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[Wednesday, February 06, 2008]
What Are Your Rights and Liabilities When Co-signing for a Credit Card?
Fair Isaac, or FICO, has excluded authorized user accounts from their system of determining credit scores of primary credit cardholders. Instead, if you want to help someone establish or improve his/her credit rating and raise credit score, you will have to assume risk and add that person as a co-signer to your account. Why a risk? Because a co-signer has the right to use the credit line of the prime borrower, and at the same time is responsible for paying on the card. A missed payment hurts the score of the account owner.
In case of an authorizes user, all the responsibility is laid upon the prime borrower, who, consequently makes all the credit card payments, even if the expenses were made by the authorized user. No risk. All depends on your own discipline.
Today authorized users are not allowed, at least legally, and due to this change there have appeared questions as to the right behavior when co-signing someone for a credit card.
What power do you have over the co-signer? Can you maintain total control over the account and cancel it when needed? How soon will co-signing for a credit card help to raise the credit score?
In his letter to us, Alan Bergman asked similar questions and his story is as follows.
"My son Jimmy graduated from college with a fat credit card debt and though he's repaid it by now, his short yet credit history seems irreversibly spoiled. My personal credit score is positively high and I can generally qualify for what is referred to as "best credit cards ". So, I wouldn't mind using it to help my son get back on good credit. What I am thinking is to co-sing for a MasterCard in his name. But I want to closely watch him paying and have the power to cancel the card if he is defaulting. I also want to be notified somehow if Jimmy is late or something so as to avoid damaging my own score. Is it possible?"
Dear Alan,
Unfortunately, authorized users do not work today and you cannot help you son improve his bad credit history without risk to your own credit reputation. But you seem to know what co-signing for a credit card might cost you and you are utterly right to make such precautions.
However, you cannot legally fulfill some of your plans. For instance, you cannot have the credit company reporting late or missed payments on the part of your son. Usually, you are notified only after two payments missed, but that's enough to spoil things for you, let's face it. Then you cannot legally forbid Jimmy to make purchases he wants with the card. If he is able to pay, let him dispose of the account.
As to your other concerns, yes - you have legal right to cancel the card if things start going wrong. If you want to be informed on all the credit card transactions, statements and payments, set up the account online and you will always know where your son stands on.
You yourself choose the credit limit on the credit card and, allowing Jimmy to take responsibility, you hasten his credit improvement. All his payment records will be reported to all the major credit bureaus, forming a positive picture of his personal credit file.
Thus, your good credit earned through years will help your son gain a strong credit history and build a successful financial future.
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