If a close friend or family member has recently asked you to co-sign a credit card for her, you may want to help out. However, co-signing is a huge responsibility and one that shouldn’t be taken lightly. It makes you responsible for another person’s credit card debt if she doesn’t make payments. Before you potentially sign your money away, ask yourself these three questions.
1. Why does this person need a co-signer?
While people who need a co-signer are collectively considered not creditworthy, some of them haven’t had the chance to prove themselves creditworthy. For instance, the majority of college students under the age of 21 must have a credit card co-signer. If your child is trying to build her credit and doesn’t seem to have destructive financial habits, it’s probably a good idea to co-sign for her.
Or maybe the person asking you to co-sign has bad credit. But don’t nix the idea of co-signing right away. Ask yourself: Why does she have bad credit? Is it because she overspends on credit cards and wants to use her new plastic to buy more non-necessities? In this case, you’ll probably want to pass. However, maybe this person had to declare bankruptcy due to large medical bills after getting very sick. Now she’s on the mend, but her credit is terrible. You likely wouldn’t count her out just yet.
2. How does the co-signee handle money?
Of course, the person who declared bankruptcy on medical bills might be an overspender as well. Look at how the person deals with debt. Is this the type of person who pays people back with the next dollar she earns? Or is she the one who goes on lavish vacations after borrowing money from loved ones to “stay afloat”?
You can’t see a person’s inner motivations and beliefs about spending and being in debt; you have to judge them on their actions. The person you’d want to co-sign for is someone who takes her commitments seriously, pays her bills on time and feels an urgency to eliminate her debt. While there’s no guarantee that this behavior will continue, it’s better to take a calculated risk than simply a risk.
3. Do I have the funds to cover the balance if the co-signee fails to do so?
If the co-signee neglects to make payments on the card you co-signed for, your credit will suffer. To prevent this, you’ll need to make at least the minimum payment on the credit card. Do you have the funds to cover a minimum payment if the card were to be maxed out? Better yet, do you enough to pay off the balance in full (assuming the card was maxed out), so you can ask the co-signee to close the account afterward?
Hopefully, your co-signee will make her payments on time each month. But you should be prepared for the worst-case scenario, where she doesn’t make payments and you have to either pay or allow your credit take the hit. If your budget is very tight, co-signing isn’t a good idea.
Bottom line: Before you co-sign for a credit card, ask yourself three questions: (1) Why does this person need a co-signer? (2) How does the co-signee handle money? and (3) Do I have the funds to cover the bill if the co-signee doesn’t? If you’re satisfied with all three answers, you can co-sign for a credit card if you want to. And in case things go poorly, check out our article on how to get removed as a co-signer — you should always have a Plan B.
Woman thinking image via Shutterstock.