Co-signing a credit card application was once a popular way for parents and grandparents to help their kids or grandkids build credit. But because it’s a risky proposition for both the co-signer and the credit card issuer, it’s not very common these days. Most credit card companies don’t even allow it anymore.
Still, co-signing a credit card application remains possible if the issuer allows it. It’s a reasonable move for co-signers who trust their co-signees. But before you rush to endorse your kid or grandkid’s first credit card, it’s best to understand what you’re getting into and decide whether it’s the best course of action.
Factors to Consider Before Co-Signing a Credit Card
Co-signing a credit card seems like a small favor, but it’s a big responsibility that can have serious consequences for your creditworthiness. Carefully consider each of these factors before going ahead with it.
Whether the Issuer Allows It
First and foremost, you can’t just walk into your bank and co-sign a credit card, nor can you just pick a card you want. You have to go to an issuer that allows it and choose a card that’s eligible.
Among the major credit card issuers, only Bank of America and U.S. Bank allow co-signers, and their policies are subject to change at any time. Smaller banks and credit unions might be more permissive, but don’t be surprised if your hometown financial institution gives you a flat “no” as well.
Whether You’re Eligible to Co-Sign
Credit card issuers only accept co-signers who’d qualify for the credit card on their own account. As a would-be co-signer, you need to meet the issuer’s minimum credit score and income requirements along with any other demands.
Your Relationship & Level of Trust With the Primary User
When you co-sign a credit card application, you assume responsibility for the account just as if you were the primary cardholder. If the other signor stops paying the bill, the issuer can go after you.
That means you should only co-sign a credit card application for someone you fully trust to pay their bills. Ideally, your co-signee should give you access to their online credit card account or let you review the bill each month. Otherwise, you won’t be sure they’re keeping up.
This level of trust and verification may not be possible outside a domestic partnership or immediate family relationship. Think very carefully about co-signing a credit card application for anyone else.
Even with a close relative you fully trust, figure out how you’ll keep tabs on the primary cardholder’s activity. You don’t automatically receive statements or online account access as a co-signer, but you can condition co-signing on the primary cardholder giving you access to them. That allows you to monitor their activity from time to time.
Whether You Can Get Out of the Deal
Because the co-signee is the primary cardholder and has full control over the account, the co-signer usually can’t just cancel their card if they fall behind on payments. But the card issuer may offer some recourse for co-signers, such as an option to pay off outstanding balances and close the account. Though financially painful, that could be better than letting the primary cardholder rack up more and more debt.
It could be easier than that. Credit card issuers generally don’t offer co-signer release, as student lenders do, but some allow co-signers to remove themselves once the primary cardholder has proven themselves capable of managing credit on their own. That usually takes a year or longer, so ask the issuer before you agree to co-sign rather than wait to find out.
Financial Implications of Co-Signing a Credit Card
Finally, and perhaps most important, consider the financial implications of being a co-signer. While the co-signee is the primary cardholder and bears first responsibility for paying the bill, the account also appears on your credit reports and can affect your credit just as if you were the primary cardholder.
That has two big ramifications for you, the co-signer. The primary cardholder’s actions can:
- Directly hurt your credit, lowering your credit score. If the primary cardholder stops paying their bills or maxes out their credit limit, these actions appear as black marks on your credit report. That could lower your credit score and increase your future borrowing costs or ability to qualify for new credit.
- Hurt your chances of qualifying for credit in the future, even without direct credit score damage. The primary cardholder’s charges can increase your debt-to-income ratio, an important indicator of your ability to repay debts. While it doesn’t affect your credit score, a high debt-to-income ratio makes you less likely to qualify for credit.
There’s also the matter of cleaning up the financial mess left by a distressed primary cardholder. The early signs of financial distress aren’t always apparent in a credit card statement, so make sure the primary cardholder knows to keep an open line of frank communication with you. Don’t agree to co-sign if you have doubts that they’ll follow through.
If things really go south, you might have to accept some amount of financial loss, or at least wait a long time for full repayment. But you and the primary cardholder should still work out in advance a concrete and accountable action plan in the event that they’re no longer able to pay the bill.
Pros & Cons of Co-Signing a Credit Card
Co-signing a credit card is a nice thing to do for someone you care about. Unfortunately, it has more potential downsides than upsides.
- Could boost your own credit score
- Helps the co-signee build credit
- May earn the co-signee a higher credit limit
- Exposes the primary cardholder to greater credit and financial risk
- May cause significant financial liability for you
- May damage your credit and affect your ability to qualify for credit in the future
- May damage your relationship with the co-signee
Pros of Co-Signing
Though it could improve your own credit, co-signing is a better deal for the co-signee than for you.
- Could boost your own credit score. Any co-signed accounts appear on your credit reports as if they were your own. So if the primary cardholder is diligent and responsible with their newfound spending power, your credit score could rise over time.
- Helps the co-signee build credit. Without your guarantee, the co-signee might have trouble qualifying for any credit on their own.
- May earn the co-signee a higher credit limit. Even if they’d qualify for a credit card on their own, your guarantee might earn them a higher spending limit and better terms. As long as you trust them, that’s a good thing.
Cons of Co-Signing
Co-signing carries serious credit risks for both parties involved. If things go south, it could damage your personal relationship with the co-signee too.
- Exposes the primary cardholder to greater credit and financial risk. Thanks to your guarantee, the primary cardholder is likely to qualify for a higher credit limit than they otherwise would. That increases the stakes for them.
- May cause significant financial liability for you. If the primary cardholder skips out on their obligations, you’re left holding the bag. Unless you take the drastic step of declaring bankruptcy, that’s likely to mean a hefty bill for you.
- May damage your credit and affect your ability to qualify for credit in the future. If you’re not closely monitoring your co-signee’s account, you might find out that they’re not paying the bill too late to avoid damage to your own creditworthiness.
- May damage your relationship with the co-signee. Co-signing a credit card is a lot like lending money to family. It’s a convenient arrangement as long as the borrower or co-signee holds up their end of the bargain. If they don’t, it could seriously damage your relationship.
Alternatives to Co-Signing
Co-signing a credit card application is rarely the best option to help a loved one build credit. Before you agree to it, consider these alternatives:
- Authorized user status, where you’re the primary cardholder and the new-to-credit person has a separate credit card that you can control or cancel
- A credit-builder loan or credit card, a special credit account that requires an upfront deposit and names the new-to-credit person as the primary account holder
- A secured credit card, another type of special credit account that requires an upfront deposit and has the new-to-credit person as the primary account holder
- An unsecured card that doesn’t require a credit check, considering noncredit factors like income and employment instead
These alternatives have similar credit-building benefits for the new-to-credit person with less risk for the lender and little to no risk for you.
Should I Co-Sign a Credit Card?
Co-signing a credit card application is rarely the best option to help a loved one build credit. It’s risky for credit card issuers, to the point that most no longer allow it. It’s risky for co-signers too, certainly more so than adding an authorized user to an existing or future credit card.
If you’re absolutely set on co-signing a credit card on someone else’s behalf, you should at least take steps to protect your interests (and the primary cardholders’).
- Check the account at least once a month. Log into the account often (at least once per month, but ideally more than that) to monitor the primary cardholder’s activity.
- Check in with the primary cardholder at least as often. Discuss the primary cardholder’s financial situation at least once a month as well. If it’s your kid living in your house, that shouldn’t be an issue. If they don’t live with you, find time to text, chat, or meet in person.
- Build cash reserves equal to the card’s credit limit. When you co-sign a credit card, you can hope for the best but need to plan for the worst. As soon as you agree to the deal, begin building a buffer to your emergency savings fund equal to the card’s credit limit.
It would be amazing if credit bureaus started every 18-year-old off with a perfect score and challenged them to live up to those expectations. We might see less irresponsible spending and fewer defaults as a result.
But for better or worse, it doesn’t work like that. Such a system would give new-to-credit folks a hand, but banks might question its objectivity. It could ultimately backfire by making lenders even more cautious than they already are. Credit could dry up, and the economy could suffer.
In the financial system as it exists today, building credit often compels already-established consumers to take some risk on their loved ones’ behalf. Though less common than it used to be, co-signing a credit card is one way to do this. It makes sense if you trust the person you’re co-signing for and if the credit card issuer allows it in the first place.
But it’s also not the only option, nor the best. So before you agree to co-sign your kid’s or younger sibling’s credit card application, suggest alternatives like a credit-builder loan, secured credit card, or authorized user status. Those aren’t risk-free either, but they tend not to be as complicated.