Chapter Nine: Financial Responsibility
Your degree of financial responsibility changes depending on how old you are. For example, suppose you are 14 years old and you accidentally break a car window while throwing a baseball around outside. Ultimately, it is up to your parents to cover the cost of replacing the window because you have not yet reached the age of financial responsibility as an adult. Now, suppose that the same scenario occurs, but this time you are a college student who is 21 years old. In this case, it isn’t your parents who are going to be responsible to pay for the damage to the window — it’s you.
Before you are 18, or in instances such as when a minor is emancipated, you will not be able to get credit on your own. This is because minors cannot legally enter into contracts without parental consent, and credit agreements are legal documents. In order to get a car loan or a credit card or even sign a contract for cell phone service, your parents must agree to the contract and sign alongside with you. If you default on paying your credit card bill, it becomes your parents’ responsibility to pay. If your parents are like most parents, they probably will not be too happy about making your payments when you originally promised to cover the payments on your own. With your parents as cosigners, however, they don’t really have a choice.
Cosigners and Joint Accounts
When your parents cosign with you, this means they assume financial responsibility if you don’t pay. This does not mean the account ultimately belongs to your parents and they just let you use it. Instead, it is an account in your name, but in essence, your parents have vouched for you. The account appears on both credit reports: Yours and your parents.
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 mandates you can only get approved for a credit card in your name under the age of 21 if you have a cosigner or if you can prove you have the income necessary to pay your debts. How do creditors determine whether you have the ability to pay debts? They look at what is called the debt-to-income (DTI) ratio, which is the amount of money you are obligated to pay in debt payments compared to the amount of money you earn. If you don’t have enough money coming in each month, and are under the age of 21, you will only be approved for credit if you get a cosigner.
If you are a minor under the age of 18, you can’t enter into a financial contract on your own because minors aren’t allowed to enter into legal obligations alone. With all of these restrictions in place to keep teens and college students from obtaining credit on their own, sometimes cosigning is the only option.
A cosigner usually does not have access to the account. For example, suppose you open a credit card account with your parents as cosigners. Even though they are financially obligated to pay the account balance, and the account will show up on their credit report and yours, they aren’t allowed access to the card to make purchases. In other words, if you don’t pay your bill, they will legally be responsible for paying it, but they don’t actually get to spend the money on the card. It can be an odd position for your parents, so you should not be surprised if they are reluctant to cosign for you.
Another option is to open a joint account with your parents. This is different than cosigning because this account will belong to both you and your parents. You will all have equal access to the available credit, and each of you will be responsible for the payments. With this type of credit card account, everyone on the account can use the credit card to make purchases. If both of your parents are joint owners on the account, all three of you will get credit cards issued to you from the same account, and the monthly bill will have all three of your names on it. This is a common arrangement for parents to enter into with their teens and college students because it allows parents to keep a close eye on the spending on the account while also allowing the teen the ability to learn how to use a credit card.
Here is the most important thing to remember when it comes to having an account with your parents: It isn’t only your finances on the line if you don’t pay in a timely manner. Your parents have likely spent years building a good credit score. If you miss a few payments on your joint account, it will drag not only your credit score down, but theirs as well. You can see why they might be nervous about opening an account with someone who is totally new to the credit game.
If your parents are willing to cosign or open a joint account with you, be glad they trust you. If they are reluctant about opening accounts with you, or you have not yet asked them to do so yet, you may want to have a conversation about the following pros of a joint account when you are first starting out:
• A joint account can be closely monitored by the parents to make sure the teen is not spending recklessly.
• Teens who get practice managing credit early on may be better prepared to manage their credit when it is in their own name.
• A teen entering adulthood with an existing credit history may be in a better position to obtain low interest credit cards and loans than a person with no such credit history.
Many people start out their credit-driven lives by making mistakes that can haunt them for years afterward in the form of a bad credit rating or charged-off accounts. If you can begin with accounts your parents help you monitor, you may be better prepared when the time comes to start managing your credit all by yourself.
Parental access
Keep this in mind when you have an account with your parents: They can see everything you buy. Whenever you make a purchase with a credit card, your creditor makes a note of the purchase and lists it on your account activity log. This information is included on the monthly statement you receive from the credit card company and can usually be accessed easily by accessing your account on the credit card company’s Web site.
Why is this so important to know? While you should periodically review the information on your credit card activity log to ensure there are no errors on the report, you should also be aware that this means that your parents can peek at what you have been buying with your credit card. Suppose your parents open a credit card account with you right before you head off to college, urging you to only use the card for emergency purchases. You then use the card to order pizza one night, but tell your parents the $20 charge was to pay a lab fee. All your parents have to do is look at the purchase activity on your statement, and it will become obvious the $20 didn’t go toward a lab fee.
Your parents can also be listed as co-owners on your bank account. This is probably the case if the account was opened before your 18th birthday. If this is the case, your parents have full access to examine how much money you deposit and withdraw, as well as where you use your debit card, if you have one linked to the account.
Remember: Parents with access to your bank account also have the ability to withdraw funds. This may not be an issue for you, but teens and college students who have parents who are irresponsible with money should be aware there is always the possibility that their parents can wipe out the balance in their accounts. On the other hand, if you have parents who are responsible with their money and who can help guide you in managing your finances, it can actually be a very good thing for your parents to have access to your accounts.