Your friends and family are supposed to lean on you when they need help. Generally, we even judge how “good” of a person someone is based on how far they go to back up a friend or family member.
Co-signing a loved one’s credit card application can be an easy way to show someone that you have faith in them and help them out a little. However, you know that there should be limits, especially if going up to bat for them puts yourself at risk. How can you tell when you should put your name and your credit on the line?
What is a Co-Signer?
Let’s back up for a second. Before you can really decide whether or not to co-sign a credit card application, you need to understand what it means. Typically, a friend or family member will ask you to be a co-signer if their credit is low, but they still need a credit card. By agreeing to become a co-signer, you are agreeing to pay the balance on the credit card if the primary holder is unable to make the payments.
You’re not just acting as a reference or agreeing to split the bill. If they don’t make payments, you will be responsible for the entire owed amount, late fees and all. This is a very big favor to ask someone.
If your friend or family member asks you to be a co-signer, you should be flattered. You obviously seem like a person that has their life and their credit score together, otherwise they wouldn’t even ask. However, knowing whether or not to take the risk can be complicated when you have a close personal relationship with the other person.
Who Needs a Co-Signer?
What is so wrong with your friend or family member’s credit that they are asking you to put yours on the line? That’s the first question that you should ask yourself. Obviously, their credit isn’t good enough to qualify for the credit card they want. There are a couple reasons why this might be the case, and you shouldn’t rush to get involved with any of them.
- They have a history of not paying back debts. Whether they’re just late, forgetful, or just flat irresponsible, this doesn’t bode well for you. If their credit is so low that a bank won’t trust them with money, why should you?
- They don’t have enough income to qualify for their desired card. Again, this doesn’t look like a good investment for you.
- They are too young to have developed credit. If this is the case, they should probably look into a student card and prove their reliability before asking a friend or family member to help them out.
Of course, you are able to see all the factors that the lender can’t. Maybe they have been working really hard to repair their credit, maybe their credit suffered from identity theft, or maybe they’re guaranteed a raise in the coming months. Friends and family are there to help each other out, so you shouldn’t completely ignore the human element, but you can’t rely solely on it either.
If you really have no idea why their credit is too low, ask them. At the point when they’re asking you to cosign their credit card application, they’re waiving a bit of their privacy. You both need to be transparent about what they’re asking for and what you’re willing to deal with.
How Does Co-Signing Affect Your Credit?
Your credit can be harmed from unpaid debts on this card, just like it would on your personal credit card. You are agreeing to back up this debt by co-signing, and the lender will definitely call you on it if it comes to it. So not only are you risking having to empty your savings to bail out your friend or family member, but you’re risking your credit too. If you’re attempting to build your own credit or preparing to take out a loan soon, take that into account before making your decision.
Even if they do pay their credit bill on time every month, your credit still might suffer if they are using up their credit line. That’s because credit is partially determined by your credit utilization ratio, which is basically how much credit you’ve used vs. the total credit available, and any cards you co-sign count towards that ratio. If the primary cardholder is driving that ratio up, your credit score might suffer.
Whether you decide to cosign their application or not, you should explain exactly what you are putting on the line. That way, if you are agreeing, it will let them know how serious the situation is, and if you are refusing, they will have a better understanding as to why. Be ready to suggest some alternatives, like a secured or prepaid card. You can still help them out by researching their options and giving your advice. No matter the outcome, you can use this predicament as a way to improve both their financial situation and your relationship.
Need more information before applying for a credit card? Visit our credit card learning center for tips and guides. Want to improve your credit score to get better interest rates? Visit our credit score resource center for tips and guides.
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