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A cosigner is legally responsible for a debt if the primary cardholder can’t pay it. Activity on a cosigned account, like late payments and high balances, impacts the credit of the primary cardholder and the cosigner alike.
If you have great credit, it will usually be pretty easy to get approved for the best credit cards. But for people who have had some serious credit problems in the past, or have no credit and are trying to establish it for the first time, qualifying for a credit card can be a challenge.
You still have several options if you’re in that position, and one of those is to get a cosigner. Cosigning allows you to piggy-back on someone else’s credit history; if the cosigner would qualify for a particular card or loan, he can lend you his good credit to help you get approved. Then you can use that account to improve your own credit, and eventually qualify for cards on your own without a cosigner.
Cosigners are legally obligated to pay back any debts associated with their accounts.
Many young people get student loans by cosigning with their parents, for example. They can’t get approved for a $60,000 loan on their own — it would be too risky for the bank — so their parents cosign to support the application with their own credit profiles.
But this probably isn’t the best tactic when it comes to credit cards, for a variety of reasons. And most card issuers don’t even allow cosigners, leaving you with only a few choices if you decide to go this route.
There are currently no major card issuers that allow cosigners except USAA, although some allow joint account owners after a primary account holder is approved.
A cosigner is a person, usually with decent credit, who formally agrees to pay back a certain debt if the primary account holder can’t pay it back. A cosigner becomes a joint account holder, and acts as a guarantor that the debt will be repaid.
If your credit is not good enough to be approved on your own, you can get a cosigner to help take responsibility for the account. There are many reasons why a person may be denied a credit card (or loan), including:
So the cosigner adds his or her own credit profile to the application along with the primary account holder’s, and together they meet the approval requirements for the card.
Cosigners agree to be legally liable for any debts associated with the account, but they don’t usually get a card of their own, monthly statements, or account access. They’re just legally liable for the debt, and that’s it. Since cosigners can’t usually check the status of the account, they may not be aware of any problems until their own credit reports are affected.
In most cases, the cosigner is on board for the entire lifetime of the account — you can’t revoke your cosigner status later on just because you’re having second thoughts. A cosigner release clause may be included for some loans, for some lenders; these are somewhat common for student loans. Once the primary account holder demonstrates responsibility and timeliness with payments, the cosigner can be released from liability.
It may seem like we’re stressing this point a lot, but it’s the most important aspect of cosigning, and it differentiates cosigning from other types of paired accounts.
When you sign that dotted line to become a cosigner, you’re essentially putting your own name — meaning your credit and your money — in harm’s way.
If the primary account holder doesn’t pay the bill, the cosigner will be held responsible and legally liable for any debts incurred on the account.
If you cosign for someone and the bill isn’t paid for a while, the account may go into default and be sold to a debt collection agency. If this happens the debt collector is coming after both the primary account holder and you for payment. The collector may even come after you before the primary user, if it decides it has a better chance of being repaid by you.
And if by some unfortunate chance the person you cosign for ends up filing bankruptcy and includes the debt in the filings, he or she is no longer liable for payment — but you are!
Another risk of cosigning is how it will affect your credit.
Cosigned accounts are reported on the cosigner’s credit reports as well as the primary account holder’s. This means you’ll both benefit if the account is managed responsibly; likewise, you’ll both suffer if the primary account holder is irresponsible with the debt.
A credit card or loan that you cosign for will usually show up on your credit reports as if it were your own card or loan. The credit card or loan balance will affect your own credit utilization, so if the primary account holder is maxing out his credit card your scores will take a hit too. And any late payments made will show up on your reports, as if you made them. Those are some of the major effects, but a cosigned account will affect your credit scores in other ways as well, like influencing the average age of your accounts.
When you cosign for a credit card or loan, you’re putting your credit in the hands of the person you’re cosigning for. If he misses a payment, is late, or runs up high balances on the account — all of these actions will affect your credit as much as it will his.
Certain actions, like late payments or having an account sent to collections, will have long-lasting negative effects on your credit that can be quite difficult to overcome. Others, like having a high credit card balance, can be resolved relatively quickly and easily just by paying down the balance.
Remember that if a person can’t be approved for a credit card or loan, it’s because the bank has deemed him or her too risky to lend to. And if the bank has decided that person is too risky, are you sure you want to enter a binding legal contract that will put your credit and your bank account on the line?
So be very careful about who you cosign for. Do you trust the person not to leave you hanging? And if the person is trustworthy, do you think he or she will be financially capable of managing the debt? Good intentions can go far, but not when it comes to debt repayment. Banks don’t care about how the primary account holder pinky swore to pay back the debt — they’ll be looking to you as the cosigner for payments.
Most of the major credit card issuers currently do not allow cosigners, although some of them did in the past. But that’s OK, because we recommend avoiding cosigning for credit cards anyway.
Currently, the only major issuers that allow cosigners are Bank of America, USAA, and U.S. Bank, but there are some restrictions involved.
With Bank of America, a cosigner may be requested for certain student credit card applications, but only if the primary applicant can’t qualify on his or her own. You can’t apply with a cosigner from the start, you have to be denied and get a request, and it’s only possible with student cards.
And with USAA, membership is limited to members of the military and their families. According to USAA customer support, “If any applicant is under the age of 21, they will have the ability to apply with a co-applicant if their initial application is declined for certain reasons.” So you may be able to apply with a cosigner in certain circumstances, but otherwise you can’t.
You may also find smaller banks and credit unions that allow cosigners.
|Card Issuer||Allows Cosigners?|
|Bank of America||Student cards only, in some cases|
|USAA||Yes (certain applicants under 21 only)|
Maybe you’ve been asked to be a cosigner by a family member, significant other, or friend. Or maybe you’re the friend or relative looking for a cosigner. In either case, you should try to dissuade people from the cosigning strategy.
Instead, we’ll give you a few other options to explore. The first two will provide credit card access in addition to establishing or building credit, while the third method is just for building credit.
If you want to help someone build or rebuild his or her credit, a better choice than cosigning would be to add that person as an authorized user on one of your existing credit cards. Or, if you’re the one looking for help, ask around to see if anyone will let you become an authorized user.
Authorized users will get a copy of the credit card to use, and, for the most part, it will show up on their credit reports like any other credit card (but some credit scoring models count authorized users a bit differently than primary cardholders). Positive account activity will help bolster the credit scores of both the primary account holder and the authorized user; and negative activity will bring the scores of both parties down as well. Over time, with enough positive activity and all other things being equal, the authorized user will build up enough credit to qualify for credit cards on his or her own.
Any spending done by authorized users will earn rewards just like the primary account holder (assuming the card provides spending rewards). Most of the benefits will usually be shared as well, with the exception of perks like travel credits. Authorized users may or may not have account access, depending on the card issuer.
Authorized users are not legally liable for credit card debt. They can charge purchases to the credit card just like the primary account holder, but only the primary user is legally liable for the debt.
Just like with cosigning, you want to be careful about who you allow to be an authorized user on your accounts. In general, you should only allow people to be authorized users if you trust that they’ll repay any charges they make with the card (unless you’ve agreed to pay for their purchases). Since authorized users aren’t liable for the debt, if they go on a spending spree and refuse or are unable to pay for it, you’ll be stuck with the bill.
Or, if you’re the one requesting to be an authorized user, it will probably help your case if you promise to pay for any charges you make with the card.
Authorized users can typically be given spending limits, so they can’t charge more than an amount you determine. This can be especially useful if you’d like to give your teenager a credit card without worrying that he’ll end up in crippling debt.
You can also decide not to give authorized users cards of their own, or request they cut up the card they have; they won’t be able to make purchases, but their credit scores will still benefit from your positive account activity.
Secured credit cards are designed for people with limited credit or bad credit, and require a refundable security deposit to be approved. The security deposit serves to fund the credit line, and with most secured cards the amount you deposit will be equal to your credit limit.
With unsecured cards, the issuing bank is basically providing a loan in the form of the credit line. But secured cards are less risky for banks because the cardholder provides that money instead; if the cardholder doesn’t pay his or her debts, the bank isn’t losing money. That’s why people with no credit or poor credit are more likely to be approved for secured cards than unsecured cards, although it’s still possible to be denied for a secured card.
Secured cards provide an easy entry to the world of credit cards, giving you a way to establish a positive account history. Some secured cards offer an upgrade path to an unsecured card, after using it for a while to show that you’re a responsible credit card user, and if your credit is otherwise good enough. Some others will return your deposit and allow you to continue using that same card.
If you’re trying to establish or improve your credit but you don’t care about getting a new credit card, consider credit builder loans. The purpose of credit builder loans is pretty self-explanatory: to build credit.
Credit builder loans are a bit like loans in reverse. Rather than providing you with funds upfront which need to be paid back, like a normal loan, credit builder loans require you to pay them back before you actually get the money.
So if you take out a $1,200 credit builder loan over 12 months, for example, you’ll be required to pay $100 per month until the loan is fully paid. After making the final payment you’ll get the $1,200.
This may sound strange, but it allows you to prove that you can pay back a loan responsibly. After successfully getting your credit builder loan, you’ll have established a positive account on your credit reports, showing a record of on-time payments. This is great for your credit scores, and, depending on your overall creditworthiness, it could lead to you qualifying for unsecured credit cards.
Cosigning for a credit card, or any other type of loan for that matter, could be one of the worst decisions you can make. It ties you up with someone whom the banks have deemed too risky to lend to on his own, putting you on the hook for any unpaid debts.
The banks have decided not to do business with that person on his own, using all their multimillion-dollar credit underwriting tools to determine his creditworthiness, and finding it lacking. So, do you think it’s wise for you to do business with him?
A bad cosigning experience might not just hurt your credit, which you may have spent years of careful effort to build: It can have a negative impact on your personal relationships as well.
Of course you want to help out your best friend or spouse, but what if he doesn’t hold up his end of the bargain? A big debt and ruined credit scores can cause major rifts in romantic relationships and friendships, and in most cases it’s probably best not to risk it.
Consider every other alternative before cosigning. If someone is coming to you for help building credit (or if you’re that person), look into authorized users and secured credit cards first. And don’t forget about credit builder loans, which are another good way to establish a credit history so you can be approved for cards on your own.
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