How Does Co-signing a Loan Affect Your Credit?
People co-sign loans for one fundamental reason: the main credit applicant does not have a sufficient credit score/history to secure a loan on his or her own. When you co-sign a loan for someone – be it an adult child, sibling or business partner – you are essentially allowing that person to “borrow” your good credit standing.
Perhaps your co-borrower is reliable and meticulous, never misses a payment and is never late. This is a best-case scenario, but that co-signed loan will still show up on your credit report as a debt you owe. If you apply for credit on your own, potential lenders will see and consider that debt when deciding whether to extend you more credit. The debt will also affect your ratio of credit available to credit used, which is a key factor credit bureaus consider when calculating your credit score.
Then, there is the worst-case scenario to consider: your co-borrower defaults on the loan. If that happens, you’re faced with two choices. You can either repay the loan yourself – even though you won’t own the house or car purchased with the loan – or refuse to pay and take the hit to your own credit score that inevitably comes with a loan default.
While it might be common for spouses, family and friends to co-sign for loans, financial experts advise to combine accounts with caution. Be sure you have open communication the person you share account responsibility with and have a clear understanding of how the account will be managed.
More than one friendship has ended and family members may become estranged over financial problems. Only you can decide whether the benefits of co-signing outweigh the risks. But before you make that decision, review your own credit report and score carefully, and understand the impact co-signing will have on your credit.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.