Beware The Curse of The Cosigner
If you’re diligent about paying your bills and keeping your credit score high, the time may come that someone may ask you to cosign for a credit card. This will become even more likely once President Obama’s CARD Act goes into effect in 2010, requiring anyone under age 21 applying for a credit card to have a cosigner if they don’t have sufficient income. Often, the person asking is a family member or friend that you may find it hard to turn down. But is the satisfaction of helping another worth the risk of destroying the credit rating you’ve worked so hard to achieve? Only you can answer that question, but there are a few things you should consider before making your decision.
Ask Yourself One Question
If you’re even considering cosigning a loan for someone else, you can help make the decision by asking yourself this—Can you afford to pay the debt if the borrower does not? If the answer is no, stop reading right here and find a way to let them down easy. As a cosigner, you are considered jointly responsible for the debt, and if the borrower can’t or won’t make their payments, the card company will come after your assets (and in some states, your spouse’s assets as well). You’ll be on the hook not only for the original amount borrowed plus interest and late fees, but collection agency or legal fees, if it gets to that point. If you’re not in a position where you could afford to do this if necessary, then you have no business cosigning a credit card.
Your Interests Come First
Even if you can afford to make good on an unpaid debt, you should carefully consider the implications of cosigning before agreeing. The most important question is why this person is coming to you for help. If he could qualify for credit on his own, he wouldn’t need to be looking for a cosigner, so what are the reasons that he’s being turned down? If there is a history of late payments, non-payments, judgments, or bankruptcies, you may want to steer clear.
Also, bear in mind that your credit report doesn’t distinguish between whether the debt is your own or that for which you’re a cosigner. You are equally liable, and credit lines on which you’re a cosigner appear on your credit report, possibly giving you more outstanding credit than lenders would like to see. This will hurt you when you apply for a loan of your own, especially if the borrower is at or near their maximum limit. Speaking of maximums, credit card limits are often increased without warning, so if your co-borrower manages to secure a higher credit limit, you may have a much higher amount of credit outstanding than you think, as well as potentially owing much more than you’re expecting if the borrower defaults.
None of this may seem to matter, until you decide to apply for a mortgage or car loan and find out that your credit score is dinged several points, causing you to pay thousands extra in interest over the life of the loan.
The Bottom Line
While it may feel good to help someone in need, you should never do it at the expense of jeopardizing your own hard-earned credit rating. If you’re not sure you’re comfortable cosigning, offer to help with budgeting strategies or other tactics to help the borrower mend their finances. You certainly have the right to refuse to take on someone else’s debt, no matter how much you love them.
Photo by thinkpanama
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