5 questions to ask before you co-sign

5 questions to ask before you co-signBefore co-signing a credit card application for a friend or loved one, understand what you're getting yourself into.

Don't mistake co-signing a credit card application with vouching for that person. Co-signing means you are liable for the debt should the main account holder be unable or unwilling to pay off their account. The credit card issuer will demand that you pay off that debt in full.

Therefore, ask yourself the following five questions before you pick up that pen, because once that ink dries, you will be sharing responsibility for that credit card bill.

1. Why would this person ask you to co-sign their application? In other words, why are they not able to get a credit card on their own? Their credit history may be so bad, the credit card company may demand that they find someone to co-sign the credit card application.

2. Do they already have a bad credit history? They may have had trouble in the past with paying down their credit cards, either through job loss or irresponsible spending. Obviously, you need to run from this scenario as credit card issuers don't care whose names are on the card, as long as someone will make regular payments at the end of the month.

3. What impact will this have on your own financial situation? Will you be able to make regular monthly payments on top of your own debt repayments if the person defaults? Will you be able to pay off that entire loan in a timely manner? If not, this could negatively impact your credit score, which could have disastrous consequences if you were planning on securing a mortgage or other loan in the near future.

4. Is this the first credit card they will have? Perhaps the person is a university student only working part time, without any sort of credit history. If the person asking for you to co-sign is trying to build up her credit history because she doesn't have any, perhaps a store credit card with limited credit would be a better option, or even a prepaid credit card. That way, you will not need to co-sign for her.

5. Is that person looking for an easy way to pay for bills? There are many other payment options available. They might consider a debit card instead or a prepaid Visa gift card.

What it comes down to is this: Why should you be risking your own excellent credit history if your friend or family member is a high risk? Perhaps it's best to help them find alternatives and encourage them to ask questions of their banker.
Published January 21, 2010

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