Co-signed credit cards: Unloved option poised for comeback?
Experts say don't sign one, issuers rarely offer it, yet ...
Co-signed credit cards have been disdained by experts as financial folly and shunned by credit card issuers as a troublesome product.
Yet, despite their reputation as the ugly ducklings of the credit world, co-signed credit cards may be poised for a comeback, pushed back into use by a changing regulatory landscape and a recession that has card issuers looking to spread risk.
One of the top credit card issuers in the United States, Discover, plans to offer it in the coming months, by the time the major provisions of the Credit CARD Act of 2009 kick in Feb. 22, 2010. "We will be offering co-sign capabilities by the time the new law takes effect," says Matthew Towson, a spokesman for Discover. Another, Capital One, is considering it.
But co-signing is a touchy subject. Many of the top U.S. card issuers refused to comment to CreditCards.com on whether they plan to offer them. Several wouldn't even disclose whether they currently offer co-signed credit cards.
Co-signed credit cards aren't the industry's most cuddly product. By definition, credit card co-signers get a bad deal. They have all the legal responsibility for the debt, and none of the charging privileges. That has made co-signing for credit cards an undesirable choice, say financial experts.
Co-signed cards typically have been used within families, allowing relatives with bad credit -- or youngsters with no credit -- access to a credit card, since a more responsible family member has agreed to pay if something goes wrong. It often does. The National Foundation for Credit Counseling's advice is typical: "Think long and hard before agreeing to co-sign a loan," say its tips on lending to family.
In recent years, with the rise of other ways of accessing plastic -- from becoming an authorized user or joint account holder to whipping out a debit card -- there was little reason for card issuers to offer co-signing to their customers. Of the top 10 credit card issuers, only two -- or possibly three, depending on who you ask -- allow a third-party to co-sign for someone else's debt. (See chart: "Which credit card issuers offer co-signed cards?")
But that could change. In February, a provision of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act will prohibit those under 21 from obtaining credit cards unless they can:
- Show that they have sufficient income to pay the bills; or
- Get a co-signer.
The measures are meant to prevent young adults (especially college students) who have little income from getting in over their heads with plastic.
What happens in February?
Observers see the new law giving issuers a nudge toward offering co-signed cards to young consumers and their more-established relatives. "I would expect to see more companies perhaps evaluating that option," says Lynne Strang, a vice president of the American Financial Services Association, a Washington, D.C.-based industry group.
"I expect to see it among some issuers, and others won't" offer it, she says. "I think it's going to be mixed, depending on what their research and their customers tell them."
And one consumer advocate believes that more issuers will offer co-signing if they want to continue to compete for the lucrative college-student market.
"I think that the companies, if they want to provide cards to people between the ages of 18 and 21, will have to" offer co-signing, says Linda Sherry, director of national priorities for Consumer Action, a Washington, D.C.-based advocacy group. "Otherwise, they'll be at a disadvantage to the rest of the market."
A long-term risk for co-signers
One consumer group points to a gap in the CARD legislation as one which could potentially leave adult co-signers on the debt hook for decades.
"There is nothing in the CARD Act that prohibits the card issuer from saying the co-signer is still liable even after the cardholder turns 21," says Chi Chi Wu, staff attorney for the Boston-based National Consumer Law Center. And co-signers, who think they are just vouching for young adults for a finite period before their 21st birthdays, may not understand that, she says.
"So a parent or guardian could still be on the hook for that debt" 10, 20 or 30 years later, Wu says.
Advocates are suggesting that the Federal Reserve, which is still reviewing the regulations, either set a finite time line for responsibility or require a co-signer to check a box if he or she agrees to be responsible for the bill after the cardholder turns 21, says Wu.
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