What Should I Consider before I Cosign a Credit Card?

There are a number of factors to consider before you cosign a credit card. Primary among them is the reliability of the person or entity for whom you are cosigning as you will be responsible for paying any accrued debt if they fail to do so. Another major consideration is the effect of the new account on your own personal credit as the amount of available — and used — credit is reflected on your individual debt statement. Depending on the state of your personal credit history, it may be difficult to obtain other loans or lines of credit for a short time if you cosign a credit card.

Before you agree to cosign a credit card, you should carefully consider the individual or business for whom you plan to cosign. Usually, an applicant requires a cosigner because he or she does not have the individual credit rating required to do so. This might simply be because he or she has no credit history at all, as with a teenager or young adult. Alternatively, it could reflect prior bad financial choices. The same may be true of businesses; a start-up business might need a cosigner because it has no credit history or because the proprietor has negative personal credit.

This is important because, as a cosigner, you are equally responsible for the debt. If the primary cardholder fails to pay the bill on time, you may receive collection calls, and the late payment may appear on your credit history. If the cardholder fails to pay the debt in its entirety, you are legally obligated to pay it.

You should also be aware that, when you cosign a credit card, the credit and debt level for that account affects your personal credit profile. You may pay your credit card bills off each month, but if you cosign a credit card and the primary cardholder carries a balance, your credit report will show that you also carry a balance for that account. This can be especially impactful if the available credit limit for the cosigned account is high or if you have limited personal credit.

Lenders often consider the ratio between your total credit limit and your level of debt. If the primary account holder carries a high level of debt in proportion to the credit limit, you will look as though you do too. This can adversely affect your ability to obtain new credit for yourself.

Another related consideration is credit "hits." When you cosign a credit card or when you apply for any type of loan or line of credit, the lender hits your credit account. Many lenders consider frequent or clustered hits to be red flags.