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Co-Signing – The Risks May Surprise You

by Kathy Kristof
Oct 25,1999

If you are considering co-signing to help your child — or anyone else — get a credit card, you might want to think twice.

For parents, co-signing is often the quickest and easiest way to help a child obtain credit or handle emergencies when he or she heads off to college or enters the working world. Unfortunately, many co-signers may not realize what they’re getting into.

Many of the risks of co-signing — for a line of credit or any other type of loan — come as a shock to the guarantor, and credit card loans are especially perilous, says Christine Larson, senior vice president and head of retail product management at Sanwa Bank in Los Angeles.

“From the standpoint of the person you are signing for, it’s a good way for them to establish credit,” Larson says. “But it is all downside for the co-signer.”

Having a co-signer can help someone with no credit history or a poor credit history obtain a loan or charge card. And, thanks to the good standing of the guarantor, that person is likely to get the credit at a lower interest rate.

For the co-signer, the rewards are solely psychological: the warm feeling of doing a good deed. The risk for the co-signer that most people understand is that the co-signer is liable for the full amount of the debt. In other words, if you help your child get a credit card and the child charges it to the limit — say, $500 — you are liable for that money if the child can’t or won’t pay.

More significant and shocking to many co-signers is that the child and the credit card issuer can mutually agree to raise the limit on the card without telling you.

“The very frightening risk for the co-signer is that the amount of risk you are taking on is unpredictable and uncontrollable,” says Robin Leonard, an attorney based in Berkeley, Calif., who is the author of “Money Troubles: Legal Strategies to Cope With Your Debts” (Nolo Press, 1997).

Moreover, since credit card loans have no set termination date, your financial guarantee can live on far longer than you may have intended.

For instance, you might be thinking only about the fact that you’re helping your college freshman establish credit by co-signing on his or her first credit card, but unless your child cancels the card after graduation, you continue to guarantee it. Your child could graduate, get a job, have his or her credit limit boosted five times, marry and have children. None of these significant life events gets you off the economic hook — a hook you might have forgotten about.

“If the primary borrower defaults, you are fully liable. If they go bankrupt, you are liable. If the creditor needs to collect, they can go after you first — they don’t even need to go after the primary borrower,” Leonard says. “The risk is tremendous.”

And that’s just the start, says Larson.

Many co-signers also don’t realize what this arrangement might do to their own credit. The debt goes on the co-signer’s credit report as well as the primary borrower’s report. If you co-sign, the credit balance on the co-signed card is considered part of your indebtedness when lenders are weighing the merits of giving you additional credit. That can hinder your ability to get a mortgage or another credit card, Larson notes.

If the primary borrower makes late payments or defaults, your credit report takes a hit. You might not even know about the late payments until you apply for another loan.

The risks involved with a credit card are so great that experts suggest would-be co-signers consider all alternatives first.

What other choices do you have if you want to help a child establish credit?

Deposit money in a bank account in the child’s name, Larson suggests. If your child has a savings account, his or her chances of getting a first credit card are greatly enhanced.

If your child already has a negative credit history, you can put up a deposit to help him or her get a so-called secured credit card. With this type of card, the credit limit is equal to or less than the amount the cardholder has on deposit at the card-issuing bank.

If your aim is primarily to provide your child with a card to handle emergencies while away from home, you can simply add his or her name to your credit card account. If the child is fiscally irresponsible, you could still end up liable for a big debt, but at least you’d find out about it when you got your next bill.

(Note: The information in this article is intended to be general in nature. Plan to discuss your particular circumstances with an attorney for how this might apply to you.)