Credit Cards for College: Co-Sign or Authorized User?

Last Updated Dec 15, 2010 4:26 PM EST

Adding a child to your credit-card account can be a dicey business. I only recently came to appreciate that when a young adult reader wrote to ask me, Why -- after years of being linked to her Dad's card while a student -- was she unable to get approved for a card of her own in the real world?

There are many possible answers to that question, ranging from her age (it helps to be 21 or older) to her income (it helps to have some) to her timing (card companies were retrenching until recently) to her Dad's credit (maybe it stinks; that would extend to any linked cardholders). All of this and more helped open my eyes to why parents must be careful when allowing a child to piggyback on their credit.

There are two common ways to get your kid a linked card:

· Co-sign on a new account. You and your child open a new credit-card account as equals. Both fill out the paperwork; it doesn't matter who did the spending, if things go bad the bank can come after you both. Your child gets the benefit of your good credit, including lower costs on unpaid balances, and will build good credit if payments are made in a timely way. But make sure you monitor this account. Your credit score will suffer along with your child's if the card is mishandled.

· Make your child an authorized user. This is the most common arrangement. Direct your card company to issue your child a card, which becomes an extension of your own. Again, you'll need to monitor the account, lest your child spend you into the poorhouse or fail to pay the bill each month and damage your credit score. You may be able to arrange for a child's bills to be sent directly to them and establish a separate credit limit. But if things go bad it's you that the bank will hunt down.

Once upon a time all authorized users had the opportunity to establish good credit. But that isn't always the case now. Check the terms and conditions of your card or call your card company and ask if they report authorized user activity for credit score purposes. I suspect the young reader who prompted this post was authorized on a card that did not report her activity and thus did nothing to build her credit history.

Which setup would I choose? Neither. My college-aged kids have debit cards linked to a checking account. Their cards have low fees and provide all the access to cash that they need. I've got plenty of stuff to monitor already. I don't need another set of statements to pore over each month. And a debit account forces them to live within their means.

A debit account will not, however, help them build a broad credit profile, as would a properly handled credit-card account. But it's not like their debit account is pointless in this regard. Their account history will matter if they later apply for a credit card from the same bank. As for building a broader credit profile, they can do that by paying their cable and electric bills on time when they move off campus -- so long as those accounts are in their name. Then, when they are 21, they can get their own credit card.

My approach means I will not have direct oversight of their first credit-card account, which scares me a bit. But we'll still talk about their finances and, hey, you have to let go at some point.

If you decide that your kids would be better off linked to your card, the authorized user route probably makes the most sense. It's easier and quicker to set up. You control the account. You can have your child de-authorized anytime with a letter or phone call. As a co-signer, you'd have to pay the balance to zero before you could free yourself and, ironically, closing out an account like that can have an adverse impact on your credit score just as having the account open might limit any other borrowing you may want to do.

So choose wisely. There's more at stake than you might think.

Photo courtesy Flickr user thetruthabout.
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  • Dan Kadlec

    Daniel J. Kadlec is an author and journalist whose work appears regularly in Time and Money magazines. He is the former editor of Time’s Generations section, which was written and edited for boomers. Kadlec came to Time from USA Today, where he was the creator and author of the daily column Street Talk, which anchored the newspaper's business coverage. He has co-written three books, including, most recently, With Purpose: Going from Success to Significance in Work and Life. He has won a New York Press Club award and a National Headliner Award for columns on the economy and investing.