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Rules for Co-signing on a Credit Card

January 23, 2015
Credit Card Basics, Credit Cards
Cosign a credit card
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Credit card companies 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. Fortunately, recruiting a friend or family member with a strong credit score to co-sign on an application can make that person look much more appealing, as the co-signer assumes the responsibility of paying any outstanding debt that the primary cardholder doesn’t make good on.

What if you’re the one being asked to co-sign? Since being a co-signer on someone else’s card can end up hurting your credit score, you’ll want to think long and hard before signing on the dotted line. Here are several ground rules worth considering to avoid that scenario.

Vet the applicant

Unless your child is the applicant for whom you’re cosigning, you’ll want to get a better sense of the person’s financial background. Although engaging in this type of conversation with a friend can be awkward, it can help ease any anxieties you might have about being a co-signer. 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 the importance of responsible credit card use

Just because co-signing on a child’s credit card application is fairly common doesn’t mean it should be taken lightly. To ensure the entire process goes smoothly, sit your child down and underscore the importance of responsible credit card use. Explain how he or she shouldn’t spend more than 30% of the monthly limit and that failing to pay off the balance each month can result in fees and will hurt both of your credit scores.

Make sure you can afford the risk

Even if your friend is on his or her knees begging you to co-sign on a credit card, 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 co-signing 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 co-signer might not possess the best personal finance skills yet. For that reason, keep an eye on the account balance to make sure that payments are made in full and on time. To help the primary cardholder out, consider setting up payment alerts on their phone or email account.

The takeaway: Because your credit score is at stake every time you co-sign 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 your child or friend develop healthy spending habits.

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