When you co-sign for a loan with someone, you apply for the loan with them, promising to repay if the primary borrower stops making payments. For the strategy to work, you should have better credit scores and a higher income than the borrower, which helps the borrower get approved. But co-signing can affect your credit, especially if you co-sign for someone who doesn’t make loan payments on time.
Co-signing a loan can help or hurt your credit scores. Late or missed payments on a loan you co-signed for typically damage your credit.
Impact on Your Credit Report
Loans usually appear in your credit reports when you’re a co-signer. After all, you’re 100% responsible for repaying the loan—equally as responsible as the person you’re helping—even if you don’t ever plan to make payments.
Credit reports help lenders understand how much you might potentially owe to all other lenders, and there’s a very real possibility that you’ll have to pay off any loans for which you co-sign. The borrower might have good intentions, but things happen. For example, events like job losses, natural disasters, and auto accidents could affect the borrower’s ability to repay.
Co-signing can make it harder for you to borrow for your own needs. Credit scores evaluate several criteria, and co-signing will most likely affect your credit scores. For example, the Amounts Owed category in your FICO credit score, which makes up 30% of your score, evaluates:
- How much total debt you have
- How much of your available credit you’re currently using—the lower, the better, but the borrower has control of that
- The number of accounts with balances (too many credit card loans can look bad)
- How much you still owe on any installment loans (brand new loans will still have high balances)
Co-signing affects all of those factors and not necessarily in a good way. If you have solid credit (for example, a FICO score above 800, and you’ve been problem-free for years), the effect might be minimal. But if you have fair credit or if you’ve never established credit accounts at all, be careful. That said, co-signing for a loan can potentially help you build up your credit.
You might still be able to borrow after you co-sign, but a co-signed loan typically reduces your borrowing ability.
Lenders evaluate how likely you are to repay based on several factors, in addition to your credit score. For example, they look at how much of your monthly income is available to pay off new loans, often with a debt-to-income ratio. A loan you’ve co-signed on will reduce the lender’s view of how much you can afford for loan repayments you have under your name.
Benefits of Co-Signing
In some cases, co-signing for a loan can help you improve your credit. That’s particularly true if you’ve never used credit in the past, or you have several negative items in your credit history.
Your credit improves when you make loan payments on time. Being associated with—and responsible for—a loan that is in good standing should generally be helpful. However, if there are any late payments, or if you and the other borrower(s) default on the loan, you’ll pay the price on your credit as if you were solely responsible for the loan.
Another way that co-signing helps you build credit is in the Credit Mix category of your FICO credit score. While that category only makes up 10% of your score, every little bit helps. The Credit Mix category looks at which types or a mix of loans with which you have experience. If you only borrow with credit cards or co-sign for credit card accounts, you won’t see much improvement. But if you’re helping with installment loans like auto loans and home loans, you might enhance the mixture of accounts in your credit reports, which should be helpful.
Monitor Your Accounts
You’re just helping a borrower, and then you should mind your own business, right?
On the contrary. Whether your goal is to protect your credit scores or build your credit, all payments must get made on time. If you’re a co-signer, this is very much your business, and it’s your problem if the borrower misses payments.
Late payments will damage good credit and significantly delay any success you’re having with building credit.
Keep tabs on the borrower—at least enough to verify that the loan stays current. Get duplicate copies of statements and log in periodically to review the loan’s progress. If you see anything you don’t understand, contact the borrower and ask what’s going on. The sooner you address problems, the better off you’ll be.
It’s also wise to see how the account appears on your credit reports (and if any late payments appear). You can check your credit score and report for free with each credit bureau once per year.
Frequently Asked Questions (FAQs)
Does a co-signer have to have good credit?
The purpose of a co-signer from a lender's perspective is to improve the chances of the loan being paid off. If you're adding a co-signer because your credit isn't great, your co-signer will need to have good credit. In general, the co-signer will need a credit score of 670 or higher, and the higher, the better. The co-signer will also need enough income to pay back the loan and a reasonable debt-to-income (DTI) ratio.
Whose credit score is used when co-signing?
Both credit scores are used when you co-sign an application. How much weight lenders give each score depends on the type of loan being applied for and the lender's policies.