Cosigning on a credit card with someone is a bit like parachuting with them out of an airplane. If it goes well, you’ll both land on your feet with a boost to both your credit scores.
And that happens more often than you might think — about one in five cosigners experience a credit score drop, and one in five end up paying for debt that’s not theirs, according to a Bankrate survey. That’s why personal finance experts usually caution against cosigning if there are alternative options available.
Here’s what you need to know before you agree to cosign on someone else’s credit card — and other alternatives that may work out better for both parties.
What Is a Credit Card Cosigner?
A credit card cosigner is someone who signs a credit card agreement with another person, usually to help the other person qualify for a card they otherwise wouldn’t qualify for. Any charges on the credit card become the responsibility of both the card account owner and the cosigner. Unlike a joint cardholder, a cosigner doesn’t have access to the account or its funds — only the liability for the debt.
If you cosign for someone and they fail to pay their bills, you’ll be contractually obligated to pay that debt. That’s why cosigning is a decision that should not be taken lightly. It can hurt both your finances and your credit score if it doesn’t go as planned.
“There’s also a potential risk to your personal relationships,” says Rod Griffin, senior director of public education and advocacy for the credit bureau Experian. “If you cosign for a friend and that friend doesn’t pay that debt, you’re going to lose trust in them, you’re going to be angry with them, and you might lose that friendship. If it’s a family member, it can be even worse in some ways.”
Before you cosign for someone, have a discussion with them about their budget, how they intend to use the card, and their plan for paying it on time and in full each month. “It’s very important to have some sort of written agreement, even if it’s your own kid,” suggests Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News and World Report.
Why Would Someone Need a Cosigner?
Generally, a person might need a cosigner because they can’t qualify for a credit card or loan on their own.
Whenever someone uses a credit card, they’re borrowing money and paying it back when the bill is due. Banks and credit card companies want to make sure they’ll be repaid, which is why they’ll look at a borrower’s credit score — which shows how likely the borrower is to repay their debts — when deciding whether to approve them for a credit card. Having a cosigner with a good credit score gives the lender greater confidence that the debt will be repaid, Griffin explains. That’s why it can be easier for someone with bad credit to qualify for a card if they have a cosigner with good credit.
Someone might need a cosigner if:
- They lack an established credit history
- They have a bad credit score due to missed payments or other derogatory marks in the past
- They don’t make enough income to qualify for a card on their own
However, keep in mind that not all credit card issuers allow cosigners, Harzog says. In fact, most major issuers don’t.
Does Cosigning Impact Your Credit?
Cosigning can impact your credit either positively or negatively. “When you cosign for a card or someone cosigns for you, that credit card account will show in both your credit history and the other person’s credit history,” says Griffin.
That means that if the account holder carries a balance from month to month, your debt-to-income ratio will increase along with your credit utilization ratio. This could cause a drop in your credit score and harm your ability to qualify for new credit. If the account holder misses a payment, it will show up on your credit report and affect your score. And if the account holder runs up a balance they can’t afford to pay and defaults completely, “it’s going to hurt your credit score and it’s going to hurt your bank account because you’re going to have to pay those debts under contract,” says Griffin.
On the positive side of things, if the account holder maintains a low balance relative to the credit limit, that could actually decrease your credit utilization ratio and raise your score. Every on-time payment also has the potential to improve the scores of both people involved.
If you cosign a card, you should let the cardholder know that you expect them to use the card responsibly, and ask them to agree in writing to make payments on time and in full. But financial challenges can disrupt even the best-laid plans. That’s why Harzog offers the following advice: “Don’t cosign on a credit card unless you have the means to pay any balance, just in case this doesn’t go well.”
Alternatives to Cosigning on a Credit Card
If you want to help a friend or family member build credit but don’t want to take on the risks associated with becoming a cosigner, here are some other options to consider:
- Adding an Authorized User: If you have a good credit score and want to help a loved one, adding them as an authorized user to your credit card account is much easier and safer than cosigning on their card. “An authorized user benefits from your credit history but is not responsible for the debt,” says Griffin. If you add an authorized user, you’ll still be in control of the account, and you can even restrict the authorized user from making charges to the account by not giving them access to a credit card. Just continue making on-time payments on that card, and it’ll positively affect your authorized user’s credit score. However, be aware that not all credit card issuers will report authorized user activity, according to Harzog. Make sure your card offers this benefit before you proceed.
- Student cards and secured cards: If someone can’t qualify for a regular credit card on their own, they may have better luck with a student credit card or a secured credit card. Student credit cards are geared toward young people who are establishing a credit history, and typically come with looser credit standards than traditional cards. Some student credit cards may require proof of enrollment in an educational institution to qualify. Secured cards require an upfront deposit that acts as the card’s credit line. Since the deposit serves as collateral, reducing the risk of the card issuer, they’re typically easier to qualify for than traditional cards. These beginner credit cards are a great way to get a foot in the door, and making consistent, on-time payments can help someone further improve their credit score.
- Credit-builder loan: A credit-builder loan from a local bank or credit union is another way for someone to build credit independently, suggests Harzog. Like a secured credit card, these loans require a deposit. The borrower doesn’t get their deposit back until they pay off the loan in full, but their on-time payments will be reported to the three credit bureaus to help them establish or improve their credit score. Credit cards are generally a more effective way to build credit, says Harzog. But a credit-builder loan can be a good alternative or addition to a credit card.
Cosigning on a credit card for a friend or family member might seem like an easy way to help them build credit, but the risks to your finances and your relationship with that person are significant. Experts recommend not cosigning on a credit card with someone — there are almost always better alternatives available.
If you want to help someone build their credit without the risk of hurting yours, you can add them as an authorized user to your account without giving them access to a credit card. This way, they can benefit from your credit history but won’t be able to make purchases on your account.
If you do decide to cosign despite the risks, make sure you sit down with that person and write up an agreement that specifies how the card can be used and how and when it will be paid. If possible, apply for the credit card with them as a joint account holder rather than a cosigner. That way, you’ll have access to the account and can keep track of their spending. This will allow you to course-correct before the debt balance gets out of control.
“Sometimes saying no, friend, is the right answer,” says Griffin. If that’s the case, you can let the person know that you don’t distrust them — you’re just following conventional advice for what is a difficult decision. Propose another way you may be able to help, like offering budgeting tips or debt repayment strategies. And suggest a few alternatives for the person to build their credit score independently. Most likely, your loved one will understand — and declining to cosign will put less pressure on your relationship than a potential financial fiasco with a cosigned credit card down the road.