If you co-sign a credit card you are taking a very real risk. A 2016 survey found that almost 40% of co-signers ended up paying off some portion of the debt that they had signed for[1]. 28% reported a negative impact on their credit score and 26% said their relationship with the other person was damaged.
Co-signing can help a loved one, and that’s an appealing prospect. The risks are still serious enough to warrant caution. Let’s take a closer look at what co-signing really means, so you can mitigate the risks and make an informed decision.
What Does it Mean to Co-Sign on a Credit Card?
Co-signing is a way for people with poor credit or a thin credit file to use credit cards that they wouldn’t be able to get on their own. If a person with better credit co-signs the card application, the person applying for a credit card may be approved or given better terms on the co-signers signature’s strength.
Being a cosigner is different from adding someone as an authorized user. The cosigner does not use the card but is liable for any unpaid balance. Any activity from the cardholder will appear on the cosigner’s credit report.
When you become a co-signer on a credit card, it’s usually because you help a family member or a friend obtain a financial service they couldn’t otherwise get. Your strong credit score can help someone with poor or nonexistent credit get substantially better terms on a credit card or even get approved by a lender.
If you decide to co-sign, you will be financially and legally responsible for the debt. It will appear on your credit report and affect your credit score. The issuer will run a hard credit check on you. It will also count toward your debt-to-income ratio. You will have to pay the debt in full if the other person can’t make the payments.
If the cardholder makes late payments, they will appear on your credit report. If the account is sent to collections the collection agency will come after you and could even sue you.
Cosigning can hurt your credit, and the cardholder will be the one making the decisions, not you.
☝️ The key point to remember is that a credit score is a numerical representation of a person’s likelihood of default: the lower the score, the higher the risk. If the risk is too high, lenders won’t approve the card. When you co-sign, that risk falls on you. Usually, you consider taking that risk because the person is important to you, and those feelings may lead you to overlook the risks.
In my experience working in the banking industry, the most common types of financial products clients co-signed for were credit cards, car loans, and student loans. It was often parents helping their children who hadn’t built enough strong credit to qualify for these products alone.
Before You Co-Sign a Credit Card
Co-signing is a big responsibility, and there are several key questions you should ask yourself first.
- How well do I know the person asking me to co-sign?
- Are they financially responsible? Will they be committed to making payments on time and keeping the credit card in good standing?
- How will this affect my credit and my debt-to-income ratio?
- Can I afford to pay down the credit card balance if the burden falls on me?
- Will I have access to monthly statements to make sure the account is in good standing?
- Will consigning affect my chances of being approved for a major loan, like a mortgage or car loan?
In short, you want to know that you’re unlikely to become responsible for the credit card and stable enough to take it on if you have to.
Advantages of Co-signing
The survey cited earlier also found that 1 in 6 Americans have been co-signers at some point in their lives. 78% of those cosigned for a family member, with 45% cosigning for a child or stepchild. 21% cosigned for friends.
Parents will often co-sign to give their kids a helping hand early in their life and career. Whether it’s a student loan for college or their first credit card, you will go above and beyond to see your loved ones thrive. My father co-signed for my student loan and my first car loan, and I am extremely grateful.
While the benefits are mostly for the main cardholder, the co-signer can also reap some benefits. If the credit card is paid on time and in good standing, it can further help you build a good credit score or diversify your credit mix.
Risks of Co-Signing
Even though there are some advantages to you and many benefits for the primary cardholder, there are also risks that you must consider.
You are Financially and Legally Responsible
If you cosign, you will be fully responsible for the credit card. If the other cardholder stops making payments for any reason, you will have to pay the balance yourself.
⚠️ The lender can sue you if the primary cardholder fails to pay.
Your Credit Score is On the Line
Your credit score will take a hit if there are any late or missed payments. You may also be charged with late payment fees and penalty fees if this happens.
Even if the cardholder has the best intentions, outside events can affect their ability to pay. Medical expenses, job loss, divorce, and other life events are responsible for many delinquencies. The lender or card issuer won’t care why the delinquency happened. You’ll still be responsible for the debt.
You’re Locked In
It is almost impossible to remove yourself from an account once you’ve signed the papers. The only way to get out of the commitment is to close a credit card account.
If you’re co-signing for your spouse or significant other, don’t expect to get out of it if you divorce or separate. Your bank or lender will still consider you responsible for the credit card even if your relationship is officially over.
It Can Affect Your Personal Relationship
Co-signing a credit card can damage or destroy a personal relationship. If the financial relationship turns bad, the stress on the personal relationship is likely to be considerable.
Before you consider co-signing you’ll need to consider all of these factors and communicate openly with the other party. If everyone’s on the same page there’s a better chance of avoiding both financial and personal problems.
Before You Co-Sign a Credit Card
Once you’ve decided to co-sign a credit card, you should take all possible precautions to ensure that things go as smoothly as possible. Here’s what you need to do before you commit.
- Make sure you have access to monthly statements.
- Ask the issuer if they offer a co-signer release.
- Ask the cardholder to agree to refinance the credit card solely under their own name once they can. If he/she agrees to this, ensure the issuer offers this as an option.
- Be fully involved in all meetings with your issuer and carefully read all documents. Ask questions and keep copies of everything.
Once the card is issued, don’t just assume that things are going well. Check the statements and make sure the payments are made on time and that the co-signed credit card is not running up a balance.
☝️ Keeping track will let you take action early if things go wrong. You don’t want your first hint of a problem to be a call from a collection agency!
These steps may seem intrusive, but they will protect both your credit score and your relationship with the cardholder. Borrowers who understand the commitment you’re making should understand why you need to be involved. If they don’t, consider that a warning sign.
Can You Remove Yourself as a Cosigner?
Some card issuers will remove a cosigner if the cardholder’s credit improves to the point where they meet the card’s requirements without a cosigner.
If the card issuer does not remove cosigners or if the cardholder does not meet the card’s minimum requirements, the only way to remove a cosigner is to close the account and pay off any remaining balance.
Alternatives to Co-Signing
If you decide to not go through with co-signing, make sure to use empathy when explaining your decision to the person who asked you. Try to offer other ways to meet their needs.
- If you have the means, it may be safer to offer a temporary loan, depending on their needs.
- Make them an authorized user on your credit card. They will have access to a credit card until they can apply for their own without needing a co-signer. Some issuers will include authorized users in their reports to the credit bureaus, which will help them build credit.
- Offer to help them apply for a secured credit card. This card is designed especially for people that want to build credit or fix their credit. Offering to pay the deposit on a secured card carries much less risk than co-signing a conventional credit card.
If the main goal is to help someone establish their own credit rating, look into some other ways to build credit. You may also be able to find other options by speaking with an accountant or financial adviser.
Co-signing a credit card is a generous choice that can help someone close to you. But before you make this decision, remember to ask questions, consider the risks, and take all possible precautions to assure that the relationship is satisfactory for both you and the person you’re helping.
