If you’re trying to build or repair your credit, using a cosigner is often a good way to go about it.
This way you can use someone else’s credit score rather than your own.
Unfortunately, most credit card companies don’t allow cosigners these days.
In this guide, we’ll discuss the pros and cons of using a cosigner, and we’ll tell you about some better options to use instead.
What Does it Mean to Cosign?
Cosigners are “legally obligated to repay the loan in full.”
When someone cosigns a loan, they’re assuming the person they’re cosigning for will pay the loan themselves. But if they default, the cosigner is on the hook for the entire amount.
But along with the legal obligation, a cosigner doesn’t usually get any of the rewards. The credit you’re applying for will be yours.
They are simply putting their name on the line to allow you the benefits.
In other words, if someone cosigns a car loan for you, they are not automatically authorized to drive it unless you allow it. You are still the owner of the vehicle.
3 reasons You Might Need a Cosigner
There are several reasons why someone might need a cosigner.
Building credit from scratch
This happens a lot when students first graduate from high school or college or when someone hasn’t used any credit for a very long time.
Most people need about three to six months of credit usage to have a credit history, but without a credit history, it’s almost impossible to get a loan. In these types of catch-22 cases, getting a cosigner might be necessary in order to start building credit.
Low credit score
All loan and credit card companies have minimum thresholds of scores they’ll accept, so if your credit score falls below that range, you’ll need another option.
This is a fairly common reason why a lot of people use cosigners. In these cases, the person applying for the loan might even have a decent credit score. But just like with other criteria, most lenders have an income threshold you have to meet.
You might be able to more easily get a cosigner in this situation as well since it is not necessarily indicative of how responsible you are with your payments.
Risks and Benefits of Cosigning
Cosigning can also affect a person’s credit score, which is the main reason many people think twice about it.
Presumably, the cosigner has a decent score since that’s what they need in order to get the loan. But if cosignee misses payments, those marks will show up on the cosigner’s report as well.
This loan could also weigh against a cosigner’s credit utilization ratio, which is important to keep low. In the case of a cosigned credit card, this might not be the case if the cardholder uses it responsibly. But if they max it out, it shows up as a maxed-out credit line for the cosigner too.
All that is to say that it may be harder than you think to find someone to cosign for you, even if you do find a credit card that allows it. And it’s important that you don’t take it lightly when you do. You’re putting both your own credit and that of your cosigner at risk.
But on the flip side of that, if you need a boost getting started or are at a point where you know you can use credit responsibly, this can be the best option. Just make sure you both know what you’re getting into.
To break down these risks and benefits more simply:
- Cosigners risk their own credit. Any activity on the account shows up on their credit reports. Plus, it could decrease their credit utilization score.
- Cosigners are legally responsible for the debt. If the borrower defaults on the loan, the cosigner will be required to pay the full amount or receive the same collection activity.
- Borrowers risk ruining relationships. If a borrower does do something to negatively affect the cosigner’s credit, it could put a strain on the relationship.
- You’ll have to close the account to remove a cosigner. Every card we’ve found requires you to completely close the account in order to remove a cosigner. And since your end goal is to have a good score of your own, you will want to do that at some point.
- Easier qualification. Obviously, the main reason to use a cosigner is to qualify for a loan more easily. And the cosigner can feel good about making this happen.
- Lower interest rates. For the borrower, a cosigner with better credit can help him get much lower interest rates and better terms for his loan.
- Higher credit utilization. While this can be a negative mark if the borrower maxes out his card, it can also be positive if he uses it very little. This way, it can open up another line of credit on your profile and boost your score a few points.
Better Alternatives to Cosigning
As you can probably tell, getting a cosigner is usually a last-resort tactic for securing credit. It can be hard to find someone willing to put so much on the line for you. But luckily for you, there are plenty of better options.
Secured Credit Cards
A secured credit card is a good way to build or repair your own credit fairly quickly. The way it works is by securing your credit line with a deposit that the bank will hold for a specified period of time. They usually have minimum and maximum deposit limits that range from $250 to $1,500, and your credit limit is equal to that amount.
Each credit card company handles cardholders’ deposits a little differently. For example, Discover’s policy states that they will review your account monthly to determine your eligibility for an unsecured card. But most other companies require you to use their card for six months to a year before receiving that consideration. I’ve also seen one or two that never return your deposit until you pay your account in full and close it out.
Credit Builder Loans
Credit builder loans are another great way to build your credit. These loans are designed specifically for that reason and are most often offered at private banking institutions, such as credit unions or local banks.
The way it works is that a bank “loans” you the money but you actually don’t get it upfront. Instead, they put it in a savings account for you and you make payments to the bank for the amount they provided. You can’t actually access the chunk of change that’s in this account until you’ve made all the payments. It’s sort of like a layaway plan for the money.
There are several benefits of credit builder loans that might make perfect sense for your situation. For one thing, because the money is secured, it’s an easier loan to qualify for. Of course, this is only beneficial if you’re using it to build your credit, not if you actually need a loan for a purchase.
For another thing, the interest rates on these loans are usually lower than secured credit cards or any bad credit loans you might qualify for with a low score.
And thirdly, it’s a good option for people who have trouble saving money. Since you can’t touch the loan until it’s paid for, you have no choice but to continue saving it. And you could end up with a good-sized amount of money in the end that will be useful for a down payment on a car, a home, or another big purchase you’ve been waiting to make.
Becoming an authorized user on someone else’s account is probably the lowest risk tactic available for building your credit. Rather than convincing someone to cosign your loan, you can ask them to put you on their account as an authorized user. When they do that, their credit activity for their card is reported on your credit report just like it is on theirs.
Of course, you’ll obviously need to make sure the person you ask is responsible with their credit.
It’s also sometimes much easier to convince someone to do this than to cosign a loan for you because they don’t have to actually give you access to their card. In other words, they can add you as an authorized user without giving you their account numbers or information.
And most companies don’t allow authorized users to make changes to the cardholders’ accounts or access the same benefits, so it can be a relatively safe exchange.
If they do trust you enough to go ahead and let you carry a card, however, this can benefit them in some ways as well. Mainly, if they have a points card, you can help them rack up points. Not to mention, you could offer to help with the payments.
Asking someone to cosign for a credit card probably isn’t necessary since you have other much better options. And the companies that allow it are few and far between.
But if you do decide this is the best option for you, make sure you treat it responsibly. And as soon as your credit score is in the range you want it, try applying for a card on your own.