It is generous of you to lend your good-credit status to a family member or friend by cosigning on a credit card. Be aware, however, that when you cosign on any loan or credit arrangement, you are entering into a binding legal agreement with a creditor, and your signature means you agree to be held responsible for the entire debt. Think first before you agree to cosign for a credit card and then think again. Consider demanding some assurances up front to decide whether the risk is worthwhile.
Social Security Numbers
Both of you will need each other's Social Security numbers. The borrower will need yours to apply for the credit card, so the creditor can check your credit history and score. If you don't already know the borrower's social security number, get it. Having the number will help you in case of default, should you have to go to small claims court, file a lien or otherwise take legal action against the borrower.
Evidence of Income
Demand evidence that the borrower has the ability to pay for the credit card. Not only should you demand recent pay stubs, but any other items that help you assess his level of responsibility. For example, ask for all three of his credit reports, leasing history, car payment history and proof of any other income outside of his job.
Agreements and Security
You should also have several agreements in place before you cosign. First, you want to make an agreement with the borrower with terms that give you some security. For example, you can demand an interest in any property purchased with the credit card and online access to the account. Consider a clause stating that you will seek legal remedies in case you are stuck with the bill. Note, any side agreement with the borrower will not release you from any obligation to pay for the credit card if the primary borrower defaults, but it makes a record of what you will do in case that happens. Consider also asking the borrower to give you something as security for your cosigning. The Federal Trade Commission also suggests that you ask the lender to agree in writing to tell you if the borrower misses a payment. This gives you some notice and some time to figure out what to do. In addition, the FTC recommends you get copies of the loan contract and the Truth-in-Lending Disclosure statement from the borrower.
Worst-Case Scenario and Rights
The FTC recommends that you also ask the credit card company to give you a worst-case scenario of how much money you could owe if the borrower defaults. A lender isn't required to do this but may if asked. You should also try to negotiate the specifics of your obligation in case of default. For example, you might be able to limit what you owe to the principal, rather than all the late charges, interest and fees that rack up in default. This agreement could be spelled out in a statement in the contract that reads to the effect of "The cosigner will be responsible only for the principal balance on this loan at the time of default." (FTC)Credit reporting agency Experian advises you to also check your state laws for any additional rights you may have as a cosigner.
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