When you have great credit, it will usually be pretty easy to get approved for the best credit cards. But for people who have had some serious credit problems in the past, or have no credit and are trying to establish it for the first time, qualifying for a credit card can be a challenge.
You still have several options if you’re in that position, and one of those is to get a co-signer. co-signing allows you to potentially benefit from someone else’s good credit history. If the co-signer would qualify for a particular card or loan on his own, he can add his name to your credit card application and potentially help you get approved. Then you can use that account to improve your own credit, if you manage it responsibly, and may eventually qualify for cards on your own without a co-signer.
However, co-signing isn’t without risks for both borrowers. For starters, co-signers are legally obligated to pay back any debts associated with their accounts. When you co-sign for someone else, you are also putting the health of your personal credit in another person’s hands.
Co-signing isn’t uncommon, but that doesn’t mean it’s a good idea. Many young people get student loans by co-signing with their parents, for example. They can’t get approved for a $60,000 loan on their own — it would be too risky for the bank — so their parents co-sign to support the application with their own income and credit profiles.
Generally, co-signing isn’t the best tactic when it comes to credit cards for a variety of reasons. And most card issuers don’t even allow co-signers, leaving you with only a few choices if you decide to go this route.
There are currently no major card issuers that allow co-signers except Bank of America, U.S. Bank and USAA. (Note: A few card issuers allow joint account owners after a primary account holder is approved.)
What Does Co-Sign Mean?
When you co-sign for a loan or credit card, you formally agree to pay back the debt if the primary account holder fails to do so. A co-signer becomes a joint account holder and acts as a guarantor that the debt will be repaid.
If your credit is not strong enough to qualify for financing on your own, you can get a co-signer to help take responsibility for the account. There are many reasons why a person may be denied a credit card (or loan), including:
- Credit history is too new
- Credit history is too thin (not enough accounts)
- Credit scores are too low
- Income is too low
A co-signer adds his or her own credit profile and income to an application along with the primary account holder’s information.Together, if they meet the approval requirements for the card, both borrowers become jointly responsible for the debt.
Co-signers agree to be legally liable for any debts associated with the account, but they don’t usually get a card of their own, monthly statements, or account access. They’re just legally liable for the debt, and that’s it. Since co-signers can’t usually check the status of the account, they may not be aware of any problems until their own credit reports are affected.
In most cases, a co-signer is on board for the entire lifetime of the account. You can’t revoke your co-signer status later on just because you’re having second thoughts.
Some loans may include a co-signer release clause. These are somewhat common with student loans. Depending on the terms of your contract, the co-signer might be eligible for a release from loan liability once the primary account holder demonstrates sufficient responsibility and timeliness with payments.
Are Co-Signers Legally Liable?
It may seem like we’re stressing this point a lot, but liability is the most misunderstood aspect of co-signing. The liability you accept when you co-sign may be different from other types of paired accounts.
When you sign the dotted line to become a co-signer, you’re putting your own name — meaning your credit history, credit scores, and your money — in harm’s way. If the primary account holder doesn’t pay the bill as agreed, you, as the co-signer, will be held responsible and legally liable for any debts incurred on the account.
When you co-sign for someone who doesn’t pay his or her bill, the account may go into default and be sold to a debt collection agency. If this happens the debt collector will almost certainly come after both the primary account holder and you for payment. The collector may even come after you before the primary user, if it decides it has a better chance of being repaid by you.
And if by some unfortunate chance the person you co-sign for ends up filing bankruptcy and includes the debt in the filings, he or she is no longer liable for payment — but you still are!
How Can Co-Signing Damage Your Credit?
Another risk of co-signing is how it can affect your credit.
Co-signed accounts are typically reported on the co-signer’s credit reports as well as the primary account holder’s reports. This means you may both benefit if the account is managed responsibly. On the other hand, both of your credit reports and scores will likely suffer if the primary account holder is irresponsible with the debt.
In the case of co-signed credit cards, the account will affect your own credit utilization as well. So, if the primary account holder uses a large percentage of the card’s credit limit (thereby raising the credit utilization ratio on the card), his credit scores and yours could take a hit.
The biggest danger from a credit score perspective is how the account could affect your overall payment history. Any late payments the primary borrower makes on the account will generally show up on your credit reports as if you paid late yourself.
Finally, a co-signed account can also affect your length of credit history. When you co-sign for a new account, you may lower your average age of credit and, by extension, your credit scores as well.
Co-signing means you’re putting your credit in the hands of the person you’re co-signing for. If they miss a payment, pay late, or run up a high balance-to-limit ratio on the account, all of these actions can affect your credit as much as it will affect the primary borrower.
Certain actions, like late payments or having an account sent to collections, generally have long-lasting negative effects on your credit that can be quite difficult to overcome. Others, like having a high credit card utilization, can be resolved relatively quickly and easily just by paying down the account balance.
Remember that if a person can’t qualify for a credit card or loan, it’s because the bank has deemed him or her too risky to lend to. And if the bank has decided that person is too risky, are you sure you want to enter into a binding legal contract that will put your credit and your bank account on the line?
It’s best to avoid co-signing altogether. If you decide to co-sign despite the risk, ask yourself if you trust the person not to leave you hanging. And if the person is trustworthy, do you think he or she will be financially capable of managing the debt? Good intentions can go a long way, but not when it comes to debt repayment. Banks don’t care about how the primary account holder pinky swore to pay back the debt. They’ll expect you, the co-signer, to take care of the debt in the event the primary borrower doesn’t pay as agreed.
Which Credit Card Issuers Allow Co-Signers?
Most of the major credit card issuers currently do not allow co-signers, although some of them did in the past. But that’s not really a problem since we recommend avoiding co-signing for credit cards anyway.
Currently, the only major issuers that allow co-signers are Bank of America, U.S. Bank, and USAA. However, there are some restrictions involved.
With Bank of America, a co-signer may be requested for certain student credit card applications if the primary applicant can’t qualify on his or her own. You can’t apply with a co-signer from the start. Rather, you have to be denied and get a request. Again, Bank of America only offers this option with student cards.
USAA is another card issuer that allows co-signers in certain situations. USAA membership is limited to members of the military and their families. According to USAA customer support, “If any applicant is under the age of 21, they will have the ability to apply with a co-applicant if their initial application is declined for certain reasons.” You may also find smaller banks and credit unions that allow co-signers.
You may also find smaller banks and credit unions that allow co-signers.
What Are Some Alternatives to Co-Signing?
There may come a time when you’re asked to co-sign by a family member, significant other, or friend. Or maybe you’re the friend or relative looking for a co-signer. In either case, you should try to dissuade people from the co-signing strategy.
Instead, we’ll give you a few other options to explore. The first two options will provide credit card access in addition to establishing or building credit. The third method is just for building credit.
- Authorized users
- Secured credit cards
- Credit builder loans
If you want to help someone build or rebuild his or her credit, a better choice than co-signing would be to add that person as an authorized user on one of your existing credit cards. Or, if you’re the one looking for help, ask around to see if a friend or family member will let you become an authorized user.
When you add an authorized user to your credit card account, your card issuer will mail you a credit card in that person’s name. The credit card is attached to your account. It is up to you whether you keep the card or hand it over to your loved one and give him or her charging privileges.
The beauty of authorized user accounts is that they will often show up on credit reports just like any other credit card. If an authorized user account does show up on your credit report, it has the potential to help (or hurt) your credit score, depending on how it is managed.
Positive account activity may help bolster the credit scores of both the primary account holder and the authorized user. Negative account activity may bring the scores of both parties down instead. Over time, with enough positive activity and all other things being equal, the authorized user may be able to build up enough credit to qualify for credit cards on his or her own.
If you give your authorized user charging privileges, the extra spending will typically earn rewards just like when you make charges on the account (assuming the card provides spending rewards). Most of the benefits will usually be shared as well, with the exception of certain perks like travel credits. Authorized users may or may not have account access, depending on the card issuer’s policy.
Authorized users are not legally liable for credit card debt. They can charge purchases to the credit card just like the primary account holder, but only the primary user is legally liable for the debt. You should be comfortable with this arrangement before you extend charging privileges to an authorized user.
Just like with co-signing, you want to be careful about who you allow to be an authorized user on your accounts. In general, you should only allow people to be authorized users if you trust that they’ll repay any charges they make (unless you’ve agreed to pay for their purchases). Since authorized users aren’t liable for the debt, if they go on a spending spree and refuse or are unable to pay for it, you’ll be stuck with the bill.
Or, if you’re the one requesting to be an authorized user, it will probably help your case if you promise to pay for any charges you make with the card. You can also ask your loved one to keep possession of the card with your name when it arrives in the mail, so he or she will feel more comfortable with the arrangement.
With many credit cards, you can set spending limits for the authorized users on your account. Spending limits can prevent authorized users from charging more on the account than makes you comfortable. This can be especially useful if you’d like to give your teenager a credit card without worrying that he’ll end up in crippling debt.
You can also decide not to give authorized users cards of their own or request they cut up the card they have. With this approach the authorized user won’t be able to make purchases, but their credit scores may still benefit from your positive account activity.
Secured credit cards
If your credit scores are poor or you’re just starting on your journey of establishing and building credit, you may need to start with a secured credit card instead of an unsecured card.
Secured credit cards are designed for people with limited credit or bad credit. They require a refundable security deposit to open an account. The security deposit serves to fund the credit line. With most secured cards the amount you deposit will be equal to your credit limit.
When you open an unsecured credit card, the issuing bank is essentially providing you a loan in the form of the credit line. But secured cards are less risky for banks because the cardholder provides that money instead.If the cardholder doesn’t pay his or her debts, the bank doesn’t lose money (or at least not much). That’s why people with no credit or poor credit are more likely to be approved for secured cards than unsecured cards, although it’s still possible to be denied for a secured card.
Secured cards provide an easy entry to the world of credit cards, giving you a way to establish a positive account history. Some secured cards offer an upgrade path to an unsecured card as well. For example, after using your secured card for a while, improving your credit, and showing that you’re a responsible credit card user, the card issuer might be willing to approve you for an unsecured account. Some card issuers will return your deposit and allow you to continue using that same card.
Credit builder loans
If you’re trying to establish or improve your credit but you don’t care about getting a new credit card, consider credit builder loans. The purpose of credit builder loans is as the name suggests: to build credit.
Credit builder loans are a bit like loans in reverse. Rather than providing you with funds upfront which need to be paid back, like a normal loan, credit builder loans require you to repay the loan before you can access the funds.
So, if you take out a $1,200 credit builder loan over 12 months, for example, you might be required to pay $100 per month until the loan is fully paid. After making the final payment you’ll get the $1,200 minus interest and fees.
This arrangement may sound strange, but it allows you to prove that you can pay back a loan responsibly. If the lender reports the account to the three credit reporting agencies — Experian, Equifax, and TransUnion — you’ll have the opportunity to establish positive credit as long as you make all of your payments on time.. This positive payment history could be great for your credit scores. Depending on your overall creditworthiness, it could lead to you qualifying for unsecured credit cards.
Co-signing for a credit card, or any other type of financing for that matter, could be one of the worst decisions you can make. It ties you up with someone whom the banks have deemed too risky and puts you on the hook for any unpaid debts.
The banks, using all their multimillion-dollar credit underwriting tools to determine his creditworthiness, have decided not to do business with that person on his own. So, do you think it’s wise for you to do business with him?
A bad co-signing experience might not just hurt your credit, which you may have spent years of careful effort to build. Co-signing can have a negative impact on your personal relationships as well.
Of course you want to help out your best friend or family member. But what if things go wrong? A big debt and ruined credit scores can cause major rifts in romantic relationships, friendships, and even families. In most cases it’s best not to risk it.
Consider every other alternative before co-signing. If someone is coming to you for help building credit (or if you’re that person), look into authorized users and secured credit cards first. And don’t forget about credit builder loans, which can be another good way to establish a credit history so you can be approved for more attractive credit cards on your own in the future.