A guarantor on a credit card helps a friend or family member be approved for a credit card by guaranteeing they’ll pay any unpaid balance. It’s most commonly used for larger lines of credit like home loans, but can apply to some credit cards. These cards do not exist in Australia, this piece exists to show how they work in other countries.
A guarantor is basically the bank’s way of lowering their own risk for approving someone with a poor credit history or low income. There are other ways to help someone get a credit card, or become responsible for another person’s debt.
Agreeing to be a guarantor on a credit card.
These guaranteed credit cards are most commonly issued to members of the same family, often a parent and child (particularly if the child is going to university for the first time), or a grown-up child may guarantee their parent’s credit card in order to give them some independence.
There are some dangers with this arrangement. The first is that the relationship’s trust can be weakened unless there are some ongoing discussions through the life of the card. Another potential danger is that it can negatively affect the guarantor’s credit rating if there are late payments, as the credit card is registered in both names.
Applying for a joint credit card
Joint credit cards are cards were there are two parties who are responsible for paying off a credit card. This is a relatively rare operation as even when there are joint transaction accounts or mortgages, many consumers who are married keep separate credit cards.
The way in which a joint credit card works is that the credit card is issued to both credit card holders and they are both liable for any debts that are built up on the card. The usual way in which the cards are made liable is under “joint and several liability”. Joint and several liability means that both the card holders are liable for the whole debt, so if one does not pay then the other holder is due to pay the whole debt, no matter which party built the debt up. Many people think that under a joint credit card then the credit card holders are only due for the debt that they incurred, or half of the total debt. This is not actually the case and they are due for the whole of the debt.
Many couples simply add their spouses to their credit card as an additional cardholder out of convenience, as do many parents with their teenage children. While this grants them access to the primary account holder’s funds, it does not help the authorised user to build their own credit. The only way for two credit card users to concurrently build separate credit is to apply for a joint account credit card. As the primary card holder you are accountable for the credit card debt.
There are some features on guaranteed credit cards that are different from standard cards. For a start, the statements are sent not only to the main card holder but also to the guarantor, providing someone else the opportunity to track the main card holder’s spending. Although this does have some implications for the main card holder’s independence, it’s recommended the guarantor keep an eye on the balance, not to interfere with the other person’s finances but to ensure no shocks are received.
Another unusual feature is that although the guaranteed card can be used without restraints, the credit limit must be agreed by both the main card holder and the guarantor. While this may not be a problem at the beginning, it can lead to misunderstanding at a later stage if the main card holder wishes to increase the credit limit but doesn’t first discuss this with the guarantor.
Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.
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