When and how to use joint credit successfully
Debt counsellors often warn about the risks of co-signing or acting as a guarantor for someone else's debt. However, there are situations where it may be worth doing if you know how to do it right.
When you co-sign for a credit product with someone, you both have access to the account, and you're both liable for the charges. This is known as having joint credit.
If you're a guarantor for someone else's credit, you don't have access to the account, but agree to shoulder the debt if the borrower doesn't pay.
For the borrower, these can both be lifelines to credit that wouldn't otherwise be available. "There are instances in life when we do need a helping hand in order to rebuild or build our credit profile and sometimes getting a co-signer or guarantor is a great way to start," says Domenic Mastromonaco, a Calgary-based expert with the Credit Counselling Society.
Having a co-signer or guarantor can help the borrower build relationships with banks faster, says Richard Moxley, author of "The Nine Rules of Credit" and spokesperson for eCredit Fix, which helps consumers learn about improving their credit scores.
When shared credit makes sense
The three most common reasons you might want to help someone in this way are:
1. To help someone with no credit history.
2. To help someone rebuild bad credit.
3. To help someone maintain their credit history.
You generally only want to enter into a shared credit agreement with someone you completely know and trust, such as a family member. For instance, your university-bound teen may want or need a credit card, but with no credit history, he'd have to work with a less reputable creditor, pay higher interest or sign up for a secured card. With you as his co-signer, however, his path may be a little smoother.
"You'd have less hoops to jump through with joint credit as opposed to a kid trying to do it by himself," Moxley explains.
Or, perhaps your spouse's credit score leaves something to be desired, while yours is solid. You can apply for credit jointly to help your partner get back in creditors' good graces. A joint application for a credit product is based on the consumer with the best credit in the pair. Their good history with credit "lessens the pull" of bad credit, Mastromonaco says.
"If you have bad credit, you're getting declined right away, but with a co-signer, it makes it a lot more likely that you'll get in through the front door," he says.
Finally, a shared credit product can help your loved one maintain his credit score, even while away from home. Moxley sees clients who work in the Alberta oil sands for months at a time. Their spouse, meanwhile, is entrusted with the account so that the oil worker maintains their good standing with creditors.
It's one way couples are able to snag mortgages while a spouse is working abroad, Moxley says.
"It's picking up where you left off instead of rebuilding again," he says. "It's a big problem for people who leave Canada for more than six months. That can be like you're starting at [age] 18 again, and this stops it from happening."
Steps to success
1. Create an exit strategy.
Determine your goal: Is it to send your child off to university with a line of credit to cover tuition? To keep your brother's credit history alive in Canada while he teaches abroad? To help your spouse clean up bad credit?
Mastromonaco and Moxley agree 12 months is a good timeframe to build or turn credit around with the help of a shared account. "This is a mentoring position," Mastromonaco says. "You don't want the umbilical cord attached forever."
Have a plan for what will happen after you reach your goal. If you want to close the account, the balance needs to sit at $0, so have a repayment plan in mind. If you want to take your name off the account, ask your creditor if a new account will be issued to your loved one, erasing his or her efforts for the past year. If so, ask what your options are; your bank should be able to help you find a solution.
In the case of a spouse, of course, you may opt to keep the account open, which may make the most sense for your combined finances.
Do your homework before co-signing, Mastromonaco says. Go over your loved one's income, and budget to cover off the loan or debt they may incur. Check in on their spending so there aren't any surprises when the statement comes in. Set ground rules, such as giving you notice before making a big purchase.
Even if you live in the same household and have equal access to the account, be sure you each get separate copies of the statement. It's your job to stay on top of the account and make sure it's being used responsibly because you have more skin in the game than they do.
3. Prepare to shoulder the debt.
Determine if you're willing to pay off the entire balance your partner may rack up. If you are, be sure you have the means to pay off the debt.
"Right out of the gate, if you're co-signing or becoming a guarantor on a loan, you want to make sure you're taking into account the worst case scenario," Mastromonaco says.See related: Do's and don'ts of joint credit, 3 ways you may be stifling your child's financial independence, 5 ways to protect your finances during divorce
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