Can Cosigning Hurt Your Credit?

/ BY / Credit Score

A good credit score can open a lot of doors - it means lower interest rates on loans and lines of credit, but it also means you’re in a position where you can co-sign for others. While it may seem like a nice thing to do, be sure you know what you’re getting into before you sign.

Co-signing basics

When a person is denied a loan or line of credit due to an unestablished credit history or a poor score, many lenders will grant the loan with a co-signer. The co-signer has a good credit history and promises to cover the payments if the borrower defaults.

Co-signing and your credit

When you act as a co-signer for someone, the new account is reported on both the borrower and the co-signer’s credit report.

If you co-sign for someone and they can no longer afford their payments, the creditors will begin to contact you for payment of the loan as well. In this case, you have two options: make the payments for them to protect your own credit score, or don’t cover the payments. If you choose not to make the payments, the late payments will be reported to the credit reporting agencies. The negative marks will stay on your report for up to seven years, making it difficult to get credit at the best rates.

Depending on how long the account goes unpaid, the effect this has on your credit can be devastating.  

Before you cosign

If you're considering cosigning a loan for someone, ask yourself these questions:

  • Do I trust the person I’m co-signing for? This is the first question you should ask yourself. If you’re co-signing for your child who is responsible, has a job, but hasn’t established a credit history yet, you may feel comfortable as a co-signer. If, on the other hand, the person asking you to co-sign is a friend who has a history of irresponsible spending, you may not be able to trust them to make their payments on time.
  • Could I afford the payments if the borrower defaults? The amount you’re co-signing for should also play a role in your decision. If the borrower can’t afford the payment, it will be easier to make payments on a credit card with a $1,000 limit, for example, than on a $200,000 mortgage.
  • Am I planning on applying for credit soon? If you’re planning on applying for a mortgage, car loan, or credit cards and credit score is a deciding factor, you may want to hold off on cosigning for a loan. It will lower your available credit limit and could affect your ability to get a loan for yourself.
  • Will it negatively affect our relationship? Money problems can drive a wedge in even the best relationships, so it’s important to consider the effect cosigning could have on your relationship with the person as well.

Co-signing for a loan is a big commitment that can have a huge impact not only on your credit score, but on your finances as well. Carefully consider the pros and cons before you sign on the dotted line.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.