Cosigning For a Credit Card Doesn’t Equal Love

August 01, 2012

The process of building (or rebuilding) credit can seem like a catch-22. In order to be approved for a prime credit card, you first need to have an established and respected credit history. But how do you attain that history, if they won’t approve you in the first place?! Is co-signing your only choice?

Actually, it’s not.

But that’s the argument many people use when pleading with a loved one to co-sign an account for them. In actuality, there are many alternative options available. But before we talk about those, let’s discuss some of the reasons why cosigning can be a bad idea.

Reason #1: Money divides people, it doesn’t unite them.

Have you ever lent someone money? If you have, there’s a good chance the outcome didn’t go as planned… they paid late, or worse yet, they didn’t pay at all!

Last fall, I loaned $3,300 to one of my best friends of nearly 10 years. This was done informally (nothing in writing) and the agreement was that she would pay me back whatever she could afford to each month, with a target amount of $300 per month.

Lo and behold, it’s over 9 months later and I haven’t been paid a dime. Our friendship is basically non-existent now. The sad truth is that this type of outcome is all too common when it comes to mingling money with a relationship. So why on earth would you want to jeopardize your relationship with someone by entering into an agreement that has a high probability of going awry? If you love or care for someone, you actually should avoid letting money come between you. The easiest way to do that is to simply avoid these types of scenarios.

Reason #2: It could ruin your good credit.

If someone has screwed up with their own money and their creditors’ money, who’s to say they won’t do the same thing with yours?

When you cosign a credit card for someone, normally it will be impossible to remove yourself in the future without the other party’s consent to do so. If you guys have a fight in the future, do you think that other person will agree to that? Yeah right! If it is a boyfriend/girlfriend you’re cosigning for, who’s to say you will still be together years from now? Because regardless of whether they are a friend or foe in the future, you will still be held liable for the account as long as it’s open.

This is another example of where you can play the “love” card right back at the person who’s asking you to cosign. If they actually love you, then they wouldn’t want to put you in a situation where your creditworthiness would be on the line.

Reason #3: There are plenty of alternatives.

Whether the person has no credit or bad credit, it’s still possible for them to open an account under their own name. They can do this using a secured credit card. With those, the account holder is essentially borrowing money from themselves since they put up a security deposit equal to the credit limit. For example, if they put up a $1,000 security deposit, then that will become their credit limit. Later on when they close the account, the deposit will be refunded to them in full.

There are plenty of low-cost options in this category. Bank of America, US Bank, and Capital One’s secured cards all charge between $25-40 per year in fees. No matter how bad their credit history may be, someone can apply for a secured card without needing a cosigner. Then after having the account for 12-18 months, they should be able to qualify for an entry-level unsecured card that gives cash rewards or airline miles.

Another good option for rebuilding credit is a secured loan. Like a secured card, you borrow against collateral. Not every bank offers these, but I know that Wells Fargo and a number of regional banks in my area have them. So they can be found. You just have to look.

Conclusion?

It’s not uncommon for someone to use the ol’ guilt trip of “if you love me, you will do this for me.” Well obviously, that holds true for many things in life – but when it comes to credit cards – it’s the opposite. If you love someone, you will not cosign a card with them… because you don’t want that to jeopardize your relationship down the road.