Here's What Happens When You Cosign a Credit Card

Finding someone to cosign on a credit card enables a person to obtain a line of credit they wouldn't qualify for on their own. It can be a great move for the primary account holder, but it carries some major risks for the cosigner. Here's what you need to know if you're thinking about cosigning a credit card for a friend or family member.

Why do some people need a cosigner?

Credit card companies are often hesitant to lend money if there's a risk the person might fall behind on the payments. They use a person's credit reports and scores to determine the likelihood of this happening.

Those with poor credit scores are considered to have a higher risk of default. And individuals with little to no credit history are often seen as risky too, because the lender doesn't have any data it can use to gauge how they'll handle borrowed money.

Individuals in these situations may not be able to open a credit card at all or, if they are able to, they'll have a much higher interest rate. But adding a cosigner can help.

A cosigner is another person with an established credit history that agrees to take responsibility for the payments if the primary borrower is unable to keep up with them. With the cosigner's stronger credit history, the credit card company may be willing to provide more favorable terms to the borrower than they could get on their own.

Factors to consider when cosigning for a card

As a cosigner, you're agreeing to take over the payments if the primary borrower is unwilling or unable to make them. This won't affect you at all if the person is diligent about making their payments on time. But if they make late payments or stop payments altogether, this will affect your credit as well.

The credit card remains on your credit report as long as you're a cosigner on the account. And even one late payment could drop your score by tens or even hundreds of points. That, in turn, could affect your ability to borrow money in the future when you need it.

So cosigning a credit card isn't something you want to do lightly. If you have any doubts about the borrower's ability to keep up with the payments, it's probably not a good idea. 

Even if you believe there won't be any problems, it's still worth sitting down with the borrower to talk about how you'll handle it if the borrower's financial circumstances change. Be sure to keep an open line of communication for as long as the card is active. And be ready to step in and take over the payments right away if the borrower is unable to, so you can avoid late fees and negative marks on your credit reports.

Alternatives to cosigning

If cosigning doesn't feel like a great fit for you, there are still other ways you can help your friend or family member build their credit over time until they're able to obtain a new credit card on their own.

Some things you can try include:

• Adding them as an authorized user to your credit card: Authorized users are able to use a credit card, but they're not the primary account holder. A good payment history on the card can help authorized users build their credit history, and you can remove them at any time. But you'll still have to set boundaries on what they can use the card for.
• Help them find a secured credit card: Secured credit cards are designed to help those with a poor credit history or no credit history to demonstrate that they can pay back borrowed money in a timely fashion. These cards are usually available to individuals with all types of credit, though they often require a security deposit and may have other fees.
• Look into credit builder loans: Credit builder loans are available through some banks and are another way to build a good credit history. You could help your friend or family member find and obtain one of these so they can improve their credit on their own.

Cosigning for a credit card might seem like the simplest option in the short term, but you have to consider the long-term consequences it could have on your finances when deciding whether it's right for you. If it's not a good fit, don't feel bad about saying no. Explain your reasons and offer to help your friend or family member in other ways until they establish a decent credit history themselves.