Dear Bankruptcy Adviser,
My daughter and son-in-law went bankrupt and then my son-in-law was late paying some credit cards. I don't think he is too responsible and I would like to help my daughter get her credit back.
What I want to do for my daughter is to co-sign for a Visa credit card in her name and let her make the payments. I would limit it to a small amount, maybe $2,000, and I would want control as far as canceling the card if she fails to make payments and credit limits go. I would have the credit card company call me if she is behind so it would not damage my credit. Can I set up a card like this? And if she pays the credit card for, say, two years on time, do you think that would help her credit? I have a high credit score.
Your desire to help your daughter rebuild her credit is a very selfless act. Risky, but selfless. I like that you want to limit your exposure and maintain complete control over the card. You are making smart decisions to protect your credit above all else.
Unfortunately, I don't think you can require the company to notify you when she has missed a payment. Typically, the creditor calls the co-signer after two missed payments, not one. One missed payment will negatively affect your credit; therefore, you should try to set up the credit card account to be viewed online so that you can review the account every month prior to the due date. You will need to proactively monitor the account to ensure your daughter has made the payments.
You are correct to add her as a co-signer on the credit card rather than as an authorized user. A co-signer is an individual in addition to the borrower who signs a note, credit card, etc., and thus assumes responsibility and liability for repayment. An authorized user is a person that has been given permission to use a credit line, but does not assume responsibility.
The difference is significant, and Fair Issac has decided to no longer include authorized user accounts in determining your FICO score. This change in policy is another example of the many suffering due to the illegal conduct of a few.
Why the change? Companies found a significant loophole in the credit reporting process. In order to raise a credit score temporarily to qualify for a loan, a person can actually "rent" another person's good credit. The official term is "credit piggybacking" and I believe it is 100 percent illegal.
When you sign a loan application, you are confirming that all information is truthful. Using someone else's credit to improve your score is definitely not truthful.
As a result, Jim, people like you who are willing to help out a family member will be required to take on legal liability. In the past, you could have added your daughter to your accounts as an authorized user. Now, you will have to risk your credit score to help your daughter improve her score.
In theory, I agree with this new requirement. No one should artificially benefit simply because they know someone with good credit. If you want to help another, then you ought to face the risk. Unfortunately, the unintended consequences are that young people with no or limited credit will face more challenges establishing good credit. People like you will speed up the process, but only if done correctly.
Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.