If you have great credit, it will generally be pretty easy to get great credit cards. But for consumers that have had a few credit problems in the past, or have no credit and are trying to establish credit for the first time, qualifying for a credit card can be a challenge.
If you’ve been unable to qualify for a credit card on your own, you may have considered asking a friend or relative to cosign in order to help you qualify and obtain the card. And if you’re a friend or relative that’s been asked to cosign on a credit card or any other type of loan, there are a number of very important risks that both parties need to consider before choosing this option.
Credit Horror Stories: A Cautionary Tale about Cosigning
Cosigners Are Legally Liable
When you agree to cosign and sign that dotted line, you’re essentially putting your own name, your credit and your own money in harms’ way. If your friend or family member doesn’t pay the bill, you’re responsible and legally liable for any debts they incur on the account.
If the person you’re cosigning for defaults on the account, it means the collector is coming after both of you for payment. And if by some unfortunate chance the person you cosign for ends up filing bankruptcy and includes the debt in the filings, he’s no longer liable for payment — but you are.
Potential Credit Damage & Cosigners
Another risk of cosigning is the potential credit risk. When you cosign on a loan, you’re putting your credit in the hands of the person you’re cosigning for. If they miss a payment, are late, or run up high balances on the account — all of these actions will affect your credit as much as it will theirs.
Cosigned accounts are reported on the cosigners’ credit reports as well as the primary account holder’s. This means you’ll both suffer if the primary account holder doesn’t manage the account responsibly.
Better Alternatives to Cosigning
Whether you’re the friend or relative looking for a cosigner –or you’ve been asked to be a cosigner, there are far better options available without all the liability and risk involved with cosigning.
If you want to help a friend or family member build or rebuild their credit, a better choice would be to add them as an authorized user to an already well-established credit card with a low limit and excellent payment history. This can help them build and establish credit until they are eventually able to get approved on their own.
Another option is a secured credit card. If your credit is poor or you’re just starting out, a secured card can help you get on your feet and build or rebuild your credit with an credit card in your own name — no cosigner involved. You’ll need a cash deposit to open the account, but after managing it responsibly for 12-24 months, you’ll be able to trade up and graduate to a traditional credit card.
Cosigning for Students
For many years, virtually any college student could apply for and receive an unsecured credit card. With the enactment of the Credit Card Accountability, Responsibility and Disclosure Act, which is otherwise known as the CARD Act, things have changed.
These days, the vast majority of college students who are under age 21 can’t be approved for credit cards without adult cosigners. The one exception is if they are able to demonstrate that they can independently pay off credit card debt.
With this in mind, you may be approached by your child to be a cosigner. Should you do it? Take the following points into consideration before signing on the dotted line.
The Debt Will Be Your Responsibility
The biggest mistake you can make is to assume that you’re just helping your child acquire a credit card. By cosigning, you are assuming responsibility for the debt too. If the student stops paying, you will have to fork over the money. Are you willing and able to do that? Think long and hard about it before proceeding.
Your Child’s Activity Could Negatively Impact Your Credit
A single late or missed payment can have disastrous results when it comes to your credit rating. If your child isn’t responsible with her card, her credit won’t just be affected; yours will too. When you cosign for a student credit card, you are exposing yourself to some serious financial risk.
Is Your Child Really Ready?
You know your child better than anyone. Is she really ready for the responsibility that goes along with an unsecured credit card? Just because she’s a college student now doesn’t mean that she will magically be responsible. Is your child responsible in other areas of her life, or does she let things slide?
You Have to Be Involved
If you’re going to cosign for a student credit card, you have to be willing to take an active role in the situation. As long as you approach the matter as a way to teach your child how to use credit cards responsibility, it could end up being a good thing. For that to happen though, you need to be willing to monitor the situation and teach your child how to use her credit card responsibly.
Tips for Using Student Credit Cards
Before cosigning for your child’s credit card, help her find the best one. It should have a low credit limit. If possible, find a card that has a low introductory rate and no annual fee. Arrange to have the statements sent to your home, or use an online account to monitor your child’s activity. If things don’t go well, you can always have the account closed.
There are other ways to help your child build a strong credit history. Instead of jumping right in and cosigning for a credit card, you could help your child get a secured credit card instead. Over time, she will build up her own credit. Upon turning 21, she will be able to get an unsecured credit card of her own, and she won’t need a cosigner at all.
The Bottom Line
Cosigning on a credit card, or any other type of loan for that matter, is probably one of the worst decisions anyone could make. I hope you heed these warnings and take them to heart. Otherwise, you may be risking the relationships and long-term friendships that you’ve spent years building — along with the impeccable credit and financial history you’ve established as well. There’s a reason someone is asking you to cosign…a bank won’t do business with them on their own. Should you?