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 their own.
If 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:
- Building 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 history.
- Paying bills conveniently: Check out electronic billing, prepaid cards or debit cards.
- Traveling: Use secured credit cards or debit cards.
- Supplementing income: Credit cards are debt, not income. Brainstorm other ways to raise cash.
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."
After 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."
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..
3. Are 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."
And 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.
Too many times, personal guilt or misplaced responsibility trumps common sense when it comes to making the decision to co-sign.
"It 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."