Co-Signing for a Credit Card May Be Hazardous to Your Financial HealthSeptember 28, 2011 - 5:55 pm
With the high rate of low credit scores among consumers today plus the stricter requirements for obtaining new credit, there is an increased occurrence of consumers needing the help of a co-signor to establish a credit card account. Since credit card applicants carrying a poor credit history can not get approved for credit card of their own accord, they have to rely on other people to make up for their credit deficiency.
To Sign or Not to Sign
Typically it will be a loved one or a close friend who will approach you about co-signing for a credit card account. The situation can get extra complicated because of this reason. No matter how close you are with the person asking, the consequences of a failed credit card account that both parties are responsible for can be much worse.
Personal financial experts recommend strongly that people do not co-sign for other people’s credit card accounts. The main reason is a co-signed account puts you and the other applicant on the hook for the balance due no matter who makes the purchases. In the event the applicant for whom you are co-signing completely defaults on the account, it is entirely your responsibility to pay the debt in full.
More than Money Issues
While the responsibility for someone else’s debt can be enough to anger you completely, there are other consequences that come with the territory. In addition to having to fork over the money to pay the outstanding debts, you will also have to face the consequences stemming from how the other person used the credit card account. For example, if the other person ran up debts that went over the credit limit of the card, both you and the other person will see the effects become apparent on your credit score.
Credit scores for both parties will drop first because the debt has been missed. Credit scores will also drop because credit has been overextended. The black marks on your credit history for not maintaining your co-signed credit obligation will not only be listed on your credit report, it will remain there for a period of seven years.
Since credit scores are now utilized by many kinds of businesses, such as insurance companies, utility companies, and potential employers, another person’s misuse of a credit card can do a lot more damage to your financial reputation as well as to your financial ability.
Dealing With the Fallout
Low credit scores are not favored by insurance companies and other businesses that rely on credit checks to make servicing decisions. As you now maintain a lowered credit score, it will likely cause your insurance rates to go up at your next renewal. You may find it difficult to get that job in the accounting office you were interviewing for recently. You will probably have to put down a sizeable down payment on your new cell phone account. The consequences on your own finances are likely going to add up to the fact you’ll be paying more for a lot of things for as long as the negative credit information lasts on your record.
All of these consequences and more can stem from agreeing to co-sign on someone else’s credit card account. It can be a long-term, drawn out process to separate yourself from credit card mistakes made by another individual when you are linked by an account. Ideally, if you are approached to serve as the co-signor for another individual (this includes your children), it is in your best interest to refuse. If the other person can not qualify for a credit card based on their own financial merits, it is likely best they work on improving their own financial house before getting involved in yours.