Helping Kids Financially without Hurting Yourself
4/3/2013 10:48:13 AM

"As parents, we often want to fix things as best we can in the least painful way possible. If our kid can't get an auto loan because of a low credit score, we immediately offer up ourselves as co-signors, or we buy the car ourselves. If our kid needs a thousand dollars to pay off a debt that has entered litigation, we open our own pocketbooks and make out a check,” McDaniel said. "Although that's what our parental instincts tell us to do, that's not always the answer. Sometimes, but not always.”

The problem with serving as a principal or co-signor on a loan is obvious: If the debt isn't paid, you're responsible. The creditor isn't concerned with the verbal agreement you made with your son or daughter at the kitchen table – they're concerned with what's on the contract, and if it's your name, you're in trouble.

"Let's say your son is going to get the bill, which is in your name, and promises to pay it every month. Then he's thirty days late in February, forgets altogether in April, pays fifteen days late in June, and falls behind in August. Guess whose credit report suffers from that?” McDaniel said.

Studies have shown that up to three-quarters of all co-signors are asked to repay loans that go into default. Rather than co-signing on a loan, McDaniel suggests meeting with a bank officer to discuss other options. You can give a tax-free gift to your child of up to $12,000, for example, and arrange an informal verbal agreement that the money will repaid in some way. If you would prefer to make it a formal loan, your financial advisor can help set it up. A loan would require proper documentation.

Should you decide to come to your child's financial rescue, consider discussing the process that created the problem in the first place. "If your child is really going to get on the path to responsible financial living, the initial problem has to be recognized. How else does a person know what to fix?” McDaniel said. "Credit counselors are good places to go for that sort of guidance. Bank officers can also help customers determine where the problems began and how they can be avoided in the future.”

When you become involved, set clear limits on what kind of help you are willing and able to provide. If you decide to loan money, you may want to insist that they make an appointment with a credit counselor, for example.

"As parents, we want to protect our children from trouble, whether it's emotional, mental, or financial. It doesn't matter how old they are – thirteen, twenty, or thirty – we're still there,” McDaniel said. "We just have to make sure we do things that will not only help them today, but tomorrow as well.”

Posted by: Kristy Armand | Submit comment | Tell a friend

Categories: Finances

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