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