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Rules for Cosigning on a Credit Card
May 21, 2015
Financial institutions are likely to view someone without a solid credit history
as a risky potential customer, making it hard to get approved for a credit card. However, recruiting a friend or family member with a strong credit score to cosign on an application can make that person look much more appealing, since the cosigner will be responsible for paying any outstanding debt that the primary cardholder doesn't make good on.
What if you're the one being asked to cosign? Since being a cosigner on someone else's card can end up hurting your credit score, you'll want to think long and hard before agreeing. Here are several ground rules worth considering.
Check out the applicant
You'll want to get a good sense of the person's financial background. If it's your child or a close family member, you may already have all the information you need. If not, ask. Although this type of conversation with a friend can be awkward, it can help ease any anxieties you might have about being a cosigner. Plus, if it turns out that your friend has a bad habit of maxing out cards and missing payments, you'll want to think twice about helping him open up a new credit card account. Ultimately, doing so will protect his finances just as much as yours.
Explain responsible credit card use
Just because cosigning on a child's credit card application is fairly common doesn't mean it should be taken lightly. Sit your child down and underscore the importance of responsible credit card use. Tell her to avoid spending more than 30% of the credit limit, and explain that failing to pay off the balance each month can result in fees. Also point out that late payments will hurt both of your credit scores.
Make sure you can afford the risk
Even if someone is on his knees begging you to cosign on a credit card, always put your own financial interests first. It may be that you're in a situation where your credit score really can't afford to take a hit, like in the years leading up to a home mortgage application. What's more, if you're having a tough time making ends meet as is, you might want to hold off on cosigning on someone's credit card application.
Keep an eye on the account balance
Whether it's your child or a friend, the primary cardholder for whom you've decided to serve as a cosigner might not possess the best personal finance skills yet. For that reason, keep an eye on the account balance to make sure payments are made in full and on time. To help the primary cardholder out, consider setting up payment alerts by text or email.
The takeaway: Because your credit score is at stake every time you cosign on a credit card application, it's a good idea to set some ground rules. Doing so is a win-win since you're protecting your financial well-being and helping someone develop healthy spending habits.