Q. I just found out my 23-year-old has credit card debt of about $20,000. He only makes $43,000 a year and he lives on his own so he has expenses. I want to help but I want him to learn not to use money he doesn’t have. What should I do?
A. It’s a tough situation. Without knowing more about your relationship and how your son built up the debt, we can give you some items to consider to make the right decision for you both.
First and foremost: has your son asked for your help?
“Sometimes the best way to teach our children about the pitfalls of easy credit is to let them work things out for themselves,” said Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield. “However if he has come to you and asked for help then he has already started the learning process.”
Gallo said the last thing you want to do is let him off the hook entirely. Too often what we see as helping is seen by the child as an ever-present “get out of jail free” card.
Gallo said he’d want to know how your son accumulated this debt and what it was used to purchase.
“My answer would be different if he used it to furnish his first apartment, pay medical bills or unexpected auto repairs as compared to dining out, extravagant vacations and otherwise living beyond his means,” Gallo said. “In addition, is he behind on his payments on this debt?”
Ron Garutti, a certified financial planner with Newroads Financial Group in Clinton, N.J., agrees that you need to know if the debt was because of frivolous spending or items such as urgent necessary repairs to a car that is needed to get him to work or for a new wardrobe for job hunting.
He recommends starting the conversation by saying you want to help — but help is not free.
“Sometimes when debt [is] cleared it has a habit to regrow immediately,” Garutti said. “You should discuss this as a possibility.”
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You also have to define what “help” means to you. Does it mean paying off all the debt?
“If ‘help’ means you have the ability to pay it all off, maybe you do that, but yet charge him lower interest,” Garutti said. “You could cut the interest in half or more and still teach a lesson while saving him a bunch of money and at the same time guaranteeing yourself a return on your money.”
If his interest is 23% and you charge him 9%, you could both come out ahead.
Gallo would recommend other requirements for you to help.
“He would need to terminate all but one of his credit cards and the one he keeps would only to be used in emergency situations or where a card is required — such as renting a car,” Gallo said. “Any purchases made with this card would have to be paid in full upon receipt of his monthly statement.”
Perhaps you would require that the statement be sent to you home for monitoring, Gallo said.
Assuming you are in the position to lend him the money to pay off this debt, he would be required to pay it back to you at a nominal interest rate over a period of time that makes the monthly payment manageable but not necessarily easy, Gallo said.
“Of course this requires that you have the ability to enforce the collection of the payments which is not always simple,” he said.