My Kid’s Drowning in Credit Card Debt! What Do I Do?

consumerismIf 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 child the money. Sometimes the debt is manageable enough that you can pay it off in the form of a personal loan to your child. You can even decide to charge them interest as well, so they learn just how much a high APR can cost them.

But you have to examine the situation from a lender’s perspective, rather than simply write a check and expect your child will make payments. What is the child’s employment situation? Will he or she be able to make payments to you without the security blanket of your relationship making them complacent? Has your child typically been a responsible spender in the past, or does he or she impulsively purchase on a grand scale regularly? If you do decide to help protect their credit history, it’s a smart idea to sign a contract with your child to make your agreement more official and binding.

If You Co-Signed, You’re on the Hook

If you co-signed on your child’s account, you’re responsible for their 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 child’s purchases will affect your credit, regardless of your involvement.

In this case, it may be more prudent to pay off the debt if you can, cancel the account, and work together to come up with a payment plan to rectify the situation and make sure it never happens again. If you haven’t co-signed yet, sit down for a serious conversation with your child on your values and financial responsibility.

Lessons to Be Learned?

Bad credit now will impact their financial future later, but so will bad habits. If your child doesn’t learn from his or her mistakes now, there could be bigger and more damaging mistakes ahead. Will bailing your child out of their financial mess with creditors make them realize the gravity of their mistake? Or will you just end up fostering their sense of dependence on you? You won’t always be there, wallet in hand to save them, so if they can manage to take the credit hit, perhaps it’s best to let them learn the lesson this time, and give them some tough love.

Communication Is Key

Loaning money to someone you love is always, always messy. While your child should intellectually know that your love is unconditional (which is why your help comes so willingly), 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 child, 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.

Click here to view the article source, from DailyFinance.com.

4 Tips to Help 20-Somethings Manage Their Debt

Debt can be a heavy burden on anyone, no matter what their age, but increasingly, young adults are starting out deeper in the hole. A recent report from credit-score provider FICO shows that student loan debt has climbed dramatically for those ages 18 to 29, with average debt rising by almost $5,000 over the course of five years.

The good news, though, is that young adults are taking steps to get their overall debt under control, reducing their balances on credit cards and their debt levels for mortgages, auto loans, and other types of debt. With 16% of 18 to 29-year-olds having no credit cards, young adults are getting the message that managing debt early on is essential to overall financial health.

With the goal of managing debt levels firmly in mind, let’s take a look at four things you should do to manage your debt prudently and successfully.

1. Get a Handle On What You Owe.

In managing debt, the first challenge is figuring out all of what you owe. By pulling a free copy of your credit report you’ll get a list of loans and credit card accounts that major credit bureaus think you have outstanding, along with contact information to track down any unexpected creditors that might appear on the list.

Once you know what you owe, you also have to know the terms of each loan. By making a list of amounts due, monthly or minimum payment obligations, rates, and other fees, you can prioritize your debt and get the most onerous loans paid down first. Usually, that’ll involve getting your credit card debt zeroed out, along with any high rate debt like private student loans before turning to lower rate debt like mortgages and government subsidized student loans. With your list in hand, you’ll know where to concentrate any extra cash that you can put toward paying down debt ahead of schedule.

2. Look for Ways to Establish a Strong Credit History.

Having too much debt is always a mistake, but going too far in the other direction can also hurt you financially. If you don’t use debt at all, then you run the risk of never building up a credit history, and that can make it much more difficult for you to get loans when you finally do want to borrow money. The better course is to use credit sparingly and wisely, perhaps with a credit card that you pay off every month and use only often enough to establish a payment record and solid credit score.

First Financial hosts free budgeting, credit management, and debt reduction seminars throughout the year, so be sure to check our online event calendar or subscribe to receive upcoming seminar alerts on your mobile phone by texting FFSeminar to 69302.*

3. Build Up Some Emergency Savings.

Diverting money away from paying down long term loans in order to create a rainy day emergency fund might sound counterintuitive in trying to manage your overall debt. But especially if your outstanding debt is of the relatively good variety — such as a low rate mortgage or government subsidized student loan debt — having an emergency fund is very useful in avoiding the need to put a surprise expense on a credit card. Once you have your credit cards paid down, keeping them paid off every month is the best way to handle debt, and an emergency fund will make it a lot easier to handle even substantial unanticipated costs without backsliding on your progress on the credit card front.

4. Get On a Budget.

Regardless of whether you have debt or how much you have, establishing a smart budget is the best way to keep your finances under control. By balancing your income against your expenses, you’ll know whether you have the flexibility to handle changes in spending patterns or whether you need to keep a firm grip on your spending. Moreover, budgeting will often reveal wasteful spending that will show you the best places to cut back on expenses, freeing up more money to put toward paying down debt and minimizing interest charges along the way.

Click here to view the article source, from The Daily Finance.

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