If you have a family member or friend with bad credit, you might get asked to co-sign on a credit card. Co-signing is a generous act that can help someone get access to credit and…
If you have a family member or friend with bad credit, you might get asked to co-sign on a credit card. Co-signing is a generous act that can help someone get access to credit and learn how to manage it responsibly, but don’t sign the dotted line just yet. There are a few risks: You could end up taking responsibility for the debt, and you may encounter roadblocks if you want to remove yourself as a co-signer later. Here’s what you need to know about co-signing on a credit card and getting removed once you’re done with your co-signer duties.
What Is a Co-Signer?
It’s fairly common for car loans, private student loans and mortgages to allow co-signers. When it comes to credit cards, however, it’s a bit rarer. According to credit bureau Experian, while Bank of America, U.S. Bank and Wells Fargo allow applicants to add a co-signer, many other major card issuers don’t.
A co-signer is someone who guarantees a credit card or loan on behalf of an applicant who can’t get approved on his or her own. Usually, it’s because the applicant has bad credit, or no or limited credit history, which increases the lender’s risk. As a co-signer, you leverage your good credit to lower that risk.
“As a co-signer, you are obliging yourself to pay the entire bill should the applicant in question not be able to fulfill their financial responsibilities,” says Leslie Tayne, a debt resolution attorney and founder and managing director of Tayne Law Group P.C. According to Tayne, debt that you didn’t personally accumulate on the card still will be considered your responsibility if the primary cardholder can’t pay it back. “Even if the [cardholder] is sick or dies, the responsibility of paying that debt falls on you.”
Credit Card Co-Signer vs. Authorized User
Co-signing a credit card might sound similar to becoming an authorized user. These two are sometimes confused, and it’s important to understand the differences.
An authorized user is someone who is added to a credit card account. You get your own credit card and are authorized to make purchases. However, authorized users are ultimately not responsible for paying the credit card balance. That burden falls on the primary account holder.
A co-signer, on the other hand, doesn’t have any access to the card account but is equally responsible for the debt. Co-signers typically don’t receive a card or any bills unless the primary account holder fails to pay.
Potential Downsides of Co-Signing
Co-signing on a credit card is a big responsibility. So why do it? According to Jennifer McDermott, head of communications and consumer advocate at savings website Finder.com, people sometimes co-sign to help their spouse get approved for a higher credit line or make joint purchases as a couple.
You also might want to co-sign for a child, family member or friend to help him or her get approved. Tayne says, “Certainly, this is a big help to someone who can’t obtain credit on their own. However, it will also result in you ultimately taking on responsibility for it.”
Since you are equally responsible for any debt and interest charges accrued, co-signing a credit card presents a risk when it comes to your credit. In fact, co-signing has about the same effect as opening a credit card on your own.
According to Tayne, any credit card or loan you co-sign for will appear on your credit reports. That will impact your debt-to-income ratio, or DTI, which measures how much of your income is allocated to monthly debt obligations. If the primary cardholder racks up a big balance, you’re on the hook for that debt, too. If you apply for your own credit card or loan, a too-high DTI could be a problem for approval.
As a co-signer, you’re trusting the primary cardholder to manage payments responsibly. Just one missed payment could have a negative impact on your credit rating. Several missed payments and you could be answering calls from debt collectors — or eventually face a lawsuit.
“It is essential that you trust the person who you are co-signing for,” says Tayne. However, she points out that even if the primary cardholder is trustworthy, death, serious illness or job loss can financially devastate even trustworthy people, and you have to accept you may become responsible for the account at some point.
If the person you co-signed for fails to responsibly maintain the credit account, it can be stressful and emotionally draining. “You also have to consider what it will do to your relationship; a missed payment can cause a rift between you and that person,” says Tayne.
Options for Removing Yourself as a Credit Card Co-Signer
Considering all the risks, co-signers may want to be removed from the account. Whether you’re simply no longer comfortable shouldering the responsibility or your circumstances have changed and you’re facing financial challenges yourself, you can avoid some financial headaches if you remove yourself as a co-signer on a credit card.
Getting released as a co-signer can be tricky, however. If you decide it’s best for you to be relieved of your co-signer duties, there are a few options you can try:
Ask the card issuer directly. The first option you should try is simply asking the card issuer to remove you as a co-signer. “Removing yourself as a co-signer isn’t always an easy process, particularly if the primary person on the account has not yet proven they are capable of paying on their own,” says McDermott. However, if the card has been open for at least a couple of years and the primary account holder has been making payments on time, the card issuer might be willing to drop you as a co-signer.
Transfer the balance. If some time has passed since you first co-signed the credit card and the primary cardholder has built up good credit, that person might be able to qualify for a credit card without your help. If that’s the case, you can recommend that the cardholder look for a balance transfer offer that will allow him or her to move the debt from the current card to a new one, sometimes for a small fee. Once the balance is transferred, the cardholder can close the credit card that has your name on it. Often, card issuers will offer zero percent APR for the first 12 to 18 months on balance transfers, so this option can be a big win for you both.
Refinance the debt. Rather than transferring the balance to another card, the primary account holder might want to consider refinancing the debt with a personal loan. Refinancing is the process of taking out a new loan to pay off an existing debt. In the case of refinancing credit card debt, the primary cardholder can take out a personal loan and use the funds to pay off the card’s balance. There are a couple of benefits to going this route: First, the interest rate may be lower, as personal loans often have lower starting interest rates than credit cards for borrowers with good credit. Second, a personal loan can consolidate more than one credit card into one easy-to-manage monthly payment.
Pay off the card. A recent study from Finder.com found that 37 percent of Americans have paid off their romantic partner’s credit card debt. But even if you and your co-signee aren’t romantically involved, you might have to take matters into your own hands if none of these other options is feasible. According to McDermott, if there is an existing balance on the card, it will need to be paid off before you can close it. “If the primary is unable or unwilling to do this, you may need to bite the bullet, make the payment and fight it out later before it impacts your credit score,” she says. “Once the balance is paid, the credit card can be closed and you will be absolved of future responsibility.”
Since co-signing can be risky and it’s not simple to be removed from the credit card account or loan, you should weigh the decision of co-signing very carefully. Tayne says, “Before you co-sign, have a discussion with the borrower. Discuss their plans to ensure their ability to repay for the entire term of the loan.”
She explains you need to be sure to cover what happens if the co-signee doesn’t pay and put an agreement in writing. “Know your rights,” Tayne adds. “I see so many co-signers default, and there is no recourse without something in writing.”