January 8th, 2009
Cosigning a Credit Card
Our loved ones can be far from perfect. They could have made poor decisions that has negatively impacted their credit rating. As such, they are now coming to you, asking if you are willing to cosign for a credit card. This is a very hard place to be in. This card will help your family member with rebuilding their credit and getting their score up. The rub is that you are staking your credit score that they will treat their card right. You credit rating is rightly under your concern, especially if you ever want to apply for future credit, a loan, a car or house. How can you make this tough decision?
Some things to consider:
If your loved one misses a payment, or goes over the limit, your credit score will get hit as though you had missed the payment yourself. You should be prepared for the possibility where you will need to take over payments as to prevent delinquency on the credit card. If neither of those possibilities can be risked, then you should respectfully decline to help and point your friend or loved one to solutions for those with poor to no credit. If you can not afford to take over the potential debt that can be accrued, you should not risk your score.
If you do cosign an application, set guidelines for your loved one in using the card. Set a credit limit between the two of you that is below the card’s limit, and make sure that you are informed before the bill is due if your friend or relative cannot make the payment. This will protect you and also inform you prior to a potential delinquency that you need to step in and take action. Make sure that you can view the account activity and details online, and that you have full access to the account. You should have complete control over the account, and should be kept up to date over any changes to the account.
One used to be able to give your friends and family a temporary boost in their credit score just by adding them as authorized users to your own credit accounts. This practice, known as credit piggy-backing, no longer works today, as authorized users no longer gain a credit boost. As a result, the only real way to help a loved one improve their score directly, is to risk your credit score by cosigning them on a new credit account, or by pointing them towards solutions designed for them.
Take the time to consider if you are willing to take the risk and step in if needed before cosigning a new credit card. If you do, do not do so blindly. Make sure you have control over the account as well, despite what ever your loved ones may say. If you are to risk your on credit score, do so on your terms. There are solutions for those with poor credit, so do not feel guilty if you cannot help. Just make sure your decision is well thought out.
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