1/20/2012 10:22 AM ET|
Co-signing for a loan? Uh-oh
You probably know you shouldn't, but what if the person asking is someone you love and trust? Here are 5 things to consider. Plus: Alternatives to co-signing.
It sounds harmless.
Just sign your name, and a friend or relative will get a much-needed credit card. Like most things in life, however, being a co-signer is not that simple.
Financially, "co-signing is probably the worst thing you can do," says John Ulzheimer, the president of consumer education for SmartCredit.com.
Judging by the complaints and lawsuits made by co-signers, it also seems to be one of the least-understood arrangements, he says. When friends and relatives co-sign, they often don't realize the new credit card debt is also theirs -- 100%.
Often, the potential co-signer has a relationship with the wannabe account holder. That, too, can be jeopardized, says Ulzheimer.
With the potential for complications, personal and financial, "there are too many downsides," he says.
Even good character is no guarantee, says Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas. Especially lately, his group has seen plenty of people with fine character who have had to default, he says. That can leave co-signers holding the bag.
"It's not worth risking your own financial security," he says.
Is someone asking you to co-sign for a credit card? Here are five things you need to know before you decide.
1. The bill is yours
When you sign that credit card contract, you're saying, "If anything goes wrong, I'll pay the balance. All of it. Plus interest and penalty fees."
You're not acting as a reference. You're not "loaning out" your good credit. You're not promising to tell bill collectors where to find the account holder. You're not offering to split the bill or help the account holder catch up if he or she falls behind.
You, (the person with good credit) are promising to pay the entire bill because the lender doesn't think the applicant is quite up to the task, says Ulzheimer. The lender has seen the applicant's credit report and financial information.
Ask why the individual needs a co-signer, he says.
- If his credit is bad, that means he doesn't have a good record with past debts. That's not a good sign for you.
- If her income isn't high enough to qualify, that tells you upfront that she probably doesn't have enough money to meet current bills plus this new one, Ulzheimer says.
- Younger than 21? Students aren't barred from getting cards, he says. They simply can't get them if they don't have the income to pay the bills.
2. Lenders will count this debt as yours
Are you planning to buy a home, refinance a mortgage or take out a loan for a large purchase such as a car or medical care? Lenders will look at your debt load - including the co-signed account.
"That account will impact your score no differently than if you were the only person on that account," says Barry Paperno, consumer affairs manager with myFICO.com. As far as creditors and potential creditors are concerned, "it is your account," he says.
Every consumer can handle only so much debt. If the co-signed card pushes you into the danger zone in the eyes of your creditors, you risk paying higher rates on your own credit cards, higher rates on future loans and even being denied credit or having your credit lines cut.
A co-signed card also has the potential to drop your credit score, says Ulzheimer.
That's because credit-scoring formulas look at how much available credit you have and how much of it you use each month. The less you use, the better, he says.
Even if your account holder pays the bill on time every month, if that person is using a chunk of the available credit, it could lower your score, says Ulzheimer.
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3. The account holder may be able to increase the credit limit
The Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, mandates that while the account holder is younger than 21, the co-signer has to give written permission for any credit limit increases, says Chi Chi Wu, staff attorney with the National Consumer Law Center.
However, once the cardholder is past the age of 21, no federal law requires that the co-signer be notified of any credit line increases, she says.
You may be thinking of co-signing, believing that if anything goes wrong, you can just write a check for your student's relatively small card bill.
However, if your adult child keeps that account open past his or her 21st birthday, the bill could end up being quite a bit more than you estimated.
4. Bad marks can show up on your credit report
Late payments, missed payments or collections on the account?
In the eyes of creditors, it's your account, too, so "you're equally at risk for any sort of negative credit reporting and/or collection activities," says Ulzheimer.
Even if you never have to pay a dime, co-signing with someone who doesn't know how to manage credit or just doesn't do it well can cost you money by eroding your own credit. These days, everyone from potential employers to loan officers to insurance companies can look at credit reports.
One smart move: Look at alternatives to co-signing. A few to consider:
- Adding the person as an authorized user to one of your credit cards. You'll be responsible for the bill, while the other person builds his or her credit. If he or she abuses the privilege, you can shut off access.
- A secured credit card. The other person gets a card in his or her own name with a credit limit backed by funds. Most secured cards build credit, and some can convert into traditional credit cards after a trial period.
- A debit card. With a checking account, the other person can get a debit card. It doesn't build credit, but it also doesn't place your credit at risk.
5. You need an exit strategy
Do you want to be responsible for your friend or relative's credit card bill for life?
If not, you need an exit strategy.
Often, ending the co-signing arrangement requires closing the card account, says Nessa Feddis, vice president and senior counsel for the American Bankers Association.
The wrinkle: Depending on the contract and your state laws, you may need the cardholder's cooperation, she says. It may not be as simple as just telling the card issuer you want out.
Another consideration: Unpaid debts accumulated while the co-signed account was open are still your responsibility -- even after the account is closed. Until they're paid, they're still your bills.
Considering co-signing? Call the issuer first, and find out exactly what your options are for ending the co-signing relationship when that day eventually comes, Feddis says. Do you have to close the account? Do you need the account holder's permission?
While you're at it, ask about your access to account information. Can you get account status and balance information as a co-signer? Will you be told if the credit line or interest rates change? Will you be notified if payments are late or if the account is heading for default?
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15 years in collections and I have only seen some really sad stories of children who put parents into bankruptcy, grandparents on the street, and close friends wanting to hire a hit man to collect the life insurance on the person they cosigned for. Cosigning is the fastest way to kill the most important relationships you'll have in life.
I have raised 4 kids and never cosigned once. They all own homes by 24, pay cash for their cars, and do not overspend. None of them make over $30,000 a year. I also have 9 grandchildren, so yes they have kids too. They have all paid for their own educations, toys, and enjoy life.
Secret: They all had to start work at 12. Never gave them an allowance. They mowed lawns, did dishes and babysit for money. One son started a bike repair shop at 14, another work for a man who raised game birds for farmers to release, and both daughters learned how to cut hair, cook and maintain their own cars.. Both daughters work from home, raise kids, and married good men, They learned how to take someone's throw away, clean it up, and sell it for a profit. We had a rule 8 hours a day for work, 8 hours for education (sometime learning to ski), but no TV till the work was done and we were always going somewhere on a weekend, regardless of weather. They all work 8-10 hour days at work and take night classes or internet classes. My wife and I are very proud of our children and efforts. We thank God, our Lord Jesus Christ, when we get together every Sunday for dinner.
I just see to many parents today still changing the diapers of 30+ adult children. Just look in your basement, if there is an able body 30 year old child living down stairs, you failed as a parent. I gave all my children the same high school graduation gift, a set of luggage and a one way bus ticket to city of their chose. Only one return after graduation from college, and after working with dad for 3 months, got his own job and moved out.
But, I had trouble with 1 credit card when I was 18 (slightly younger and dumber), so I needed a co-signer. Thankfully, my dad was kind enough knowing I just graduated college and started working full-time, I would pay my bills. Also, I have gotten my credit score back up to above 700 and have no issue getting credit or loans anymore. SOME, not all will do this. But to us that NEED(ED) a co-signer, it is nice to be able to never have them worry if you show you can earn it.
And @DWW322, we have to call the Pa. dept. of trans. and get his name off of the title. They will do it once the loan is fully paid off declared by the bank.
If you co sign , and don't pay it will affect your rating but you're not liable to pay a debt that never existed! "They" monitized your signature and say gave you $2000 "credit". It went on the books as a debit, not a debt. It didn't start out at zero and you spent $2000 that you have to pay back to zero. $2000 was transfered to an account and it was spent down to $0.00. If you spent it.. you could pay it back but you don't have to 'cause they can't prove the debt ever existed because it never did. It was always a debit. They just call it a credit card.
After a couple months they will default the "loan"...sell it to a collections agency for penny's on the dollar. Now these pieces of dirt will try to re-contract w/ you by having you acknowledge the "debt". (that never existed) then they can sue you.
When anyone calls you on the phone and asks your name, Don't verify it. Always ask who's calling please? If its a collection agency, tell them Pursuent to Title 15 of USC 1692 of the Fair Debt Collections Act you are hereby notified to cease all calls to this number. Document all calls received, record them if you like, you can sue them for harrasment - $800 ea. call.
If the take you to court, Go, if not they will win by default. Your summons will call you the Defendant..but your not! You are an alledged Defendant. The judge will ask why..you say because you have never done business with this company..You have never entered into a contract w/ them. The judge will ask them if they have any proof and if you didn't re-contact over the phone...THEY WON'T HAVE ANY!
It should get dismissed and they'll have 15 days to appeal. THEY WILL GO AWAY.
Under the Rules of Civil Procedure, You can only be held for damages by the REAL PARTY OF INTEREST, collection agencys are not this! Also, even if they claim to have your signature, under the Rules of Evidence 601, 602, 604, Only you can verify your signature. No one else can. Say.. this is not my signature. It appears to be a masterful forgery.
Under Rules of Civil Procedure: Rule 3.7 When their Atty. speaks... Object! alawyer cannot act as both prosecuter and witness. He can't testify to anything...besides he's not the real party of interest , so everything he says is 2nd hand...Heresay...inadmissable in court.
I am not an Attorney and do not practice law. Read your Constitution, Know your rights!!
Blessed is the creator, for we are given inalienable rights. Now go and sin no more.
No. That was easy enough. Besides the fact that you will be stuck paying the bill if whoever you cosigned for does not pay, and it can mess up your credit rating, there is another reason.
Whatever amount you cosign for is added to the amount of your credit that you owe. If after cosigning you attempt to get a loan, the amount can run up how much you owe and you can get disapproved for the loan. Lots of reasons not to.
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