Don't Co-sign! Make them Authorized Users instead

If you have done some things right and your financial house appears in order, a relative will ask you to co-sign a loan for them. Co-signing is only one of the ways available to help your credit-challenged relative. There are other ways that may deliver the desired results with less exposure and risk for you, especially with a little bit of planning.
Let’s look at your options and so you can make an informed choice about co-signing. When you co-sign you become a JOINT account holder. Each and every member on a joint account agrees to be individually responsible for 100% scheduled repayment of the outstanding debt regardless of the other members' payments or promises. When you co-sign if a payment is missed, your credit score will receive the full negative impact of the late payment.
This could be catastrophic if it compounds an already diminished credit score. No doubt, the new co-signed loan’s high-balance-to-limit ratio, and short history have already reduced your credit scores several points. That happened just by signing up; missed payments or not. So be prepared to take a credit score hit when you co-sign.
How long will it take your score to recover from these factors assuming a pristine repayment history? The answer depends on several factors. Credit scoring is an art and a science. Whatever calculations the algorithm conjures to determine our scores, the following is empirically factual for every credit score. They go down a helluva lot faster than they rebound. It is never down one month; up the next for any credit scoring model in existence regardless of the previous history.
If your relative needs you to co-sign to “build credit” then you can also do that by making them an authorized user on your credit cards. If you do, you will almost immediately transfer your credit history to theirs. And without any risk or exposure to new debt for either of you. Now, this strategy will not work for impulse or emergency “gotta have a co-signer or else “ situations. But adding someone as an authorized user can be the gift that keeps on gifting. As with most successful credit score improvement strategies, the more time you give this one, the better.
But the gift isn’t for everyone. Here are six questions whose answers will help you decide if your situation is a fit for the authorized user strategy:

1. Can the authorized user be added to “good news only” tradeline?
   1. Ratio ** less than 30% balance to limit
   2. Payment history ** On time every time
   3. Length ** Longer the better
2. Who can be your authorized user?
   1. Check the CC policies
   2. No age limit
   3. Anyone you decide
   4. No credit check
3. What are the rights and responsibilities of an authorized user?
   1. Not responsible for debt or payments
   2. Can charge up  to account limit without further approval
   3. Adhere to relevant portions of the credit card agreement
4. What are account holder’s duties, rights, responsibilities, and exposure?
   1. Maintain an unblemished tradeline for both ratios and payments
   2. Control access to credit
   3. Monitor account
   4. Remove authorized user before negative impact event reports
5. What are the authorized user’s qualifications and duties?
   1. Fully trustworthy with access to your credit card limit
   2. Appreciates the privilege
   3. Maintains your security and trust
   4. Not curious
   5. Gets off the account ASAP!!
6. How to add an authorized user safely?
   1. Don’t give them a card
   2. Don’t give them the account number
   3. Notify them when they have been added or removed
      

Pro-actively adding authorized user to your credit card accounts can be an effective MoneySmartLife strategy and give a good credit legacy to your offspring. It is part of monitoring/mentoring your children’s credit. Having good long-term authorized user tradelines on the credit reports means they are more likely to be approved without the need for a co-signer when they apply for credit.
Good credit grandparents can leave good credit legacies safely to multiple generations since there are rarely limits on the number of authorized users. Just make sure that each of the six questions has the right answer.

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