My Kid's Drowning in Credit Card Debt! What Do I Do?
If you trusted your son or daughter to keep track of their finances, and they slipped up, what in the world are you supposed to do?
Let's say they've racked up a big, nasty credit card debt -- to the tune of thousands of dollars. Should you pay off their debts to help keep their credit score above water? Or is it better to let them learn from their mistakes and suffer the consequences? Though each individual situation is different, here are your options, what's at stake, and a few pointers to help you plot your course of action.
A Personal Loan, With a Contract
If you have the means, think about whether or not you want to loan your daughter the money. Sometimes her debt is manageable enough that you can pay it off in the form of a personal loan to your daughter. You can charge her interest as well, so she learns just how much a high APR can cost her.
But you have to examine the situation from a lender's perspective, rather than simply write a check and expect she'll make payments. What is her employment situation? Will she be able to make payments to you without the security blanket of your relationship making her complacent? Has she typically been a responsible spender in the past, or does she impulsively purchase on a grand scale regularly? If you do decide to help protect her credit history, it's a smart idea to sign a contract with your daughter to make your agreement more official and binding.
If You Co-Signed, You're on the Hook
If you co-signed on your son's account, you're responsible for his credit card debt. Because of regulations passed in the CARD Act of 2009, it's more difficult for young adults to qualify for credit cards, so more and more parents are co-signing on accounts and acting as guarantors for their children. If you've already taken that step, you should hopefully have realized that your son's purchases will affect your credit, regardless of your involvement.
Lessons to Be Learned?
Bad credit now will impact her financial future later, but so will bad habits. If your daughter doesn't learn from her mistakes now, there could be bigger and more damaging mistakes ahead. Will bailing your daughter out of her financial mess with creditors make her realize the gravity of her mistake? Or will you just end up fostering her sense of dependence on you? You won't always be there, wallet in hand to save her, so if she can manage to take the credit hit, perhaps it's best to let her learn her lesson this time, and give her some tough love.
Communication Is Key
Loaning money to someone you love is always, always messy. While your son should intellectually know that your love is unconditional (which is why your help comes so willingly), for him, it's emotionally very difficult to face your parents when you owe them money. Plenty of relationships have been ruined by debts of personal loans, both from neglected payments and feelings of shame. Be sure that if you choose to help your son, you commit to maintaining an open dialogue and doing your best to keep business and family separate.
Ultimately, each family and financial situation is different. But before you make a plan to tackle your son or daughter's debt, you need to examine the situation from all angles. There are many factors in play, but above all, your relationship and your child's sense of responsibility from this learning experience should be at the forefront of your mind.