Cosigning for a credit card is the process of applying for a new account with someone else. If the card issuer approves your application, you and your loved one will share a joint account. You’re both equally liable for any charges made and, if your cosigner doesn’t pay the bill, the card issuer will expect you to pick up the tab. While cosigning used to be relatively common, not every issuer offers this option anymore.
Joint credit cards are a potential solution for couples who want to streamline their finances. Parents who are trying to help their children establish credit may consider cosigning for credit cards as well. Yet, just because a joint credit card might help you solve a problem, doesn’t mean that cosigning is your best option.
As with any other financial decision, there are pros and cons to sharing a credit card account with another person.
Pros to Cosigning for a Credit Card
1. It might be easier to qualify or to secure better terms.
Qualifying for new credit cards can be tough for someone with a limited or bad credit history. That’s especially true to qualify for cards that offer attractive benefits or rewards.
When you cosign for a credit-challenged loved one, your good credit rating can work in their favor. Not only could your good credit and additional income make it easier for your friend or family member to qualify for a credit card, but it might also lead to lower interest rates, higher credit limits and better terms overall.
2. Your joint account holder’s credit might benefit, and so could yours.
When used wisely, credit cards have the potential to improve your credit scores. With joint accounts, such credit-boosting benefits may extend to both cardholders. It’s critical to make every payment on time and keep your credit utilization ratio low on the account. (Credit utilization is the ratio between your credit card limits and balances.)
Poorly managed credit cards could damage the credit of all parties involved rather than improving it.
3. You can combine credit card rewards and reduce the number of bills to manage.
A joint credit card can be easier to manage if you share your finances with someone else. With a joint account, you receive a single monthly bill. Tracking credit card rewards can be simpler as well. However, it’s worth noting that you can achieve a simple bill and rewards management system without cosigning by using cards that offer straightforward rewards.
Cons of Cosigning for a Credit Card
1. Your credit scores will be at risk.
Joint credit cards show up on the credit reports of both account holders. So, as mentioned, the credit card can either hurt or help both of your credit scores. It comes down to how you and your cosigner manage the account.
Of course, late payments or a default can inflict severe credit score damage on both borrowers. No matter who makes the charge on a joint credit card, you’re both responsible for the bill. Even if you or your cosigner always pay on time, the simple act of carrying a high balance on the card compared to your credit limit could hurt you both as well. (It could also cost you more money in interest fees.)
2. Future borrowing capacity could be limited when you apply for new financing.
Carrying a balance on a joint credit card doesn’t just have the potential to lower credit scores. Even with good credit, joint credit card debt could make it hard to qualify for new financing in the future.
When you apply for new financing, the lender will consider your existing debts versus your income. This calculation is known as your debt-to-income ratio or DTI. Essentially, the more outstanding debt you owe on your credit report, the less future borrowing power you have.
3. Cosigning can damage relationships.
One of the biggest risks of cosigning is the damage it can inflict on your relationships. For example, you might cosign for your child’s credit card with the understanding that she’ll only use a portion of the credit limit and will pay the bill. But if your child manages the account poorly, it can lead to serious consequences for both of you.
When you cosign, you have to remember that you’re equally responsible for the debt, no matter what type of verbal agreement you make with your loved one.
4. Joint debt is difficult to separate after the fact.
Joint credit card debt can be tough to navigate in the event of a separation or divorce. Even if your divorce decree states that your ex-spouse is responsible for the balance on the account, the lender won’t see it that way. You’ll both still be liable for the debt until it’s paid off or consolidated with a new loan or credit card that belongs to just one of you.
Joint Credit Cards vs. Authorized User Status
Some people confuse joint credit cards with authorized user status. And since either option results in credit cards under multiple names being tied to the same account, that confusion is understandable. Yet there are significant differences between cosigning for a credit card and becoming an authorized user.
Joint Credit Cards
When you open a joint credit card, both you and your cosigner accept equal liability for any charges you make on the account. The account and its history will show up on your three credit reports and the three credit reports of your joint account holder as well.
Spouses sometimes prefer joint credit cards, but they’re popular among children and parents as well. Thanks to the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act), consumers under the age of 21 may need a cosigner to open a credit card account unless they have independent income or assets.
Most credit card issuers allow you to add authorized users (AUs) onto your account. When you make this request, you’ll receive a card in your loved one’s name. If you give the card to your loved one, he or she can begin to make charges on your account. Often, the account will also show up on your friend or relative’s credit reports and could help him or her begin to establish credit.
When an AU makes charges on your account, you can earn credit card rewards just like you would if you made those purchases yourself. So, if you’re considering a joint credit card to streamline the rewards-earning process, the authorized user strategy can accomplish this same goal.
When you authorize someone else to use your account, you maintain control as the primary account holder. You can remove AUs from your credit card whenever you wish, at which point they’ll no longer be able to make purchases. In the meantime, you’re on the hook for any charges your AU makes. The AU generally isn’t liable. But an authorized user generally can’t request credit limit increases, add additional AUs or dispute fraudulent charges.
Alternatives to Cosigning
There are several reasons why you might consider cosigning for a credit card with a spouse or loved one. Yet before you agree to take on the risk of sharing a joint debt with someone else, you should consider these two alternatives.
Secured Credit Card
One alternative to cosigning for a credit card is for you to help your loved one to open a secured credit card. This solution doesn’t work well for couples who want joint credit cards for budgeting or reward-sharing purposes. But if your loved one is over 21 years of age and can’t qualify for a credit card due to credit problems, a secured card might help.
With a secured credit card, the cardholder puts down a deposit that’s usually equal to the credit limit on the account. So, a $500 deposit should give you a $500 credit limit. Because you’re backing the account with your personal funds, the risk to the card issuer is considerably lower. As a result, it’s much easier to qualify for a secured credit card than a standard unsecured card, even if you have no credit established or bad credit.
Arguably the best alternative to cosigned or joint credit cards is the authorized user strategy, explained above. Adding a family member or friend to your credit card as an authorized user has several advantages.
Adding an authorized user may help loved ones who:
- Prefers to simplify budgeting by using the same credit card.
- Wants to earn credit card rewards on the same account.
- Can’t qualify for a credit card on their own due to credit issues.
- Needs help establishing credit for the first time.
As you can see, adding your partner or child as an authorized user may accomplish many of the same goals as cosigning. Yet the risk involved with authorized user account status is easier for you to keep under control.
Cosigning for credit card accounts isn’t as common as it used to be. In fact, if you want to open a joint credit card with someone else, you’ll have to do some extra homework to find card issuers that still allow it. And before you do, think carefully about both the benefits along with what could go wrong before you make a commitment.
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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