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Should you co-sign on a credit card? Why many issuers don't allow it

CNBC Select answers what it means to co-sign on a credit card, what you should consider before doing so and why some major issuers don't allow it.

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You may have been asked by a friend, family member or even spouse to co-sign for a credit card on their behalf. 

There are a few scenarios that would lead someone to ask for a co-signer: perhaps your family member is new to credit, or maybe your friend just got laid off because of the coronavirus pandemic and their income isn't enough to qualify for a new credit card on their own.

Whatever the case, it's easy to say "yes" to help someone you care about. But there are a couple of things you should know before you co-sign for someone else's credit card — including why many credit card issuers don't even allow it.

Below, CNBC Select takes a look at what you should know before co-signing and other options to consider instead.

What does it mean to co-sign on a credit card?

When you co-sign for someone else, you are essentially letting that person borrow your good credit in order to qualify for a credit card. It's the same scenario as when a parent co-signs on a student loan for their kid. A teen or young adult likely does not have enough credit to get a $60,000 loan from the bank, but a parent with a longer credit history does.

For credit newcomers or those who've seen their income drop, having a co-signer on a credit card can help them qualify when they otherwise would not be approved. The new account holder is then responsible for their own credit card payments, but the co-signer acts as the backup if the debt goes unpaid. 

For this reason alone, it's a big decision to co-sign on a credit card for someone else. As a co-signer, you have full legal responsibility for the account and guarantee to the issuer that the debt will be repaid if the borrower does not pay the loan as agreed.

This is why only a few major credit card issuers even allow co-signers for credit cards. If you have to have a co-signer to get a credit card, it signals to an issuer that you are less certain about your ability to pay your debts and need to have that backup just in case.

And for those issuers that do allow co-signers, there are most likely rules around the type of applicants who can use them. You will want to check with your preferred card issuer before assuming you can co-sign for a credit card, and also ask about any restrictions. 

Co-signing for someone else can damage your credit

Say you co-sign on a credit card for a friend or family member. Because your credit profile was used in helping them qualify for a credit card, each action taken on that account will reflect back onto your credit report. And likewise, any credit activity on your friend or family member's account can impact your score as well. 

In this way, you could both benefit as your friend builds consistently positive credit habits, such as on-time bill payments and spending within their means. But if the person you co-signed for is late or missing payments altogether, you will be responsible to make the full payment and both your credit scores will be damaged in the process. 

If you've already co-signed for another person's credit card, you probably won't have access to their account, so you should pay careful attention to your credit report. Watch out for any red flags or dips in your credit score that you don't think you caused.

Other options to consider before co-signing on a credit card

There are other ways to help your friend or family member out when they ask you to co-sign for a credit card for them. If you aren't comfortable with co-signing, you may want to consider suggesting to them either of the below options.

  1. Add them as an authorized user onto your credit card: Authorized users can be added to someone else's credit card account instead of opening their own credit card. This is an easy way for your friend or family member to build credit without the responsibility of making payments to your account. Note that an authorized user's activity on your credit card will still have an affect on your credit score. Likewise, if you make late payments, this could harm your authorized user's credit score too. However, adding an authorized user to your credit card account gives you more oversight than co-signing a credit card for someone else. Just be aware that some credit cards charge a fee for authorized users, but those that don't include: Chase Sapphire Preferred® Card, Capital One® Venture® Rewards Credit Card, Bank of America® Cash Rewards credit card and the Citi® Double Cash Card
  1. Suggest that person get a secured credit card: Secured credit cards are typically easier to qualify for and have less strict income requirements. This is great news for someone who is just starting to build their credit score. A secured credit card works by having cardholders make a deposit upfront, which generally ends up being their credit limit. For this reason, secured cards have lower credit limits and are meant to be used conservatively to build good credit habits and increase credit scores. The security deposit is usually refunded when the cardholder upgrades to an unsecured credit card, assuming their balance is paid in full. CNBC Select's top pick for the best secured credit card and the best starter credit card is the Discover it® Secured Credit Card because cardholders can earn cash back and a matching welcome bonus at the end of the year (for new card members in the first year only). The Capital One® Secured is the best for a low security deposit upfront (as low as $49, based on your creditworthiness) and the First Tech® Federal Credit Union Platinum Secured Mastercard® is the best for a high credit limit (as high as $25,000, equivalent to your deposit).

Information about the Capital One® Venture® Rewards Credit Card, Bank of America® Cash Rewards credit card, Capital One® Secured, and First Tech® Federal Credit Union Platinum Secured Mastercard® has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

For rates and fees of the Discover it® Secured Credit Card, click here.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.