We've all done it, or at least been asked to: let someone less responsible share our credit by co-signing a loan for them or adding them to our credit card account. Here's what to do when you need the party to end...
One of the common mistakes we sometimes make with credit is trying to help out friends and family members. Just last week, I did a news story called 3 Reasons You Shouldn’t Co-Sign That Loan, explaining the dangers of tying your credit to someone else’s. Here’s a recent email that will underline the point…
Hey Stace – can I call you “Stace”, since we’re obviously friends? – I have a question about transferring a credit card.
About 15 years ago, I got a Discover card for myself and my sister, with me being the primary. As the economy changed, she took a turn for the worse and has been relying more and more on said card. I’ve never used it, and she’s racked up considerable debt with it.
Initially she was late, but now she’s making on-time and consistent payments. Having a family of my own now, it’s affecting my refinancing as well as my credit. My debt-to-income ratio came into question recently. I was wondering if there’s a way to have me removed from the card and my sister take sole responsibility? Please let me know your thoughts – and thank you regardless.
As my dad used to say, Eddie, you can call me anything, except late for dinner!
The short answer is no, you won’t get Discover to drop you from this card. You’ll have to close that account, then let your sister open another one in her own name.
The logic’s not hard to follow: If you were Discover, you’d want as many responsible parties as possible on the account, especially the ones most likely to pay the bill. Remember, Discover granted you this credit after considering the credit history of both you and your sister – at least, that’s what I assume they did. It wouldn’t be good business, or fair, to let one off the hook after the account is opened.
How to close a credit card account
The way to cancel this credit card is to pay off the balance, then notify Discover in writing that you’d like the account closed. Paying the balance and cutting up the card isn’t enough. Here are the steps you need to take…
1. Stop using the card and pay the balance. Don’t call and cancel the card until you’re sure it’s completely paid off. If there’s still a balance, it’s possible Discover could raise the interest rate. Pay it off first.
2. Confirm there’s no account balance, and get the address to send your request. When you think it’s paid off, call the issuer by using the 800 number on the back of the card. Confirm the balance is zero and there are no charges or interest pending. If there are, don’t cancel yet – get the amount and send in a check. When you’re certain there’s a zero balance, call in again and tell them you’re canceling. At the same time, request an address to send the cancellation notice.
3. Send the cancellation letter. Here’s a good example from Creditcards.com, which also offers a handy checklist.
To: Credit card issuer
I wish to close my credit card account with your institution.
I have, on DATE, requested by phone that my credit card account be closed. DETAILS OF PRIOR CONVERSATION.
I wish that my credit report reflect that the account was “closed at the consumer’s request.” I also request written confirmation of the account’s closure.
The check number that I used to pay off the account is:
The check cleared my account on this date:
This letter is sent via certified mail, return receipt requested.
As the letter suggests, you should send it certified, return receipt requested. Providing the account has a zero balance, either cardholder can cancel it, although both signatures would be better than one.
This process should do the trick, but if you don’t receive a reply back within a couple of weeks, call and follow up. If you still don’t, repeat this process until you do.
What if sis won’t go along?
We hope in Eddie’s case that everyone’s on the same page. But there are situations where the person with the plastic isn’t keen on losing it. What then?
First step: Call the issuer and close the account to new purchases. Once the account is no longer able to accrue new charges, you’ll repeat the process above – pay it off and formally close it.
And if the person using the card refuses to pay the balance? Don’t waste time trying to explain to Discover that you didn’t benefit from the card, and thus shouldn’t be responsible. They won’t care, and you are responsible.
Paying someone else’s balance to rid yourself of a joint account won’t be fun, but then, that’s why people like me recommend never co-signing or otherwise tying your credit to others – unless, of course, you’re the one with crummy credit and theirs is stellar. In that case, do it early and often.
Could this actually lower Eddie’s credit score?
While Eddie obviously should get out from under this card, he should also keep in mind that this account, if paid on time, could be helping his credit score. That’s true for two reasons: length and utilization ratio.
Look at the factors that influence your credit score, and you’ll find 15 percent of your score comes from length of your credit history. This account is 15 years old. So all things being equal, it would be an account to keep.
In addition, closing any credit account also will negatively affect Eddie’s credit utilization ratio – that’s the credit he’s used vs. the credit he has available. So if he has a total of $10,000 available and is only using $2,000, his utilization ratio would be an attractive 20 percent. Closing this account will lower his available credit, which could raise his utilization ratio. So, all things being equal, he’d keep unused accounts open.
But all things aren’t equal. Eddie can’t remain responsible for his sister’s debts, and this account needs to go. Plus, there are things Eddie can do to maintain his credit score. He could replace the credit he now shows on this Discover card by seeking a higher credit limit on another card – that would keep his utilization ratio intact. And if he has other old credit accounts, the loss of one probably won’t hurt.