Co-signing a credit card is a way for two people to share the responsibility of paying off the debt accrued on a credit card. The primary cardholder applies for the credit card and adds a co-signer to the account. The co-signer agrees to take on the financial responsibility if the primary cardholder cannot pay. While co-signing a credit card can be helpful in certain situations, it also comes with potential risks and drawbacks.
This article will explain the pros and cons of co-signing a credit card so you can make an informed decision when signing a credit card with one of your family members or friends.
Pros of Co-Signing a Credit Card:
Help Build Credit
Co-signing a credit card can be an excellent way for someone to build their credit. For example, if a young adult is starting to build credit, a parent or guardian can co-sign on their credit card. The primary cardholder can use the card responsibly and pay off the balance each month, which will help build their credit history. As the primary cardholder builds a good credit history, they may become eligible for loans or credit cards with better terms and interest rates in the future. However, getting the best credit card with enticing perks and better terms is the rule of thumb to build credit after co-signing the agreement.
Sharing the Responsibility
Co-signing a credit card means that two people share the responsibility of paying off the debt accrued on the card. This can be helpful in situations where one person may not have enough income or credit history to qualify for a credit card on their own. In addition, sharing the responsibility can help ensure that the card is used responsibly, as both parties will be aware of the charges and payments made on the card.
Convenience
Co-signing a credit card can be convenient for both parties. The primary cardholder can use the card for purchases, while the co-signer can monitor the account and make payments if needed. This can be particularly useful for parents who want to keep an eye on their child’s spending or for couples who want to manage their finances together.
Access to Rewards
Co-signing a credit card with rewards can provide the primary cardholder and the co-signer with access to rewards exciting reward programs. This can include cashback, points, or miles, which can be redeemed for travel or other rewards.
Joint Responsibility
Co-signing a credit card means that both parties share the responsibility of paying off the debt accrued on the card. This can be helpful in situations where one person may not have enough income or credit history to qualify for a credit card on their own. In addition, sharing the responsibility can help ensure that the card is used responsibly, as both parties will be aware of the charges and payments made on the card.
Cons of Co-Signing a Credit Card:
Risk of Damaged Credit Score
If the primary cardholder is unable to make payments or maxes out the card, both parties’ credit scores could be negatively impacted. Even if the co-signer is making all the payments, a high balance on the card could still negatively affect their credit score, which could impact their ability to get credit in the future.
Limited Control
Co-signing a credit card means that both parties have access to the account and can make purchases. This can be problematic if the primary cardholder is not using the card responsibly. The co-signer may not have the ability to control how the card is being used or limit the amount spent on the card.
Financial Responsibility
Co-signing a credit card means that both parties are responsible for paying off the debt accrued on the card. If the primary cardholder cannot make payments, the co-signer will be responsible for paying off the debt. This can be a significant financial burden and could impact the co-signer’s ability to pay their own bills or loans.
Legal Liability
After co-signing a credit card, both parties are legally liable for the debt accrued on the card. If the primary cardholder cannot make payments, the co-signer could be sued by the credit card company to collect the debt. This could result in wage garnishment, liens, or other legal action, which could impact the co-signer’s credit score and financial well-being.
Strained Relationships
Co-signing a credit card can also strain relationships between the primary cardholder and the co-signer. If the primary cardholder is not using the card responsibly or is unable to make payments, this can cause tension and conflict between the parties. In some cases, co-signing a credit card can even lead to damaged relationships, as the financial burden and stress can be significant.
Conclusion
Signing a credit card agreement with your friend or family member can be a useful tool for building credit, sharing financial responsibility, and managing finances. However, it also comes with potential risks and drawbacks, including the risk of damaging credit scores, limited control over how the card is used, financial responsibility, legal liability, and strained relationships. Before co-signing a credit card, it is essential to carefully consider the pros and cons and discuss them with the other party involved. It is crucial to have an agreement in place for how the card will be used, how payments will be made, and what will happen if the primary cardholder cannot make payments. If both parties are willing to take on the risks and responsibilities, co-signing a credit card can be a helpful financial tool. However, it is essential to approach it with caution and responsibility to avoid potential negative consequences.