Bank of Mum and Dad can damage your credit standing

Posted in 'Credit Crunch' by Neil Greenhill

23 May 2012

Youth unemployment is rarely out of the news - this week Ed Milliband claimed that the current high levels of unemployment in the young will cost the country £30 billion in the next 10 years - the estimated cost has gone up by £2 billion in the last 3 months alone. It’s not just the Chancellor who will be paying for this - 63% of parents will be helping their children, with handouts averaging £3,632.

The current economic crisis has also made it much harder to obtain credit and this has hit the young hardest - their credit reports just don't go back for as many years and, because of this, lenders have relatively thin payment histories available to enable them to judge how creditworthy young applicants will turn out to be. This has led to an unprecedented rise in the number of parents taking out credit for their offspring. The most obvious method is to have the young adult as an additional cardholder on a credit card account. Mobile phones and personal loans are also being taken out by parents on behalf of young adults, and even mortgages have been taken out by parents on properties lived in by their adult offspring.

This can be a great help in the short term - helping them to stay in touch, purchase a car or even get a foot on the housing ladder.

But in the long term this does nothing to build a payment history for the young adult. It simply reinforces the existing problem - by taking out the credit for your child their credit report will go undeveloped and they will continue to face a similar problem for longer than is necessary.

Even taking out a mobile phone contract for a child will deprive them of an important source of payment history for their credit report.

It is estimated there are 7 million "credit virgins" in the UK with thin credit reports who will find it hard to obtain credit on their own standing.

A recent survey showed that 40% of those aged in their twenties had no credit report. A staggering 22% of those in their forties also had no payment history entries on report.

If parents do financially support family members in this way, and if the ‘dependent’ can no longer afford to make the repayments on time, parents must consider whether the extra financial burden of covering those payments can be afforded. If not, the late payments and arrears will end up on the parents’ credit reports, damaging their own credit standing.

No matter how natural the urge may be to help, it may be best to leave a young adult to overcome the problem of obtaining their own credit. By forcing them to work at building their credit report – by taking up rebuilder cards with small credit limits and taking slow but sure steps to lay down their own payment history, parents can rest easy that their young family members will find it easier to obtain credit in the future.

Neil Greenhill is a Credit Analyst at Checkmyfile and has a degree in Law and Politics from Cardiff University. He is also an Associate Member of the Institute of Credit Management.