Okay young people, this one is for the parents out there. Go get a soda or something.
You want to do good things for your kids. You want to take care of them and teach them to take care of themselves when you can’t. We all know that, you’re good people.
Let’s say you have some questions about teaching your kids about finance. So you go to your friendly, neighborhood finance “professional”, and ask for some tips to help them out.
The first thing they tell you is to sign your kids as authorized users on some of your credit cards. They will tell you that this nifty little trick will allow them to benefit from your strong credit rating. They will tell you about how much this practice will save them over the years.
The second thing they will tell you is that it is okay to buy their car for them, because you don’t want to negatively impact your kidlet’s debt to income ratio by saddling them with a car payment that (frankly) might be a little more than they can afford.
Here’s a little truth that you need to know:
First, FICO is well aware of this little trick, and as of September of this year, it won’t work anymore. The real truth is, most lenders never put too much stock in this. What this really did was to help your kids get into more debt than they could pay off. The good news is that they won’t be able to after September.
The second item is a little more tricky, but the result is pretty simple. Don’t finance a car (or any other vehicle) for your kid under your credit. Sure, you may save a few dollars, but you aren’t benefitting them at all. About five years from now, they will be in the same predicament, but just five years older. If there is no other option (call me. I know MANY MANY alternatives), co-sign for them, but you want to negotiate this in such a way that the child is “first”, or “on-top” of the registration. Will they pay a little more in interest up front? Sure, but after about a year or so with a great payment history, they can usually refinance the car into their name alone, and take advantage of better rates. This way, when they are ready to buy their next car, you aren’t going to be asked to be on the hook.
Just as in many other aspects of life, sometimes the tough answer is the right one. You don’t want your kid to harm themselves, so the best way to avoid this to make them shoulder more responsibility now, when you are still able to help them. They may not like it at first, but they will eventually “get it”, and that is worth so much more than you may know.