Is Co-Signing for Credit a Good Idea?

With so much financial trouble spanning the globe, there is a good chance that some of your own family members may be experiencing some problems with their credit. With less-than-perfect credit histories, people who need or want a credit card will find it even more difficult than in the past to establish or re-establish their good credit. Though getting a credit card and using it responsibly may be one way to improve current credit scores. Without the initial good history, some people will need help in order to get a credit card and that is where you may come in.

Being a co-signer on a credit card for a family member or friend can be more of a difficult personal decision to make than most people might think. In reality, if you choose to help you can make a big difference and greatly increase the likelihood that their application will be approved.  And while you obviously want to help a family member or a friend out with their dilemma, you must be aware that you will be putting your own personal credit score at risk in the process.

Here is a list of considerations to ponder before agreeing to co-sign on someone else’s card.

How responsible is this person?  The number one consideration you need to make involves the responsibility level of the other person. If they have a history and a tendency to let bill payments slide, be prepared to face the music in the event the person decides once again to stiff you on their monthly payment. As a co-signer, you will then assume full responsibility of paying the debt from your own pocket. This late or non-payment will affect your credit rating negatively just as much as it will affect the other person. If you have even the slightest concern this situation may arise at any point, politely refuse to co-sign.

Set your own terms and conditions.  The next thing that you need to do if you decide to move forward with the joint application is to set your own terms and conditions with the other person. As co-signer, your expectations should be clarified. For instance, if you are not comfortable with more than $300 in purchases on the card at any one time, you must make sure the other person understands this as well as any other terms set forth. You must decide on how the payments will be made. Some co-signers may request the money for the payment be given to them personally to always ensure on time payments. There should also be a time line set in the even the other person does not have the money so that you will have enough notice before the payment is due to work out other arrangements.

Maintain access to the account at all times.  If you do agree to co-sign on a credit card, make sure you have 24/7 access to the online account so you can always monitor the situation and keep up-to-date with any account changes. Having access and partial control of the account can help prevent financially poor decisions made by the other person.

Be upfront with the other party. If you officially decide that while you would love to help someone in need but you simply can’t afford to co-sign, make sure to properly set expectations upfront right away with the other person. Don’t be tricked or talked into doing something that makes you feel uncomfortable or can jeopardize your own financial situation.

Establish trust.  If the shoe is on the other foot and you are in the position of having to ask someone else to co-sign on a credit card for you, focus on presenting as close to a risk-free proposal as possible to ensure the other person will have confidence in you. If you think you’re ready to ask for help, you first must be absolutely sure that you can afford to pay back the balances you accrue each month. Only make purchases you can afford to pay for in cash and tuck that cash into an envelope so you are confident you will have enough money to pay off the balance on the credit card each and every month.

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This entry was posted on Friday, February 13th, 2009 at 7:21 am and is filed under Card Security, Tips & Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.