Should You Cosign a Loan or a Credit Card?

Sun, Oct 11, 2009

Cosign Loan I recently read a Money magazine article about helping your child manage credit. The article discussed a new law that will certainly help protect children from carless use of credit cards.

New credit card law

Often children get off to the wrong start by going to college, opening up a credit card and running up the balance with little forethought of the consequences.

But new legislation taking effect in February banks prohibits banks from issuing cards to those under 21 unless they have an adult co-signer or proof of means to cover payments.

I appreciate the new law because ultimately, I think it will help children avoid debt earlier in life. However, another perspective needs to be kept in mind when considering co-signing a credit card agreement with your child.

Biblical view of co-signing

Biblically, we are advised not to co-sign any loan. Anytime you co-sign you become legally responsible for the debt if the other person defaults.

It is poor judgment to countersign another’s note, to become responsible for his debts Proverbs 17:18 (TLB).

“But this is my child we’re talking about here!” I know; I’ve had the same thoughts and feelings. When my children are old enough to drive, I’m sure I will want them to have an automobile. And many of us have had parents co-sign for us on such loans in the past.

Also, many have had friends or family ask them to co-sign because there credit isn’t good enough for a loan. And many have taken on this responsibility to later find they are now responsible for making the payments. The irresponsible friend or family member, who once shook their hand in gratefulness, defaulted on the loan and left them with a mess of debt.

Related to co-signing for our child’s credit card, this becomes tricky because like it or not, credit scores are a part of society today. Having a credit card and managing it responsibly helps build better credit.

You will probably want your child to establish some form of credit. It’s a measure often used for such things as signing a lease to an apartment which children will most likely do once they graduate school.

A better answer than co-signing

However, I think there is a better answer than co-signing. For me personally, I plan to follow the Biblical guidance and not co-sign for my child. This means, at least by the new law, my children will have to wait until they are 21 to open up a credit card. It also means that first car will need to be paid with cash because I’m not interested in anymore car loans!

This approach may present challenges, but I’m willing to accept those because ultimately, I think my children will be better off if I follow God’s plan for finances.

I think the right answer is taking the route of wise personal finance coach. The article did provide some thoughtful advice about starting your child with a debit card. As children enter the teenage years I think it’s important for them to take more responsibility in money management. One of the ways to do this is to manage their own checking and savings accounts. A debit card can be set up for purchases and help teach wise spending principles.

Only after principles of wise spending, saving, giving and earning are taught to a child, are they positioned well to open a card card account. At that point, they won’t need a co-signer because they will have learned what it means to be good financial stewards.

If you’re in a co-signed loan today, think about trying to get out of it. Most of the time these loans, even with family and close friends, do not end up in a good situation for the person who was willing to co-sign. Remember, the person who needed you to co-sign, requested help because ultimately, they don’t have a good track record for meeting loan agreements to begin with.

What are your thoughts on co-signing loans and were you aware of this Biblical principle?

Photo by JasonRogersFooDogGiraffeBee.

Tags: Cosigning, Credit Cards