Chris Bridges, Founder and CEO of VITAL Card
Are you tired of being rejected on your credit applications? Are you worried about a low credit score hampering your chances of qualifying for a loan? Joint credit or co-borrowing can be an effective alternative to increase your chances of qualifying.
Why Is Joint Credit Important?
Joint credit applications can considerably reduce the likelihood of rejection.
According to the Federal Reserve Bank of New York, rejection rates among applicants increased by 2.0 percentage points from 15.7% in 2020 to 17.5% in 2021. Additionally, it was even worse for credit card applications as the average rejection rate for credit card applications during 2021 rose by 6.0 percentage points to 20.9%.
What Is Joint Credit?
Joint credit is the process of applying for any credit or financing option with another individual, often known as the co-borrower. Upon the application’s approval, both borrowers are liable for repaying the debt because the credit is legally issued in both of your names.
How Does Joint Credit Work?
While either applicant can pay the installments or the debt through whatever division they deem fit, each applicant is 100% responsible for the debt. This also implies both the applicants will have equal access and control over the credit amount. Additionally, joint borrowing will impact both applicants’ credit scores and reports.
Joint credit does not guarantee joint ownership. For example, a joint mortgage has nothing to do with whose name is on the deed. Even though two individuals are jointly responsible for repaying the mortgage, only one of them can choose to have the ownership. Of course, this depends on your requirements — two individuals can be co-borrowers and co-owners.
Co-signing a loan is different from co-borrowing. Like co-borrowing, the co-signer will be responsible for 100% of the debt. However, the critical difference is that the co-signer will have no access to the account or the debt.
A cosigner may or may not have access to the account information, depending on the terms of the agreement. If the original applicant defaults on their payment, this may adversely impact the cosigner’s credit history.
What Are the Different Types of Credit?
There are various types of credit for which you can make a joint application:
- Joint mortgage
- Joint credit card
- Joint personal loan
It is usually easier to qualify for a joint mortgage or car loan than for joint personal loans or joint credit card accounts.
When you buy a house with a joint mortgage, you share the responsibility for repaying the monthly amount (principal plus interest) with your co-applicant. While the two applicants do not have to be married, they must be above 18 and individually qualify for the loan. In addition, the lender will verify both the parties’ credit scores, income, current debt, and employment history.
Joint Credit Card
A joint credit card account allows you to share a line of credit. Both the cardholders are legally responsible for paying the debt. You are not just accountable for your debt but also the debt your co-applicant accrues by using the card. Typically, co-applicants for credit cards can include your spouse, close friend, or a family member.
Joint Personal Loan
Similarly, you can apply for a personal loan with another individual. Both applicants are 100% responsible for paying back the debt. The lender does not care which one of you pays and what fraction. The only consideration is that payments are made according to the agreement.
What Factors Should You Consider While Co-borrowing?
Consider the following factors before making a decision:
- Can you qualify for the loan alone?
- Can you use a co-signer?
- Your relationship with the co-borrower
While joint credit can have multiple benefits for both applicants, it warrants close consideration. As with any financial decision, whether you should apply for joint credit or not depends on your particular context.
For example, what type of credit are you applying for? What is the purpose of borrowing?
Can You Qualify for the Loan Alone?
You may already qualify for individual borrowing, perhaps because it’s a small credit requirement or a personal use credit card. In that case, there is hardly any upside to bringing in a co-borrower since individual applications can be less challenging logistically.
Can You Use a Co-signer?
A co-signer serves a similar purpose as a co-borrower. However, they do not have access to the account or your debt. Consider using a co-signer as it offers the lender higher security, which may improve the conditions of your loan.
Plus, the co-signer won’t have access to your debt, giving you more agency. Moreover, co-signers improve your chances of qualifying for credit even if you have a poor credit history.
Your Relationship With the Co-borrower
Since both borrowers have 100% responsibility for repaying the debt, it is essential to trust your co-borrower. Make sure your objectives align, and there is complete transparency over the repayment structure. For example, will you split the installments?
Will you alternate each month? These are important factors to agree on beforehand to avoid defaults and confusion later. Further, ensure that you both are aware of each other’s credit history, income, and spending patterns (especially in the case of a credit card).
If either applicant defaults on a payment, loses their job or goes bankrupt, the entire debt burden will fall on the other individual. Additionally, ensure that your relationship with the co-applicant is not volatile or subject to significant changes, at least during the duration of the credit repayment. This will make the process much easier to manage logistically.
Think of applying for joint credit as a business agreement — layout your terms and conditions in front of each other before making a decision. And most importantly, ensure that you trust your co-applicant.
What Are the Advantages of Joint Credit?
Joint credit can offer multiple benefits to both applicants if managed correctly. These are the benefits of joint credit:
- Improves chances of qualification and qualifying for a larger amount
- Get better terms for borrowing
- Positive impact on credit
Improves Chances of Qualification and Qualifying for a Larger Amount
In some cases, you might not be able to qualify for credit individually. This might be because of a low income or poor credit score. In these cases, bringing in the right co-applicant who can supplement your income and credit history can improve your chances of qualifying for a larger credit amount. For example, joint income makes couples eligible for a larger mortgage amount.
Even with a good credit history, income can be a huge limitation in your borrowing eligibility. You may already have current credit obligations, which can further hamper your chances of qualifying.
Adding a joint applicant who earns a separate income from you can make you eligible to apply for more credit.
Get Better Terms for Borrowing
Multiple borrowers offer higher security to the lender. If one fails or defaults, the other borrower is liable to pay back the entire amount. As a reward for lower risk, borrowers tend to offer better borrowing terms. For example, you might qualify for a lower interest rate or a more favorable duration.
Additionally, combined credit scores and joint income further strengthen your application, improving credit terms.
Positive Impact on Credit
When you co-borrow with someone, that activity is reflected on both your credit reports. Hence, well-managed joint credit can remarkably improve your credit score. Even if you do not make actual repayments or your co-borrower repays the debt entirely, it will improve your credit history.
What Are the Disadvantages of Joint Credit?
Consider the various points mentioned in the “factors to consider while co-borrowing” section to mitigate against the disadvantages of joint credit:
- Each co-applicant is liable for the full credit amount
- Negative impact on your credit report
Each Co-applicant Is Liable for the Full Credit Amount
Essentially, the lender views both parties as individual borrowers. Hence, you have to accept full responsibility for the debt. This is precisely why managing joint credit can get complicated if your relationship with the co-applicant changes, such as a separation or a divorce.
Negative Impact on Your Credit Report
Like any credit history, timely debt repayment is vital to maintaining a good score. However, if you and your co-applicant are unclear about who pays back what percentage of the debt or your relationship worsens, you might miss a payment or default on the credit amount. In this case, another person’s actions can worsen your credit score.
How To Build Your Credit Without A Joint Card
If you are looking for a credit alternative, but a joint credit card is not the ideal solution for you, a VITAL Card may work better. VITAL Card uses the VITAL Score method, a method that looks at banking data as well as credit history to approve cardholders.
This method works better than traditional credit worthiness methods because it looks into a lot of data that is sometimes left out of scoring and approval models.
With a VITAL Card, new cardholders can earn rewards for their responsible spending habits.
A VITAL cardholder also earns referral rewards for every member they refer that goes on to be approved. Referring a loved one to their own VITAL Card can help both approved cardholders earn cash rewards through their VITAL Card.
These rewards include cash back on all purchases, which can be used to put money back into their savings and overall financial wellness. A cardholder can also earn Credit Health Rewards, or cash rewards for an increase of credit score points. Learn more about VITAL Card and its reward benefits today.
VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.