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Beware cosigning for others' credit cards

January 13, 2011 12:00:00 AM PST
Recent reforms to the banking industry have made it much tougher for students to get their own credit cards. But some teens are finding ways to get around this new law and it could be putting them at risk. What these students are doing to get those credit cards could ruin their credit and their friends' credit.

And once they graduate, having poor credit could really haunt them when they try to buy a home, a car or even when they try to get a job.

Molly Heilny is frustrated. The 20-year-old college sophomore can't get a credit card.

"I don't really have anyone that could cosign, so I could apply for a million credit cards and they're never going to give me one," said Heilny.

That's because when the federal Credit CARD Act went into effect it restricted anyone under 21 from getting a credit card unless they have someone over 21 cosign for it. Or they can prove they have a source of income. But some college students, experts say, are finding loopholes and creating ways to get around this. How?

"One of the ways that we've seen college kids do this, and it's actually quite clever, is they're actually finding classmates who are in fact over 21 and do qualify under the CARD Act rules to cosign for them," said John Ulzheimer, president of conusmer education, Credit.com.

One Web advice column even fielded a question from an "over 21-year-old" student asking if he should start charging students to cosign, thinking he'd make money doing it. Experts say paying to "piggyback" off someone's good credit is common, and it could really start to take off on college campuses.

"It's very possible that a whole industry could spring around consumers willing to sell or rent out their good credit to younger students who are having trouble establishing credit for the first time," said author Gerri Detweiler.

Another option? Business credit cards: there's no age restriction, anyone can apply, and you don't even need to prove you have a business.

"It is a gaping loophole in the CARD Act and the credit-card-issuing community is definitely taking advantage of it," said Ulzheimer.

But here are the problems: First off, business credit cards do not have the same protection as consumer credit cards. They are still subject to rate increases and floating due dates, the things the Credit CARD Act was designed to protect against.

And if you are considering cosigning for someone under 21, you need to remember there's no such thing as "safe" cosigning.

"When you cosign you are taking on legal liability for that debt, so if the person you cosign for can't or doesn't pay, guess what? You're going to be the one getting the calls from the debt collectors," said Detweiler.

It's important to remember when you cosign for anyone, that debt appears on your credit report for years to come, which can also impact your credit score if you ever apply for a mortgage or loan.