Updated May 20, 2014

Credit Card with Cosigner: Good, Bad, and Ugly of Cosigning

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Credit cards can be a great way to establish a person's credit history. But oftentimes, consumers are unable to qualify for a credit card on their own when they have no prior credit experience. They may need a cosigner to get them started.

If you’re a parent of a teenager or 20-something adult, you’ll likely get a request to be a cosigner. The Credit CARD Act of 2009 has raised the bar for how younger adults can get a credit card; it’s not as easy as it was when you were their age. Before you agree to become a cosigner, which involves taking on some risk to your own credit history, you’ll want to consider all of the pros and cons. We’ve addressed the major ones in this article.

The Good

The number one advantage of cosigning for a credit card is that you’re helping your child (or other trusted family member or friend) gain access to credit and build credit history. You may also be helping them get access to a much better rate on their card than they could by themselves, reducing the potential interest that they’ll have to pay over the life of the card.

While your loved one’s credit status may improve, you may notice a positive boost in your credit score as well. If the cardholder is responsible with the card, paying the bill on time each month and keeping the balance well below the limit, your overall credit picture could improve. It isn’t likely to raise your score by much, but every point counts.

The Bad

There are times when adding another credit card to your credit history can negatively affect your score – even if the cardholder pays the bill on time each month. This typically occurs when the cardholder gets close to maxing out the card (credit-scoring algorithms look at the debt-to-credit ratio of credit card accounts) or when the card has a high credit limit, which will increase your potential for taking on too much debt, in the eyes of credit scoring companies.

If you won’t need a loan, such as for a new vehicle or house, in the near future, then this possible negative effect on your score won’t be much of an issue for you. However, the consequences of vouching for someone else could be significant (see below).

The Ugly

As much as we’d love to think our friends and family are perfect, mistakes happen…especially when it comes to a first-time credit card holder. Before you sign the dotted line, be aware that as a cosigner, you are accepting legal responsibility for all the debt and fees that result from this person’s credit card usage. If the primary cardholder defaults on payments, you will be responsible for footing the bill. And, even worse, these mistakes can also affect your credit. For that reason, while you may be open to helping a credit card first-timer, you should be wary of helping out someone who has a bad history of paying bills on time or who lacks sufficient income to be able to pay up each month.

Create a Positive Experience

You can help increase the pros and decrease the cons of cosigning by taking an active role in the credit card account from the beginning. Before agreeing to cosign for a credit card, take the time to talk to your friend or family member about responsible credit usage.

Also make sure the person has considered all the options. An alternative to needing a cosigner is signing up for a secured credit card. Cardholders deposit money up-front with the credit card issuer, as collateral against their credit limit.

If your loved one still wants to move ahead with a cosigning agreement, draft some ground rules regarding the credit card account, so everyone knows what is expected of them, and include some contingency plans for if one of you ends up in dire straits. And ask the card issuer to mail a copy of the monthly statement to your address as well as the primary card holder’s so you can keep an eye on the account.

By following these simple steps, you will help your loved one get off to the right start in their credit adventure.

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