Risk You Take When Co-Signing on a Credit Card

You have worked hard to get yourself into a position where you have at least fair, if not good, credit. If the people in your life are aware of the fact that your credit is better than their credit, there is a good chance that someone is eventually going to ask you to co-sign on a credit card or loan for them. For some people, this will be a teenager seeking to get a first credit card with your assistance as the co-signing parents. For others, the request comes from a different family member or friend. In all of these cases, you may be interested in co-signing on a credit card in order to help the person that you care about. However, you should be aware of the fact that doing this causes you some serious financial risks and that it’s not something that should be done without serious forethought and consideration.

To understand the risk that you are taking, spend a moment thinking about the reason that a credit card company would issue a card to someone else only if you are going to act as the co-signer on the credit card. The goal of the credit card company is going to be to lend money and then to receive payment back with interest added on. The credit card company will lend the money to people only with the intention of getting the payment back in the long run. If the credit card company believes that the individual doesn’t have the ability or sense of responsibility to pay back the debt, the company won’t make the loan offer. The credit card company will allow the loan to take place with the assistance of the co-signer because the company believes that the co-signer will pay off the debt if the borrower fails to do so.

The major risk that you take when you opt to co-sign on a credit card is the risk that you are going to have to pay back the debts that someone else racks up. For example, your teen may max out the credit card and then be unable to pay off the debt. Or your friend may have good intentions of paying for the items purchased on a credit card but may be too financially overwhelmed to make the payments. If the debt fails to be repaid, you are one of the people responsible for taking care of the problem. This means that you may be contacted by a debt collection agency and asked to pay the full amount of debt with interest. Failure to do so could result in hits against your own credit and may even result in a lawsuit with your named as a co-defendant. This could mean that you get a court judgment requiring you to pay back the loan and that can seriously damage your credit.

This isn’t to say that it’s never okay to co-sign on a credit card for someone that you care about. You may find that the person that you’re signing for is completely responsible and capable of making on-time payments that don’t jeopardize your credit at all. For parents seeking to help teens get on their financial feet, this can be a smart move. However, it’s something that should be carefully assessed with an eye towards whether or not the individual is going to be able to make payments. Also consider whether you can pay off outstanding debts if the worst case scenario does happen and you become responsible.

Related Posts:

• 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...
• Signing the Back of Your Credit Card - More and more often, credit card holders are refusing to sign the back of their credit cards, believing that the practice helps...
• Risks When You Co-Sign for a Credit Card - If you have a friend or family member that’s applying for a credit card, you may be tempted to co-sign for the credit...
• What Are The Responsibilities of a Co-Signer? - When someone with bad credit or even no credit history at all wants to apply for a new card, it can be...

This entry was posted on Monday, July 14th, 2008 at 12:54 pm and is filed under Debt & Consolidation. 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.