Credit Cards

Do you need to cosign on a credit card?

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Co-signing a credit card with someone is a bit like skydiving with that person from an airplane. If all goes well, you’ll both be on your feet with a boost in your credit scores.

But it’s also risky: If one person derails the deal by making late payments or racking up a large balance, it could hurt both people’s finances and their relationship.

And that happens more often than you might think: Roughly one in five cosigners experience a drop in their credit score and one in five end up paying off debt that isn’t theirs, according to a Bankrate survey. That’s why personal finance experts often caution against co-signing if alternative options are available.

Here’s what you need to know before agreeing to co-sign someone else’s credit card, and other alternatives that may work better for both parties.

What is a credit card cosigner?

A credit card cosigner is someone who signs a credit card agreement with another person, usually to help the other person qualify for a card they might not otherwise qualify for. Any credit card charges are the responsibility of both the card account owner and the co-signer. Unlike a joint cardholder, a cosigner has no access to the account or its funds, only responsibility for the debt.

If you are a co-signer for someone and you don’t pay their bills, you will be contractually obligated to pay that debt. That’s why being a cosigner is a decision not to be taken lightly. It can damage both your finances and your credit score if it doesn’t go as planned.

“There’s also a potential risk to your personal relationships,” says Rod Griffin, senior director of public education and advocacy at credit bureau Experian. “If you vouch for a friend and that friend doesn’t pay that debt, you’ll lose trust in them, you’ll get mad at them and you could lose that friendship. If he is a family member, he may be even worse in some respects.”

Before you sign up for someone, talk to them about their budget, how they plan to use the card, and your plan to pay it off on time and in full each month. “It’s very important to have some kind of agreement in writing, even if it’s your own child,” suggests Beverly Harzog, credit card expert and consumer finance analyst for US News and World Report.

Why would someone need a cosigner?

In general, a person may need a cosigner because they cannot qualify for a credit card or loan on their own.

If someone is building credit for the first time or has had payment problems in the past, they may need a cosigner to qualify for a new card, Griffin says.

Every time someone uses a credit card, they are borrowing money and paying it back when the bill is due. Banks and credit card companies want to make sure they will be repaid, which is why they will look at a borrower’s credit score, which shows how likely it is that the borrower will repay its debts, when deciding whether to approve a credit card. credit. . Having a cosigner with a good credit score gives the lender more confidence that the debt will be paid, Griffin explains. That’s why it may be easier for someone with bad credit to qualify for a card if they have a co-signer with good credit.

Someone might need a cosigner if:

Keep in mind, however, that not all credit card issuers allow cosigners, says Harzog. In fact, most major issuers don’t.

Does Cosigning Affect Your Credit?

Co-signing can affect your credit positively or negatively. “When you co-sign a card or have someone do it for you, that credit card account will show up on both your credit report and the other person’s credit report,” says Griffin.

That means if the account owner carries a balance from month to month, their debt-to-income ratio will increase along with their credit utilization ratio. This could cause a drop in your credit score and hurt your ability to qualify for new credit. If the account holder misses a payment, it will show up on their credit report and affect their score. And if the account holder builds up a balance he can’t pay and defaults entirely, “it will hurt his credit score and his bank account because he will have to pay those debts under contract,” says Griffin.

On the positive side of things, if the account owner maintains a low balance relative to the credit limit, that could lower their credit utilization ratio and raise their score. Each timely payment also has the potential to improve the scores of both people involved.

If you are a co-signer on a card, you must inform the cardholder that you expect them to use the card responsibly and ask them to agree in writing to make payments on time and in full. But financial challenges can upset even the best laid plans. That’s why Harzog offers the following advice: “Don’t sign on a credit card unless you have the means to pay off any balance, in case this doesn’t work out.”

Alternatives to co-signing on a credit card

If you want to help a friend or family member build credit, but don’t want to take the risks associated with becoming a cosigner, here are some other options to consider:

  • Adding an authorized user: If you have a good credit score and want to help a loved one, adding them as an authorized user to your credit card account is much easier and more secure than co-signing with your card. “An authorized user benefits from your credit history but is not responsible for the debt,” says Griffin. If you add an authorized user, you will still have control of the account and can even restrict the authorized user from charging the account by not giving them access to a credit card. Just keep making timely payments on that card and you’ll positively affect your authorized user’s credit score. Keep in mind, however, that not all credit card issuers will report authorized user activity, according to Harzog. Make sure your card offers this benefit before continuing.
  • Student cards and secured cards: If someone can’t qualify for a regular credit card on their own, they may have better luck with a student credit card or a secured credit card. Student credit cards are aimed at young people who are establishing a credit history and usually come with more flexible credit standards than traditional cards. Some student credit cards may require proof of enrollment in an educational institution to qualify. Secured cards require an advance deposit that acts as the card’s line of credit. Since the deposit serves as collateral, reducing the card issuer’s risk, they are usually easier to qualify for than traditional cards. These beginner credit cards are a great way to get a foot in the door, and making timely and consistent payments can help someone further improve their credit score.
  • Credit Builder Loan: A credit-building loan from a local bank or credit union is another way someone can independently build credit, suggests Harzog. Like a secured credit card, these loans require a deposit. The borrower doesn’t get his deposit back until he pays off the loan in full, but his timely payments will be reported to all three credit bureaus to help them establish or improve his credit score. Credit cards are generally a more effective way to build credit, says Harzog. But a credit building loan can be a good alternative or addition to a credit card.

Bottom line

Cosigning a credit card for a friend or family member may seem like an easy way to help them build credit, but the risks to your finances and your relationship with that person are significant. Experts recommend not co-signing a credit card with someone; There are almost always better alternatives available.

pro tip

If you want to help someone build their credit without risking your own, you can add them as an authorized user to your account without giving them access to a credit card. In this way, they will be able to benefit from your credit history but will not be able to make purchases on your account.

If you decide to co-sign despite the risks, be sure to sit down with that person and draw up an agreement that specifies how the card can be used and how and when it will be paid. If possible, apply for the credit card with them as the joint account holder instead of co-signer. That way, you’ll have access to the account and be able to track your spending. This will allow you to correct course before your debt balance spirals out of control.

“Sometimes saying no, man, is the right answer,” says Griffin. If that’s the case, you can let the person know that you don’t mistrust them; you are just following conventional advice for what is a difficult decision. Suggest another way you can help, like offering budgeting advice or debt-payoff strategies. And suggest some alternatives for the person to build their credit score independently. Chances are your loved one will understand, and refusing to co-sign will put less strain on your relationship than a potential financial fiasco with a co-signed credit card in the future.

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