If your credit is squeaky clean, friends or family members may ask you to serve as cosigner on their credit card application. Think twice before entering this arrangement. The credit rating of the other person may improve, while yours is negatively affected.
There are alternatives to serving as a cosigner and these should be explored.
By cosigning a credit card application, a person agrees to share responsibility for balance repayment. Cosigners help others with bad credit or no credit get a card they cannot get on their own. The cosigner takes on the most risk in this arrangement.
If the other person defaults on repayment, creditors go after the cosigner. The debt becomes his or hers and will appear on the credit report.
Cosigners have little control in this situation because they cannot limit the amount of spending the person does. They also cannot close the credit card account if spending gets out of control. Before agreeing to cosign, a person should have a serious conversation with the primary applicant.
Both parties should agree on the credit limit. This amount should be affordable for the cosigner to repay in the event of default.
Debt accumulated by the primary cardholder impacts the cosigner. If a high credit limit is chosen, this could affect the credit utilization ratio and lower the credit score of the cosigner. Once a reasonable credit limit is agreed upon, a contract should be drafted and signed by both parties.
Though this document is not legally binding, it outlines what happens following default.
This whole situation can get very uncomfortable so luckily, there are alternatives. The individual may qualify for credit cards for bad credit without needing a cosigner. Bad credit credit cards feature high interest rates and limited lines of credit but their responsible use helps credit-impaired individuals improve their credit score.