Pros And Cons Of Co-Signing For A Credit Card And Alternatives

Co-signing on a credit card account means taking on financial risk to help someone else build stronger credit. Few banks still allow co-signing on credit cards, instead allowing authorized usership as a means of helping those with lesser credit work toward better financial health  under the guidance of someone more established.

How Does Co-Signing Work?

When a person co-signs on a credit account, they’re essentially saying that they are responsible for the charges on the account in the event the account holder can’t pay the bill. A co-signer is not an account holder and does not access the account—they’re only providing a guarantee they will step in if a bill cannot be paid.

When a primary account holder would not otherwise be approved because of damaged or non-existent credit history, co-signing could be an option. A bank traditionally allows a co-signer on the account to assume responsibility for any debt in the event the account holder defaults on payments. While co-signing used to be relatively common, few issuers offer the option anymore.

Co-signing for a credit card is a useful solution for those with low credit scores. Parents or guardians who are trying to help their children establish credit may consider co-signing for a credit card as well. But co-signing for a card is not always your best option—several alternatives exist and as with any other financial decision, there are pros and cons to sharing the responsibility of a credit card account with another person.

A co-signer must be over the age of 21, demonstrate an ability to make minimum payments on the account and have sufficient credit to qualify for the credit card before he or she will be approved, as per the rules of The CARD Act of 2009.

Advantages to Co-Signing

It Might Be Easier To Qualify or To Secure Better Terms

Qualifying for new credit cards can be tough for someone with a limited or bad credit history. This is especially true regarding cards offering attractive benefits and reward earning.

• When you co-sign for a credit-challenged account holder, your good credit rating can work to support an application. You’re reducing the risk a lender sees when it evaluates an application.
• Good credit and additional income might also lead to lower interest rates, higher credit limits and better terms overall.

The Primary Account Holder’s Credit Might Benefit, and So Could Yours

• When used wisely, credit cards have the potential to improve your credit scores. The flipside; poorly managed credit card accounts can damage the credit of all parties involved.

Disadvantages to Co-Signing

Your Credit Score Is at Risk

• Any late or missed payments on the account are redirected to a co-signer. A co-signed credit card can hurt or help both user and co-signer’s’ credit scores depending on how the account is managed.
• Late payments or a default can inflict severe credit score damage on both the primary account holder and the co-signer.

Future Borrowing Capacity Could Be Limited

• Even with good credit, co-signing onto credit card debt can make it harder to qualify for additional financing in the future.
• When you apply for new financing, a lender will consider your existing debts versus your income. This calculation is known as your debt-to-income ratio or DTI. The lower your DTI, the better. An additional account can raise your DTI.

Co-Signing Can Damage Relationships

• One of the biggest risks of co-signing is the damage it can inflict on relationships.
  • For example, you might co-sign for your child’s credit card with the understanding that they’ll only use a portion of the credit limit and will pay the bill on time in full each month. But if your child manages the account poorly, it can lead to serious consequences for you both.
• When you co-sign, you have to remember you’re ultimately responsible for the debt, no matter what type of personal agreement you make with the other party. If the cardholder defaults and the bank turns to you, the co-signer, you’ll have to pay the bill.

Co-Signing vs. Joint Credit Cards

Joint account ownership is often confused with co-signing. A co-signinger takes on debt risk but has no access to the account, whereas a joint account involves two equally-responsible parties on an account together, both with full access.

Joint Credit Cards

When you open a joint credit card, both you and your account partner accept equal liability for any charges made on the account. Both parties must fill out applications and are both provided the rights and responsibilities of a primary account holder. The account and its history will show up on your three credit reports and the three credit reports of any joint account holder as well.

Alternatives to Co-Signing

Co-signing on credit card accounts isn’t around much anymore. Though a few banks may offer this service, most of what you’re looking to accomplish with a co-signer—namely helping someone to build or access credit—can be handled another way.

Secured Credit Card

Secured credit cards offer a fairly painless way to build credit without the need for help from a family member or friend. If an applicant is over 21 years of age and can’t qualify for a credit card due to credit problems or lack of credit history, a secured card might help build or rebuild a credit score.

With a secured credit card, the cardholder puts down a deposit usually equal to the credit limit on the account. So, a $500 deposit will normally provide a $500 credit limit. Because a cardholder backs the account with personal funds, the risk to the card issuer is considerably lower. As a result, it’s much easier to qualify for a secured credit card than a standard unsecured card, even if you have no credit established or bad credit.

Authorized User

Banks most commonly offer authorized usership. Authorized users are non-primary cardholders issued cards on another, primary user’s account. Authorized users generally see activity reported to credit bureaus, making authorized usership an option to help those in need of tools to build credit.

Adding an authorized user may help those who:

• Prefer to simplify budgeting by using the same credit card account
• Want to earn credit card rewards on the same account
• Can’t qualify for a credit card on their own due to credit issues
• Need help establishing credit for the first time

While few issuers offer joint credit cards or co-signing, many credit card issuers do allow you to add authorized users onto your account. When you make this request, an authorized user will receive a separate card in his or her own name, but the card will be tied to the primary account and the primary account holder is still liable. Often, these accounts will also show up on the authorized user’s credit reports which could help them begin to establish credit.

When an authorized user makes charges on your account, the primary account holder can see all the charges on the bill and earn credit card rewards just like you would if you made those purchases yourself. If you’re considering a joint credit card to streamline the rewards-earning process, the authorized user strategy can accomplish this same goal.

When you authorize someone else to use your account, you maintain control as the primary account holder. You can remove authorized users from your credit card whenever you wish, at which point they’ll no longer be able to make purchases. In the meantime, you’re on the hook for any charges your authorized user makes. An authorized user generally can’t request credit limit increases, add additional authorized users or dispute fraudulent charges.

Adding a partner or child as an authorized user may accomplish many of the same goals as co-signing. The risk involved with authorized user account status is easier for most to keep under control and manage more directly as a primary account holder.

Bottom Line

Co-signing for credit card accounts isn’t as common as it used to be. In fact, if you want to cosign with someone else, you’ll have to do some extra homework to find card issuers that still allow it. Before you do, think carefully about both the benefits along with what could go wrong before you make a commitment.

Frequently Asked Questions (FAQs)