There are a number of Americans out there who are denied the privilege of holding the plastic. This could be due to any number of reasons: tighter credit card lending standards, an individual’s low credit rating, or the borrower could be under the federal age limit of 21. In the end, however, if they want to get a credit card, they have to ask a friend or family member to co-sign for them.
Basically, co-signing is when you put your signature on a loan alongside another person. This makes you jointly responsible for the loan. This is a particularly common practice among those who have older children that may be gaining some amount of financial independence and want a credit card to increase their spending flexibility. If you’re asked, this can put you in a tough position. You want to help out, but at the same time, your credit could be damaged if the person you co-sign for uses it imprudently. Mixing personal relationships with money can be a dangerous cocktail. At the same time, if they use it well, it will actually boost your credit rating. For better or for worse, your credit life will be yoked to theirs.
The Pros and Cons of Co-Signing
There can be numerous pitfalls. For one thing, it’s important to understand that when you co-sign on such an account with someone, the lender issuing the account considers you to be equally responsible for it, regardless of whether you’re actually using the card. That means that the account will be added to your credit report, and can impact your credit score either positively or negatively.
Now, if the account is managed properly, it can be a boost to your credit score, which you might see as a benefit, but you obviously also run the risk of being negatively impacted by misuse. That means every missed deadline will affect your payment history, and the amount of debt carried on the account will figure into your credit utilization ratio. And because you’re responsible for the balance, if the other person you co-signed for falls behind, you’ll also owe the debt, and if the account is managed so poorly that it’s sent to collections, you’ll get the same phone calls they do. And obviously, it will have a huge negative impact on your credit score.
Certainly, when you co-sign on someone’s account, you are doing them a big favor – if your credit rating is good, you’ll probably help them get a more favorable set of terms – but the benefits to you are likely minimal compared with the potential drawbacks. For this reason, you should carefully consider whether co-signing on another person’s account will truly be a good idea for you and your current financial situation.
Image: Brett L., via Flickr