If your credit score is low or your income isn't consistent, lenders may reject your application for a line of credit. Cosigners with strong credit scores and high income can help applicants secure lines of credit at rates they normally would not qualify for. It can be a sweet deal for you but places a large financial liability on your cosigner.
Loan Versus a Line of Credit
When you take out a loan, the lender gives you a lump sum of cash you promise to repay in fixed installments. The loan can be secured by an asset -- for example, a house or a car -- or it can be unsecured and used for personal purposes.
Lines of credit act a little differently. If approved, a lender allows you to have access to a certain amount of cash if you need it. If you need to pull out funds against the credit line, you can. You'll be responsible for paying interest on what you pull out, and for repaying the principal. You only owe interest on what you actually borrow, though, so you won't owe any interest or principal if you never take advantage of the credit.
Credit cards are the most common unsecured credit line used by consumers. Some lenders also offer a personal line of credit that's unsecured and can be used for any purpose. Home equity lines of credit -- HELOCs for short -- are a popular line of credit option that's secured with the borrower's home.
Cosigners and Lines of Credit
Just as they do with traditional loans, many lenders allow cosigners on line-of-credit applications. Bankrate.com reports that Bank of America, Discover and Wells Fargo all allow cosigners on credit card applications. Lenders, like TD Bank and First Colonial Community Bank also consider cosigners for personal lines of credit and home equity lines of credit.
Not every lender will allow you a cosigner, though. For example, Capital One and Citi offer credit cards specifically designed for younger individuals with a short credit history but specifically disallow cosigners on the account. That means that the primary cardholder needs to generate sufficient income to qualify for the line of credit on his own.
It's also important to note that adding a cosigner to your line of credit doesn't automatically mean your application will be approved. Regions, a financial corporation, notes that adding a cosigner who's in a weak financial position isn't likely to help your application. Lenders are more likely to approve your application if the cosigner has a high, stable income, a good credit history and minimal debts.
CardHub notes that cosigners are helpful for students looking to establish a credit history and for individuals with low scores that have since learned to use credit responsibly.
Considerations When Using a Cosigner
Asking someone to cosign on your line of credit application is a big deal. By cosigning the line of credit, cosigners promise to cover any amount owed to the lender if you borrow money and don't pay it back. That means that your mistakes can ruin your cosigner's credit score and he can be sued if you default.
Cosigners take on a lot of risk, especially if the line of credit is large. CardHub points out that if things don't go as planned and you can't make payments, you could permanently damage the personal relationship with your friend or family member. If you want to use a cosigner, it's important to have an honest discussion about these issues before pulling the trigger.