Co-signing for a credit card is a significant financial decision that warrants careful consideration. It’s crucial to weigh the following factors before committing to co-signing:
- Credit History and Score: Assess the primary applicant’s credit history and score. Co-signing for someone with a poor credit history could affect your credit standing and make it challenging to secure loans or credit in the future.
- Financial Responsibility: Evaluate the applicant’s financial responsibility. Co-signing implies you’re equally responsible for any debts incurred. Ensure the individual has a track record of managing their finances prudently.
- Communication and Trust: Establish open communication and trust. Discuss financial expectations and responsibilities, and ensure both parties are on the same page regarding spending limits, repayment schedules, and overall credit card usage.
- Personal Finances: Analyze your own financial situation. Consider how co-signing may impact your financial stability and any potential risks involved. Be prepared to assume responsibility for payments if the primary applicant defaults.
- Relationship Dynamics: Assess the relationship dynamics with the individual. Understand the potential implications co-signing might have on your relationship and be prepared to navigate any conflicts that may arise due to financial obligations.
- Legal Ramifications: Familiarize yourself with the legal implications of co-signing. Understand the terms and conditions of the credit card agreement and the legal obligations you’re assuming. Seek legal advice if necessary to fully comprehend the associated risks.
- Alternative Options: Explore alternative ways to help the individual build their credit, such as becoming an authorized user on your own credit card or encouraging them to apply for a secured credit card. These options can minimize the risks associated with co-signing.
By considering these factors, you can make an informed decision about whether or not to co-sign a credit card. Always prioritize financial prudence and open communication to minimize any potential risks or complications that may arise from this significant financial commitment.
Co-signing for a credit card might seem like a small favor, but it comes with a significant responsibility and could have serious repercussions on your credit. Take into account each factor carefully before proceeding.
Issuer’s Allowance Firstly, you can’t just walk into a bank and co-sign for a credit card, nor can you simply pick a card you desire. You must go to the issuer that allows it and select a card that meets the criteria.
Among the major credit card issuers, only Bank of America and US Bank allow co-signing, and their policies may change at any time. Smaller banks and credit unions might be more lenient, but don’t be surprised if your hometown financial institution explicitly refuses you.
Eligibility for Co-Signing Credit card issuers only accept co-signers who are eligible to obtain a credit card on their own account. As a potential co-signer, you need to meet the issuer’s minimum credit score and income requirements, as well as any other stipulations.
Your Relationship and Level of Trust with the Primary User When you co-sign a credit card application, you are equally responsible for the account as if you were the primary cardholder. If the other signer stops paying the bills, the issuer can hold you accountable.
This means you should only co-sign credit card applications for individuals you trust implicitly to pay their bills. Ideally, your co-signer should allow you access to their online credit card account or allow you to review the statements monthly. Otherwise, you won’t be able to determine if they’re keeping up.
This level of trust and verification might be impossible outside of intimate family or direct relative relationships. Be cautious when co-signing for others.
Even with close relatives you fully trust, figure out how closely you can monitor the primary cardholder’s activity. As a co-signer, you won’t automatically receive the statements or online account access, but you can negotiate co-signing conditions with the primary cardholder to grant you access. This enables you to monitor their activities from time to time.
Your Ability to Exit the Arrangement Since the co-signer is the primary cardholder and has full control over the account, you typically can’t directly cancel their card if they default on payments. However, the issuer may provide some recourse for co-signers, such as options to clear outstanding balances and close the account. While it may be financially painful, it might be better than allowing the primary cardholder to accumulate more and more debt.
It might be easier than that. Credit card issuers typically don’t offer co-signer release as student loan issuers do, but some institutions allow co-signers to remove themselves once the primary cardholder demonstrates the ability to manage the credit on their own. This usually takes a year or more, so ask the issuer before agreeing to co-sign, rather than waiting to find out.
Financial Impact of Co-Signing for a Credit Card Lastly, and perhaps most importantly, consider the financial impact of being a co-signer. While the co-signer is the primary cardholder and bears primary responsibility for paying the bills, the account will still appear on your credit report and affect your credit as if you were the primary cardholder.
This has two significant effects for you as a co-signer. The primary cardholder’s actions can:
Directly harm your credit by lowering your credit score. If the primary cardholder stops paying the bills or goes over the credit limit, these actions will show up as blemishes on your credit report. This could lower your credit score and increase the cost of your future borrowing or eligibility for new credit.
Even without direct harm to your credit score, it can impact your future chances of obtaining credit. The primary cardholder’s expenses add to your debt-to-income ratio, a critical indicator of your ability to repay debt. While it won’t affect your credit score, a higher debt-to-income ratio can lower your eligibility for credit.
There’s also the issue of untangling the financial mess left behind by the struggling primary cardholder. Early signs of financial distress may not always show up on the credit card statement, so make sure the primary cardholder knows to maintain open communication with you. If you suspect they won’t follow through, do not agree to co-sign.
If things do go sour, you may have to accept some financial losses or, at the very least, wait a long time for full repayment. But you and the primary cardholder should still develop a specific and responsible action plan in advance in case they can’t pay the bills anymore.
Pros and Cons of Co-Signing for a Credit Card Co-signing for a credit card can be a good thing for someone you care about. Unfortunately, the potential drawbacks outweigh the advantages.
Can improve your own credit score Helps the co-signer build credit Can secure a higher credit limit for the co-signer Cons
Puts the primary cardholder at greater credit and financial risk Could entail significant financial responsibility for you May harm your credit and affect your ability to qualify for credit in the future Could strain your relationship with the co-signer
Alternatives to Co-signing
Co-signing a credit card application is rarely the best option for helping a loved one build credit. Before you agree, consider the following alternatives:
Authorized user status, where you, as the primary cardholder, give an individual access to a separate credit card that you can control or cancel Credit-builder loans or credit cards, a special type of credit account that requires a prepaid deposit and designates the individual as the primary account holder for newly acquired credit Secured credit cards, another type of special credit account that requires a prepaid deposit and designates the individual as the primary account holder for newly acquired credit Unsecured cards that don’t require a credit check but consider non-credit factors such as income and employment
These alternatives offer similar credit-building benefits for the individual acquiring new credit, with less risk for the creditor and minimal or no risk for you.
Should I Co-sign for a Credit Card?
Co-signing for a credit card application is rarely the best option for helping a loved one build credit. This poses a risk for the credit card issuer to the point that most issuers no longer allow it. There’s also a risk for the co-signer, certainly greater than adding an authorized user to an existing or future credit card.
If you absolutely decide to co-sign for a credit card on behalf of someone else, you should take measures to protect your interests (as well as those of the primary cardholder).
Check the account at least monthly. Log in to the account regularly (at least once a month, but ideally more often) to monitor the primary cardholder’s activity.
Stay in regular contact with the primary cardholder. Discuss the primary cardholder’s financial situation at least once a month. If your child lives with you, that shouldn’t be an issue. If they don’t live together, find time to text, chat, or meet in person.
Build a cash reserve equivalent to the card’s credit limit. When you co-sign for a credit card, you can hope for the best but need to prepare for the worst. Start building a buffer in your emergency savings fund equivalent to the card’s credit limit once you agree to the arrangement.