4 questions to ask before you co-sign on a credit card
Explore alternatives, find out what you're in for with this cheat sheet
By Dana Dratch
Co-signing for a credit card has been an option for decades, but the
issue of co-signing is especially relevant recently, says Ed Mierzwinski,
consumer program director for the U.S. Public Interest Research Group. In February 2010, the Credit CARD Act of 2009 -- a credit reform law -- will require co-signers
for card applicants under 21 who don't have sufficient income to qualify on
someone asks that you to sign on the dotted co-sign line, here are a few
questions to ask yourself and the wannabe cardholder:
1. Why do you need a
card? This isn't food, housing or a ride to work. No one "needs" a credit
card. There are alternatives. Here are some options for different scenarios:
credit or repairing bad credit: Try a card from a small retailer or a secured card. Both are relatively easy to get, and they help the cardholder build a positive
bills conveniently: Check out electronic billing, prepaid cards or debit
Traveling: Use secured
credit cards or debit cards.
income: Credit cards are debt, not income. Brainstorm other ways to raise
2. Why can't you get a
card on your own? If an issuer --
which stands to make money from the deal -- doesn't want to take the risk, why
should you? If you're agreeing to take on the debt, you need to ask why the
person can't get a card solo. Here are some answers to common co-signer arguments:
If the applicant says: "I'm under 21, and the law requires it."
Your response: "No, it doesn't."
the Credit CARD Act's major changes take effect in February of 2010, adults 18 to 20 can still get cards on
their own -- provided they have the income to qualify. If applicants can't get
cards, they probably can't afford to repay those charges.
If the applicant says: "The
economy's tight. No one's getting credit anymore."
Getting poll results. Please wait...
Your response: "Plenty
of people get cards every day."
If a cardholder is turned down, it's because
something in that credit report signals that prompt repayment is unlikely. If
you co-sign and the issuer is right, you'll end up with the bill.
If the applicant says: "There
are mistakes on my credit report."
Your response: "Clean
them up -- it's free -- and then reapply."
If there are errors, an applicant is better
off correcting them than ignoring the situation and getting another card.
If the applicant says: "I have too much credit already. My other
cards are maxed out. I need another card to keep things going."
Your response: Just walk away. Better yet, run..
there other options that give me more control? An option for parents of college students who want to give their kids exposure to credit without risking financial disaster is to add them as authorized users to the parent's card. Some credit cards allow you to limit charges by authorized user, which could limit major damages. The upside: Authorized user status also helps build credit. The downside: The bills come to
you every month, and you're still responsible for them.
Don't forget your local credit union. Not only do credit unions issue cards,
but if someone doesn't qualify, a credit union can offer pointers for improving
that credit history.
4. Can I afford to pay off the entire account
balance if the cardholder doesn't? If
you don't have the means to pay off the full balance up to the credit limit,
with fees and penalty interest rates, the answer to co-signing is always "no."
if your own future financial picture is clouded by shaky employment prospects, pending
retirement, fixed income or medical conditions, you can't shoulder this burden, either.
many times, personal guilt or misplaced responsibility trumps common sense when it comes
to making the decision to co-sign.
becomes an emotional decision," says Lynne Strang, vice president of the
American Financial Services Association, a member group of credit lenders. "A
person needs to step back and look at it as a business transaction and evaluate
it on those terms."
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