Co-signing on a secured card can be a helpful way to build credit, but it’s important to understand the legal implications before making this decision. In this article, we’ll explore the legalities of co-signing on a secured card and what you need to know before taking on this responsibility.
What is a Secured Card?
Before we dive into the legalities of co-signing on a secured card, let’s first define what a secured card is.
A cash deposit-backed card, also known as a secured card, is a credit card variant that involves a deposit as a form of security. In situations where the cardholder fails to fulfill payment obligations, this collateral deposit acts as a safeguard for the credit card issuer. Generally, the credit limit of a secured card matches the cash deposit.
Secured cards are often used by individuals with no credit history or a poor credit score to build or rebuild their credit. They are also commonly used by parents to help their children establish credit.
What Does it Mean to Co-Sign on a Secured Card?
Co-signing on a secured card means that you are agreeing to take on the responsibility of the credit card along with the primary cardholder. This means that if the primary cardholder is unable to make payments, you will be held legally responsible for the debt.
Co-signing on a secured card is different from being an authorized user. As an authorized user, you have access to use the credit card, but you are not legally responsible for the debt. As a co-signer, you are equally responsible for the debt and any missed payments will affect your credit score.
Legal Implications of Co-Signing on a Secured Card
Joint Liability for Debt
As mentioned, co-signing on a secured card means that you are equally responsible for the debt. This means that if the primary cardholder is unable to make payments, the credit card company can come after you for the debt. They can also report any missed payments to the credit bureaus, which will negatively impact your credit score.
Potential Legal Action
If the primary cardholder is unable to make payments and the credit card debt goes into default, the credit card company may take legal action against both the primary cardholder and the co-signer. This can result in wage garnishment, property liens, or even bankruptcy.
Impact on Credit Score
As a co-signer, any missed payments or default on the credit card will also affect your credit score. This can make it difficult for you to obtain credit in the future, as lenders will see that you have a history of not paying your debts.
Difficulty Removing Yourself as a Co-Signer
Removing yourself as a co-signer on a secured card can be difficult. The primary cardholder will need to demonstrate that they are able to make payments on their own and have a good credit history. This can take time and may not be possible if the primary cardholder is struggling with their finances.
Do you know how co-signing affect on marriage? Read legal considerations on secured credit cards and marriage.
How to Protect Yourself as a Co-Signer
If you are considering co-signing on a secured card, it’s important to take steps to protect yourself and your credit. Here are some tips to keep in mind:
Have a Written Agreement
Before co-signing on a secured card, it’s important to have a written agreement with the primary cardholder. This agreement should outline the terms of the co-signing arrangement, including who is responsible for making payments and how any missed payments will be handled.
Monitor the Account
As a co-signer, it’s important to monitor the account regularly to ensure that payments are being made on time. You can do this by setting up alerts or regularly checking the account online. If you notice any missed payments, it’s important to address them immediately with the primary cardholder.
Set Limits on the Credit Limit
When co-signing on a secured card, you can request that the credit limit be set at a certain amount. This can help limit your liability in case the primary cardholder overspends and is unable to make payments.
Have an Exit Plan
Before co-signing on a secured card, it’s important to have an exit plan in case things don’t go as planned. This could include having the primary cardholder refinance the debt in their name only or having them pay off the balance and close the account.
Alternatives to Co-Signing on a Secured Card
If you are hesitant to co-sign on a secured card, there are alternatives that can help the primary cardholder build credit without putting you at risk. These include:
Authorized User
As mentioned, being an authorized user on a credit card means that you have access to use the card, but you are not legally responsible for the debt. This can be a good option for parents who want to help their children build credit without taking on any risk.
Joint Account Holder
Another option is to become a joint account holder on a credit card. This means that you and the primary cardholder are both responsible for the debt, but you have equal control over the account. This can be a good option for couples who want to share a credit card and build credit together.
Secured Card in Your Name
If you are looking to build credit, you can also consider getting a secured card in your own name. This way, you are solely responsible for the debt and can build your credit without putting anyone else at risk.
Conclusion
Co-signing on a secured card can be a helpful way to build credit, but it’s important to understand the legal implications before making this decision. As a co-signer, you are equally responsible for the debt and any missed payments can negatively impact your credit score. It’s important to have a written agreement, monitor the account, and have an exit plan in case things don’t go as planned. If you are hesitant to co-sign, there are alternatives such as being an authorized user or getting a secured card in your own name. By understanding the legalities of co-signing on a secured card, you can make an informed decision that is best for your financial situation.
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