Four Fatal Financial Favors

Photo by alvi2047

Several years ago my credit rating was above 700 and credit-card offers poured into my mailbox. Then I agreed to loan a long-time friend $2,000 for one month. One month stretched to six months and the friend had disappeared. Needless to say, I never got my money back. 

Offering to make the loan was just the beginning of my stupidity. I'd used one of those blank checks that credit card companies like to send to good customers. Not only did I end up paying extra fees  but "someone" at the bank replicated the check and lifted another $2000 from my account. They only got $500 and I got a big ding on my credit report for bouncing the second check. I couldn't prove the second check was a forgery and, because my credit rating had slipped to 699, the bank wouldn't give me a loan to repay the $2,500 at a lower interest rate.

Whine, whine, whine, right? Obviously, I learned a big lesson and have never been stupid enough to loan a friend more than $5. 

Sooner or later, a friend or family member will ask you to do them one of the following four financial favors. When this happens, remember the wise counsel Polonius gave his son in Shakespeare's Hamlet: "Neither a borrow nor a lender be, for loan oft loses both itself and friend."

1. Lending Money
Friends and family members may want to borrow from the YouBank, but doing so can change the entire nature of your relationship if the debtor doesn't comply with the terms of the loan. Even spotting a friend $10 at the bar can end a relationship. If you do decide to lend money to a loved one, think of it as a gift and you'll be delightfully surprised when the debt is repaid. Also, never loan a larger amount than you can afford. If that ten spot means you won't eat for the next few days, you can't afford to make the loan. 

2. Co-Signing Loans
Parents frequently co-sign loans for their kids and, when the fruit of their loins reneges on the debt, end up paying off the balance. Remember co-signing a loan means you're equally responsible for repayment of the entire debt. If things get messy, it could damage your credit rating, which can lead to a severe increase in your credit-card interest rates and limit your ability to borrow money in the future. 

3. Authorizing Secondary Card Use
Here's another mistake parents often make. The kid is off to college and, just in case of an emergency, you give them a copy of your credit card and sign them on a an authorized user. The bills start to roll in and the kid is charging a lot of pizza deliveries like the card represents a bottomless pit of cash. The same situation can occur when a married couple goes through a divorce but they continue to share a credit card. Even if the divorce agreement stipulates the secondary card user will pay the bill, there is no way you can legally force them to do so. 

Authorizing a friend or family member on your card gives them carte blanche to use the card but they have no legal liability for payment. You could end up stuck with a big bill and another ding on your credit rating. 

4. Letting Family or Friends Move In
You see this situation all too often in advice columns. Parents allow an unemployed child to move in and don't charge rent because, well, it's their kid. Or a best-friend asks if they can bunk at your place until they're back on their feet. What incentive do they have to move out when living rent free? You may en up with a permanent couch ornament and there's no end in site. 

Or you may allow your mother-in-law to move in rent free. After all, she's in her 80s and can't last that long. Then the woman hangs on for another 10 years, doesn't contribute a red cent to household expenses and expects you to wait on her hand and foot. (I'm not saying all mothers-in-law behave this way. Just consider this a worse-case scenario.)

Once ensconced in your home, it can take the equivalent of an extradition order to pry a leach loose. Establish a set period of residency, create a short-term lease and enforce it -- by law, if necessary.