because seniors can be especially vulnerable to retail scams and fraudulent marketing, he adds.
Sometimes parents steal their children’s identities
The idea of a parent purposely stealing a child’s identity for financial gain sounds particularly disturbing. But Ken Meiser, a vice president at ID Analytics, a credit and fraud risk management company, says it’s not 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 has run into financial trouble and has poor credit, it might 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. That child might not learn that his Social Security number has been used by the parent until he is an adult, applying for a loan for the first time.
“The only way to get it off your history is by being vociferous in saying, ‘I did not do this. I was not of legal age,’” Meiser says. The credit card issuer will likely open up a fraud case, and the family member who opened the account could face legal consequences.
Look for other ways to help instead
If your parents are struggling financially, there are other ways to help than by sharing a credit account. First, talk to them about how they got into trouble, Heath suggests. Perhaps they could use the help of a credit counselor or bankruptcy attorney. If they’re in desperate need of something specific, such as 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 could also put down 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 the balance in full each month,” says Heather Battison, a vice president at credit reporting agency TransUnion. You could lose the money if the card isn’t paid off, but your credit score wouldn’t be hurt since the card is in your parent’s name, not yours.
While problems that come about as a result of shared credit accounts can strain relationships, Strasser discovered that families can also come out stronger.
“Yes, I am deeply sad, but I don’t want to lose my dad because of this,” she says. “I only have one dad, and I had to learn how to focus on the things about him that I love.” He may have missed mortgage payments, she says, but he never misses her son’s Little League games.
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This article was written by NerdWallet and was originally published by Forbes.
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