When someone you know is in need of financing via credit card, they might ask you as a co-signer in order to be approved.
BadCreditResources.com is a site dedicated to helping people with bad credit rebuild their credit. And we have all been there, we need a loan or line of credit but we keep getting declined due to our credit score being too low. At that time we looked around and asked (sometimes begged) friends and family member to help us out by co-signing a loan or credit card.
If you were lucky. Someone said yes and helped you out. But do you really know how lucky you were? There are plenty of legal liabilities about co-signing that you should keep in mind. In general, it is advised to avoid co-signing on a credit card (or loan) for anyone. No matter what your relationship with that person may be.
Here are five reasons why you should NEVER co-sign for someone.
You are required by law to pay the bill.
When you co-sign for a loan or a credit card. You are basically telling the lender that if your friend or family member can not make the payments you will. But what if you can’t afford to make those payments? Unfortunately, the lender will still hold you responsible. The lender has the right to, and will go after you for the payment. In the case of a car loan, if the car ends up being repossessed, the repossession will show up on your credit report.
The cardholder is in control.
You co-sign for a credit card with a small $300 limit. But what if your friend or family member makes payments on time for 6 months and then ask them for a credit limit increase. Based on their income, that $300 card can turn into a $2500 credit card or more! You will not be notified that you are now the co-signer of a $2500 credit card. And yes, responsible for the full credit limit. Not just the $300 you agreed to.
Your credit is directly affected.
Every time the person you co-signed for makes a late payment or no payment at all. It will negatively affect your credit score! You have to make your friend or family member understand that iif they can’t make a payment they need to tell you immediately. You must make that payment for them. It may not sound fair, but the late payment will show up not just on their credit report but on yours too.
Lenders consider this your debt.
If you co-sign for someone who constantly maxes out their credit limit. It can adversely affect your credit utilization. Ideally, you need to be using less than 30% of your available credit. If you are currently at that 30% threshold and the person you co-signed for constantly maxes out their credit. Your utilization will be more than 30%. Once you reach 35% credit utilization you will see your credit score start to drop because you are using too much credit. You can fix that by paying down more of your credit card balances or advising the person you co-signed for to reduce the amount they charge each month.
Removing yourself from the contract isn’t always simple.
In many cases, you cannot get out from under this credit card co-sign contract without full cooperation of the cardholder. If something goes wrong, not only are you still tied to the contract but your personal relationship with the cardholder will also suffer. Even if the contract is terminated, you will still be liable for any debts. Your credit score will still be penalized for any lapse in payment while you were still the co-signer of the card.
At the end of the day. If you have ever had bad credit, you know its a long, hard road to recovery. Most people are not lucky enough to get someone to co-sign for them. And maybe that’s a good thing. It made it possible for them to understand the recovery process, improve how they manage their finances, and really build good credit habits.
So if a friend or family member asks you to co-sign. Gently but firmly say no. And point them to a site like ours. We have hundreds of articles on how to manage not just your credit, but your finances. We also have all kinds of bad credit financers to help them start rebuilding their credit.