Risks to keep in mind when co-signing a new credit card application for a friend or family member

Dubai: Most laws prohibit banks from issuing credit cards to anyone under 21 unless the person has a co-signer or enough income to pay off the card. But one of the easiest ways to help a young adult or any family member build credit history is by adding him or her as an authorised user or be a co-signer on one of your credit cards.

This can establish a record for that person with the credit reporting agencies if he or she doesn’t already have one, plus increase important credit score factors like the average age of accounts and overall credit utilisation or the amount of available credit you are using.

However, being an authorised user isn’t the same as being a co-signer on the credit card account. Here’s what you need to know about the differences.

If you’re looking to build credit, becoming an authorised user on someone else’s credit card is a smart option. It can be relatively low-risk and allows you to build or boost your credit score. But before you sign up there are some things you should know.

When you’re added as an authorised user to someone else’s credit card account, you can piggyback off their credit. With that in mind, you should really only become an authorised user on an account owned by someone with good (670-799) or excellent credit (800-850).

A co-signer, on the other hand, is a shared responsibility. Just like co-signing for a student loan, the account would be opened in the name of your child or family member, but you are both equally responsible for any amounts charged to the card.

While the bank will generally only come to you for payment if the primary cardholder doesn’t pay, it legally has the right to demand payment from you without asking the primary cardholder first.

1. In some ways, being a co-signer is a natural next step to help a child or family member build credit by opening an account that person is responsible for, rather than simply riding along on your account.

2. On the other hand, it’s a bigger risk on your part — while it’s fairly easy to place limits on an authorised user card or revoke access entirely, it’s much harder to place restrictions on an account that partially belongs to someone else.

3. Being a co-signer is also a long-term commitment: by default, you’ll be responsible for the card and have it show up on your credit report for as long as the account is open.

1. While some banks will remove a co-signer after certain conditions have been met (for example, once the primary account holder has established a good payment history and sufficient income to support the card), your ability to remove yourself from the account without shutting it down depends on the bank’s policies and discretion.

2. Co-signing for a card can also interfere with your own credit card applications when banks have restrictions that make approval for new cards conditional on how many accounts you’ve opened recently.

3. While it may be possible to get around this requirement when you are ineligible for authorised user accounts, convincing a representative that a co-signed card shouldn’t count against you is likely to be more difficult. 

If you’re trying to help someone boost their credit, being a co-signer for a credit card application can make a big difference. However, it’s also a significant risk, since you’re then responsible for a credit card that you don’t completely control.

In most cases, it’s best to start by adding the other person as an authorised user on some of your cards — the person will get a credit score boost while also enjoying some of the premium benefits your cards offer, while you maintain full control of the accounts you’re responsible for.

After he or she has proved the ability to handle your cards responsibly, you can consider being a co-signer if the person still can’t get a card without an assist.

Adding an authorised user won't hurt your credit – unless they spend too much and leave you in a lot of debt, or they exceed your credit limit. If you're considering adding an authorised user, we've got the information you need to make the right decision.