5 things you should know before you co-sign a credit card
It sounds harmless. Just sign your name, and a friend or relative will gain access to one of today’s best credit cards. Like most things in life, however, being a co-signer is not that simple. Financially, “co-signing is probably the worst thing you can do,” says John Ulzheimer, a nationally recognized credit expert who has previously worked for both FICO and Equifax.
Judging by the complaints and lawsuits made by co-signers, it also seems to be one of the least understood arrangements, he says. When friends and relatives co-sign, they often don’t realize the new card debt is also theirs—100 percent. Often, the potential co-signer has a relationship with the hopeful account holder. That, too, can be jeopardized. According to Ulzheimer, with the potential for complications—personal and financial—there are too many downsides to co-signing.
Even good character is no guarantee, says Todd Mark, a nonprofit consultant and former vice president of education at the Consumer Credit Counseling Service of Greater Dallas. Especially lately, his group has seen plenty of people with fine character who have had to default, he says. That can leave co-signers footing some large financial obligations.
“It’s not worth risking your own financial security,” Mark says.
Is someone asking you to co-sign for a credit card? Here are five facts you need to know before you decide.
1. You are responsible for all charges made on the card
What does a co-signer do? When you agree to co-sign for a credit card, here’s what you’re telling the credit card issuer: “If anything goes wrong, I’ll pay the balance. All of it. Plus interest and any penalty fees.”
Some people assume that co-signing a credit card is the same thing as serving as a reference. This isn’t the case. When you co-sign a credit card, you are taking co-ownership of the credit account—which makes you legally responsible for all charges made on the card.
You (the person with good credit) are promising to pay the entire bill because the lender doesn’t think the applicant is quite up to the task, explains Ulzheimer. The lender has seen the applicant’s credit report and financial information and has determined that the person does not have the necessary credit to maintain the account on their own.
Before you co-sign a credit card, Ulzheimer suggests asking the friend or relative why they are looking for a credit card with a co-signer.
If the person has bad credit, that means they might be a potential credit risk—that is, they might miss payments or default on their debts. That’s not a good sign for you since you’ll be stuck with any unpaid bills.
If the person’s income isn’t high enough to qualify for the credit card they want, it might mean that they don’t have enough money to pay their current bills as well as an additional credit card bill—another bad sign.
Is the person needing the co-signer younger than 21? Students aren’t barred from getting credit cards, Ulzheimer explains, but they’ll have a harder time opening a line of credit if they don’t have the income to pay the bills.
2. The extra debt could affect your ability to get new credit
Are you planning to buy a home, refinance a mortgage or take out a loan for a large purchase such as a car or medical care? Before determining your eligibility and interest rate, lenders will look at your debt load—including the co-signed account.
“That account will impact your score no differently than if you were the only person on that account,” says Barry Paperno, a credit scoring expert who has previously served at FICO and Experian. As far as creditors and potential creditors are concerned, the account is yours.
Every consumer can handle only so much debt. If this card pushes you into the danger zone in the eyes of your own creditors, you risk paying higher interest rates on your own credit cards and any future loans—and your next credit card application might even get denied.
3. Your credit score could go down
Does being a co-signer affect your credit? Yes. Co-signing a credit card could lower your credit score—and it might even cause long-term damage to your credit history.
Why? Two reasons.
First, nearly all credit-scoring formulas base a percentage of your score on your current balances versus your available credit. This is called a credit utilization ratio, and it makes up 30 percent of your FICO credit score. The less credit you use, the better, Ulzheimer explains. If your friend or relative uses a significant chunk of the available credit on a co-signed card, it could lower your score—even if the account holder makes on-time payments every month.
Second, if the account holder makes late payments or begins missing payments, their actions will also show up on your credit report. In the eyes of creditors, this is your account, so “you’re equally at risk for any sort of negative credit reporting and/or collection activities,” says Ulzheimer. Since derogatory marks can remain on your credit report for as much as a decade, co-signing a credit card can be riskier than you realize.
4. The account holder could increase the credit limit without your consent
The Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, mandates that while the account holder is younger than 21, the co-signer has to give written permission for any credit limit increases, says Chi Chi Wu, staff attorney with the National Consumer Law Center.
However, once the cardholder is past the age of 21, no federal law requires that the co-signer be notified of any credit line increases, she says.
Some people, for example, decide to co-sign a credit card when their child goes off to college—believing that if anything goes wrong, they can just write a check for their child’s relatively small card bill. If their child keeps the credit card account open past their 21st birthday and begins increasing the credit limit, the bill could end up being quite a bit more than their parents estimated.
5. If you want out, you might have to close the credit card
Do you want to be responsible for your friend or relative’s credit card bill for life? If not, you need an exit strategy.
Often, ending the co-signing arrangement requires closing the card account, says Nessa Feddis, senior vice president at the American Bankers Association.
Closing a credit card account comes with a few downsides, and closing a co-signed credit account adds one more wrinkle. Depending on the contract and your state laws, you may need the cardholder’s cooperation, Feddis explains. It may not be as simple as just telling the card issuer you want out.
Plus, any unpaid debts accumulated while the co-signed account was open are still your responsibility—even after the account is closed. That means that until they’re paid, they’re your bills, too.
If you are considering co-signing, call the credit card issuer first to find out exactly what your options are for ending the co-signing relationship, Feddis says. Do you have to close the account? Do you need the account holder’s permission?
While you’re at it, ask about your co-signer rights, including your right to access account information. Can you get account status and balance information as a co-signer? Will you be told if the credit line or interest rates change? Will you be notified if payments are late or if the account is heading for default?
Knowing this will help you be prepared in the event that you co-sign and things go south.
Which credit cards allow co-signers?
If someone tells you that they want to open a credit card with a co-signer, you might have an easy reason to say no. The number of credit cards that allow co-signers are limited, as most credit card issuers no longer allow people to open a credit card with a co-signer.
Which credit cards allow co-signers? As of this writing, only Bank of America, USAA and U.S. Bank offer credit cards that allow co-signers—and even then, your co-signing options might be limited.
Instead of co-signing a credit card, you’ll be better off considering one of the many alternatives to finding a credit card that allows co-signers.
Alternatives to co-signing a credit card
Instead of co-signing a credit card with a friend, relative or college-aged child, look at some alternatives that won’t risk your credit. Here are a few to consider:
- Being an authorized user. You can add them as an authorized user on one of your existing credit cards. The other person can use their authorized user status to build their credit without the risks associated with a co-signed credit card. Yes, you’ll still be responsible for any charges made to the card—but you have more control and if an authorized user starts making too many purchases or otherwise abusing the privilege, you can easily shut off access.
- A secured credit card. The other person gets a card in his or her own name with a credit limit backed by a deposit. Most secured cards build credit, and many secured cards convert into traditional unsecured credit cards after a trial period.
- A student credit card. Parents who want their college-aged children to begin building a positive credit history should encourage their kids to apply for one of the best cards for students. They can get their own card that isn’t tied to your finances. Plus, they often come with perks tailored to students.
The bottom line
Co-signing a credit card sounds like it’s a good way to help a friend or family member build credit—but it actually comes with a lot of risk for you, including the possibility of damaging your credit history or credit score.
If someone close to you is thinking about applying for a credit card with a co-signer, ask them to consider other options. Becoming an authorized user on a credit card, for example, offers many of the benefits of a co-signed credit card without the associated risks. A secured credit card is another good way to build credit.
If they still want you to co-sign a credit card account, think carefully before you agree—and make sure you understand your co-signer rights before you sign any contracts.