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Co-signer, joint account holder, guarantor: Know the difference

Summary

Thinking about sharing a card account with someone? Take heed. Your liability for the debt could vary greatly depending upon the type of account you choose

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If you’re thinking about sharing a credit card account with someone, take heed. All shared accounts aren’t the same. There are different policies with different names and your charging rights and liability for debt could vary greatly depending upon the type of account you choose.

Co-sign, joint account, guarantor - know the differences

There are a number of reasons why people share credit card accounts. Some share a credit card account with their college-bound children to give the kids access to emergency cash. Others do it to help out family members and friends who would not qualify for a credit card on their own.  Some married couples prefer to share a credit card account to handle household expenses.

Most consumer advocates advise against sharing credit card accounts. Not only can you be stuck having to pay for a debt you did not incur, but a shared debt could cause a lender to think your debt load is too high, hurting your credit score. “You may not be eligible for a loan because some other person’s credit card balance or loans are on your credit report and they have to be included in your debt-to-income ratio,” says David Flores, a financial counselor at GreenPath Debt Solutions.

If you’re contemplating the risks of a shared account, make sure understand these differences among your options.

The basics of shared accounts

If you’re looking to share an account, there are four basic options.

1. Two people can become joint applicants. In this type of agreement, each applicant has charging privileges and each is equally liable for all of the debt, says Nessa Feddis, a spokeswoman with the American Bankers Association. If you have this type of agreement, you could be held accountable for charges even if the other person made them.  “You often see this in divorce where you have a joint account and one person ran up the bill, but they’re both liable,” Feddis says.

2. You can co-sign on an account for another person. In this type of agreement, the co-signer agrees to pay the balance on the account if the other person defaults. Typically, as a co-signer, you don’t have charging privileges on the account, Feddis says. Your job is simply to take over the bill if the other person does not pay.

3. You can become a guarantor for another person. This type of agreement is similar to a co-signing agreement in that you agree to take over the debt if the other person does not pay. As with co-signing agreements, the guarantor does not get charging privileges on the account. But there is also a slight difference when it comes to liability, Feddis says. A bank must take more steps to get a guarantor to pay the debt than a co-signer. While the lender can come after the co-signer for the debt practically as soon as the bill is overdue, “The guarantor doesn’t become liable until the bank has exhausted all other means of collection from the original borrowers,” Feddis says.

4. You can add an authorized user to your account. Generally speaking, an authorized user has charging privileges on the account but in the lender’s eyes, the original cardholder is responsible for the entire debt. However, in some states, authorized users may be legally held responsible for their charges on the account.

There are exceptions to these general rules, as different lenders have their own definitions for the different types of agreements. At Bank of America, for example, the terms co-signer and joint accountholder are interchangeable, in that both describe a relationship where the two applicants have charging privileges and liability on the account, says spokeswoman Betty Riess. Also, all lenders don’t offer all options. Joint account and authorized user agreements are the options most frequently available. The ability to co-sign or become a guarantor on an account is not as common.

Ending the agreement

Just because you decide to share an account with someone today doesn’t mean you’ll want to share an account with them tomorrow. But depending upon the type of account you have, parting ways may be more difficult than you think.

The guarantor doesn’t become liable until the bank has exhausted all other means of collection from the original borrowers.

Authorized users are relatively easy to take off of an account. Since the lender considers you liable for the entire debt regardless of who makes the charges, you can simply let the bank know that you want to take an authorized user off of the account and it will be done. However, for safety purposes, “If the account owner doesn’t feel they could confirm that the previous authorized user will discontinue using the card, we would recommend they close the account and request a new card be issued with a new account number,” suggests Natalie Brown, a spokeswoman with Wells Fargo. In that situation, the account owner would not have to go through a new application process, Brown adds.

Ending a co-signing, guarantor or joint accountholder relationship is not so simple. You can’t just kick someone off the account; you have to close the account entirely and both parties must re-apply for credit in their own name and on their own merit. If there’s a balance, liability must be determined, and the lender may not let you terminate the agreement until the balance is paid in full.

Before agreeing to any shared credit card account, “make sure you know what you’re getting into and how difficult or easy it is going to be for you to get out of that relationship,” says Flores.  “In many cases, it’s probably not very easy.”

Survey of card issuer’s shared account offerings
Card issuerTypes of shared accounts Basics of the accountsHow to end the agreements
American Express
Cardholders can have supplemental cards (authorized users) added to the account.Those with supplemental cards and the original cardholder all have charging privileges on the account. The original cardholder can set spending limits on the supplemental card holders. The supplemental cardholders are not liable for the balance on the account.The original cardholder can take the supplental cardholders off of the account at any time.
Bank of America
Co-signer/joint account holder; guarantor; authorized userCo-signers and joint accountholders have charging privileges on the account. Both applicants with the co-signer and joint accountholder agreement are responsible for the debt. Guarantor is ultimately responsible for the payment of the account if the main applicant does not pay, but does not have charging privileges. Authorized users have charging privileges but aren’t liable for the debt.With joint and co-signed accounts, both accountholders must agree to have one party removed from liability. Issuer would complete a credit review and the remaining accountholder must demonstrate creditworthiness and ability to pay the current credit line. With guaranteed accounts, issuer would complete a credit review and remaining accountholder must demonstrate  creditworthiness and ability to pay the current credit line. Authorized users can be removed from the account at any time.
Capital One
Authorized userAuthorized users have charging privileges but aren’t liable for the debt.An authorized user can be removed at any time, even if the account has a balance.
ChaseAuthorized userAuthorized users have charging privileges, but the original cardholder is liable for the debt.The original cardholder can take the authorized user off of the account at any time.
CitiAuthorized userAuthorized users have charging privileges, but the original cardholder is liable for the debt.An authorized user can be removed at any time, even if the account has a balance.
Discover
Joint accountholder; authorized userJoint account holders are equally liable for any balances created on the account and both have charging priveleges. Authorized users and the original cardholder have charging privileges but the authorized user isn’t liable for the balance on the account.Joint account holders may close the account but they remain liable for the debt on the account. An authorized user can be removed at any time, even if the account has a balance.
Wells Fargo
Joint accountholder; authorized userJoint Accountholders are equally liable for any balances created on the account and both have charging privileges. Authorized users and the original cardholder have charging privileges but the authorized user isn’t liable for the balance on the account.Joint account holders would have to close the account, but they would remain liable for the debt on the account. An authorized user can be removed from the account at any time.
Source: CreditCards.com research, updated May 16, 2013.

See related:Can you remove co-signed loans from credit reports?, Why co-signing on a card for an ex is a mistake, 10 ways co-signers can protect themselves

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