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3 Things to Consider Before Co-Signing on a Credit Card

May 7, 2015
Credit Cards
3 things to consider before cosigning on a credit card
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It’s admirable to want to help someone financially. But co-signing on a credit card for a person with bad or no credit might be more than you’d bargained for if you’re not careful. Here are a few things to consider before putting your credit in someone else’s hands:

1. You are 100% liable for unpaid debts

When you co-sign on a loan or credit card, you’re doing more than acting as a reference or lending your good name. “As a co-signer, you share full responsibility for the debt along with the person for whom you co-signed,” says Rod Griffin, director of public education at the Experian credit bureau. Not only does this mean you are equally responsible for making payments, but you are also liable for late-payment fees, penalty APRs or collection expenses.

If the borrower defaults on the debt, the lender may take legal action against you, including wage garnishment, a lawsuit or a lien against your property. Before you agree to co-sign on a credit card, make sure you have enough cash to cover debt up to the card’s credit limit and keep an eye on the account to hold the borrower accountable.

2. It can hurt your credit score

Co-signing on a credit card can boost your credit if the account holder makes payments on time. But late payments can have a negative impact on your credit score, and the later a payment, the more severe the consequences will be. “A collection account in your credit history,” Griffin says, “is extremely negative and will have serious implications when you apply for new credit.”

Even if the borrower is making payments on time, having an extra credit card account on your credit report can have a negative effect on your credit. Your credit utilization — your credit card balances as a percentage of your credit limit — is a big factor in your credit score. If your loved one carries a balance of $4,000 and the card has a $5,000 limit, his or her credit utilization is 80%, well over the recommended maximum of 30%. Not only will that result in a negative mark on their credit score, but it will also show up on your credit report because you’re an account owner.

3. It may be harder for you to get a loan

If you’re planning on buying a home, refinancing your current home or taking out a loan for a large purchase, lenders will look at your total debt load in addition to your credit score to determine your creditworthiness. Because a co-signed account isn’t treated any differently on your credit report than an account on which you’re a primary borrower, co-signing effectively increases your debt load, even if your only contribution is helping secure the approval. If you have too much outstanding debt, lenders may view you as a risky borrower and decline to extend credit.

Think twice before co-signing

Communication is also key, Griffin says: “You and the person you are co-signing for need to understand very clearly the commitment you are making and the responsibility they have to you as a result of that commitment.” Also, consider what you know about the person asking you to co-sign before deciding to put your credit at risk. If a card issuer isn’t willing to extend that person credit, there may be a good reason for it.

Co-signing on a credit card for a friend or family member isn’t always a bad idea, but it’s essential to consider how doing so will affect your personal financial situation, as well as your relationship.

Ben Luthi is a staff writer covering personal finance for NerdWallet. Follow him on Twitter @benluthi and on Google+.

Image via iStock.