4 ground rules to set before co-signing a credit card
By UK CreditCards.com
If you have an impeccable credit history, a loved one may ask you to co-sign a credit card. It might be hard to say no, especially if it's someone you care about and trust. But co-signing is risky. Even though it can help someone you love get access to and improve his or her credit, it can also drag your good credit down.
A co-signer is someone who agrees to share the responsibility for paying someone else's credit card balance. This gives those who have a limited or bad credit history a chance to get a card if they can't get one on their own. If someone reliable is willing to sign up for responsibility of the debt, the card issuer is more likely to take a chance on someone who has been unreliable in the past or has not used credit before.
When co-signing a card, remember that the majority of the risks are yours. If the person who has asked you to co-sign defaults, you will be contacted by the creditors for the outstanding balance. The debt will become your own and will appear on your credit report. Moreover, even though you're taking most of the risks, you have little control over the situation. The account holder has a card to use as he or she pleases. And, as a co-signer, you don't have the authority to close the account if things spiral out of control.
The person asking you to co-sign might have other options -- like getting a secured card or a card from a retailer. If neither of these alternatives is possible and you decide to sign on the dotted line anyway, here are some ground rules you should lay down first.
on a maximum credit limit.
Both parties need to agree to a credit limit, the maximum amount of debt that can be charged on the card. Make sure it's a limit you're comfortable with -- and one that you could pay off (on top of your own financial obligations) if the worst happens.
If the limit is too high, it could affect your utilisation ratio, which compares the amount of credit you have available to the amount you're using. Remember: any debt the account holder racks up is in your name. So, if you agree to a high limit -- and the account holder reaches it -- the credit bureaus will see that you have a lot of used credit compared to available credit. Even if you didn't personally rack up that debt, it could still ding your credit score.
If you are not happy with the amount the account holder suggests, explain that you are still willing to co-sign the credit card but would prefer a lower credit limit. If the person reacts negatively, perhaps you should rethink co-signing the card at all.
If you are co-signing for a close friend, family member or a loved one, asking that person to sign a contract may seem harsh. However, you are putting your financial history at risk, and you need to protect yourself.
Consider what agreement you would like in place, should you end up making repayments or paying the debt in full. Perhaps you will ask the account holder to pay you back the principal amount plus further interest. This needs to be written in a contract and signed by both of you.
Such a contract would not be legally binding. But, if the person reacts negatively or suggests that a contract is not necessary, you might want to reconsider co-signing.
Before you agree to co-sign, set up regular meetings so the two of you can discuss your current financial situations. If the primary account holder is having difficulties one particular month, this gives them ample opportunity to warn you in advance and perhaps ask that you pay the instalment on this occasion. If this does happen, it is important that you do make the payment on time to protect your own credit.
Ask the card issuer to send monthly statements to you, as well as to the account holder. That way, you can keep track of the balance. Try to find a credit card that provides online account management, rather than just one monthly statement, so that you can constantly keep an eye on the activity on the account -- and address any anomalies as quickly as possible.
Published: 17 January 2012
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