In the early 1990s, I cosigned for a credit card for my son, who was then a college student. The credit card had a limit of $500. Recently, my credit report showed a substantial balance on the card. I called the bank, which informed me that it is an active account for my son. I am now appealing to get off the card, which has been frustrating. It seems wrong that the bank would increase a balance limit from $500 to $20,000 without informing the cosigner. What do you think? — Name withheld
You’ve just discovered a big downside to cosigning for a card: Activity associated with a cosigned account appears on your credit record, but you may receive no notice of late payments or other problems with the card.
It can be difficult to untangle your fortunes, too. In most cases, the only way to get the cosigner off the account is by paying the balance and closing the card; generally either you or your son can do it. (Your son will then have to apply on his own for a new card.) “These are the very reasons I always advise against cosigning,” says John Ulzheimer, president of consumer education for SmartCredit.com. The CARD Act (the credit card law that took effect in 2010) does little to address this problem, although it does provide one extra protection for cosigners: Lenders may no longer raise the credit limit for children younger than 21 without the cosigner’s written permission. But that notification isn’t required after the child turns 21.
Many parents are considering cosigning for their kids’ credit cards now that the CARD Act makes it more difficult for children under age 21 to get cards on their own. But before you sign up, be aware of the long-term risks to your credit. Any late payments could hurt your credit record. And your credit score—and ability to take out new loans—could suffer even if your child never misses a deadline.
“You are fully responsible for all debt on that account,” says Maxine Sweet, vice-president of public education for the credit bureau Experian. The balance on the card affects your credit utilization ratio—the amount of available credit that you have used—which has a big impact on your credit score. And potential lenders will also include the card balance in your debt-to-income ratio when deciding whether you can afford to take on new loans.
Roths for minors
I want to set up a Roth IRA for my son, who is 16 and has started to work, but we can’t meet the $1,000 initial investment or the $100 monthly automatic investment that most investment companies require. Can you recommend any brokerages or fund companies with low minimums? — T. H., Katy, Texas
It’s a wonderful idea to set up a Roth IRA for your son, and your timing is perfect: You can open a Roth IRA for a child of any age who has earned income from a job, and you have until April 17, 2012, to make contributions for 2011. You can invest up to the amount of income the child earned for the year, with a $5,000 maximum.
A few firms make it easy for kids to start small Roths. TD Ameritrade has no minimums or annual fees for its IRAs (the IRA must be in the minor’s name as well as the custodian’s name, and it must use the minor’s tax ID number). You can invest in stocks, funds or other investments available in the firm’s brokerage accounts, including more than 100 commission-free exchange-traded funds. And you can sign up to have any amount—even just $50 per month—automatically transferred from a bank account to the IRA.
Scottrade offers IRAs to minors with a minimum investment of $500 for new accounts and with no annual fees or setup costs. Charles Schwab allows minors to open a custodial Roth IRA with $100; it charges no annual or maintenance fees.