How to Help Your Kids With Their Lousy Credit

Most parents don’t want to see their child — even as an adult — face-plant in any endeavor. Parents teach kids to walk and talk, feed them, clothe them and hope they are preparing them well for adulthood. Their instinct (hopefully) is to protect. If a young person isn’t handling credit responsibly, parents may secretly believe it is because they failed to adequately prepare them, says financial therapist Amanda Clayman.

But helping can put parents back in a parental role even when the “child” is now an adult and should be treated as such, Clayman said. “There’s lots of room for stepping on toes, and parents can’t impose a solution,” she said.

One of the biggest dilemmas occurs when young adults mishandle credit so badly that they are going to run into trouble finding a place to live or getting an auto loan so that they can commute to work. What’s a parent to do?

“You can listen for clues, like complaining about financial stress or not having enough money,” Clayman said. But you can’t really intrude and insist on helping. Nor can you sneak a peek at your adult child’s credit reports or scores (it’s against the law). But you can ask questions to see if they are willing to talk about their credit woes. If so, you can ask if they want help.

Giving Your Child a Boost

If they do want help, what do you do? Credit expert Barry Paperno, who blogs at Speaking of Credit, says the answer depends on how bad the situation is. Merely boosting thin-to-bad credit is often fairly simple, he said. (It isn’t quick though, so the sooner you start, the better.)

“A good FICO credit score, the gateway to obtaining or improving credit, can be achieved by simply one credit account in the young person’s name that was: 1) opened at least six months ago, and 2) was last reported to the credit bureau by the creditor within the past six months,” Paperno wrote in an email. Of course, the account needs to have been paid on time.

One option, Paperno said, is adding the young person as an authorized user to one of the parent’s existing accounts. This can help even if the younger person’s credit is so bad he or she can’t get a secured credit card. The entire account history will often appear on the authorized user’s credit reports.

“Simply adding the adult child to a couple of their store or bank cards as an authorized user could quickly have that low score headed upward as soon as the account is included in her credit report and credit score,” he said. “Adding positive credit to an otherwise negative credit report is one way of boosting even the worst credit score.”

But it’s important to understand that an authorized user has access to the entire credit line and no obligation to pay — an understandable point of concern and one parents should fully understand. Parents can eliminate this risk by cutting up the card the day it arrives and making sure the young person does not have access to account information. That way, your child’s score can benefit while the two of you work on better financial habits and re-establishing trust.

“As signs of financial management awareness emerge, such as through employment and/or diligent repayment of existing debts, the ability to use a card in limited situations — school or car expenses, for instance — could be a way of easing the young person into the land of the creditworthy,” Paperno said.

Addressing Deeper Money Woes

Of course, often the credit problem is the result of a financial one, and the younger person can’t get approved for a credit card or loan to cover expenses or make a large purchase. Then you have a stickier situation. Parents may want to step in. And young adults may want help, but also want to maintain autonomy and financial privacy.

Clayman said it’s important to first establish why the problem occurred. Was it spending without a budget? Breaking a lease? Offering to pick up tabs for others as a way of gaining approval? A medical emergency? Paying bills late?

If it’s a one-time thing, a parent may want to step in and provide monetary assistance to soften the consequences, but if it’s a pattern, it may be better to let the young adult experience the problem, perhaps not forever, but until he or she has a plan for different behavior, she said. Whatever the reason, you want to be sure that it has been addressed.

If you want to help, a good place to start is to figure out how bad the current situation is. This can involve adding up bills and comparing them to income sources as well as checking credit together. (Lenders — the ones who won’t approve a credit line for your adult child — would also want information on income and credit before forking any money over.) Your child can check their credit report for free once a year at AnnualCreditReport.com or see their score for free each month on Credit.com.

There are other ways parents can help.

Give your child a security deposit for a secured credit card. And then be sure they understand that on-time payments and keeping the balance low relative to the credit limit is crucial to rebuilding credit. If they want an accountability partner, they could set up text alerts or allow online access to the card for a trusted friend, or maybe a parent. If all goes well, the security deposit should be returned to you when they close the account.
Co-sign for a loan. If you’re going this route, know that you will be responsible for the full amount if the young adult does not pay as agreed. You might choose to take out a small loan for this purpose rather than co-signing for, say, a car. If you do co-sign for something big, consider either having statements sent to your home or making sure you have online access so you can check if the account is being paid on time. Otherwise, you risk damage to your credit — and to your relationship.
Think beyond monetary aid. Helping out financially may not even involve writing a check, Clayman said. The older generation could help by, for example, taking care of a grandchild after school, which would free up money that was being spent on after-school care.
Suggest credit counseling. The hardest part may be knowing when to step in versus when to step back. If your child wants your help financially, but you aren’t sure they are open to advice, you may want to tell them you’ll consider their request only after they’ve talked with a credit or financial counselor.

Protecting Your Relationship

If you are providing monetary aid, Clayman suggests talking about worst-case scenarios and what they could do to the relationship — and how both parties would respond. If you had just co-signed a loan for your daughter’s new car and she lost her job, what would you do? What does she think or hope you would do? What would you do if she missed a payment and then went on a nice vacation? Is the daughter worried that she will now be judged on every dime she spends? Does the money have “strings” attached?

While a lender wouldn’t raise an eyebrow and ask about whether someone with limited funds really has any business buying designer jeans, a parent or counselor might. It’s good to be aware going in that the financial issues are also relational, Clayman said.