Why You Shouldn't Co-Sign For Someone Else
A good credit score is pretty much a requirement to survive in today's society. Credit card issuers, lenders, utility companies, and apartment complexes all use credit history to grant an application. As someone with a good credit score, you may not worry about having applications turned down, but you could be asked to co-sign for a friend or relative who doesn't have such a great credit history.
Be careful. You might think you're just offering up your name to help your friend or relative get approved for a loan or credit card or apartment. However, you're putting more on the line than just your signature—your financial future could be at risk when you decide to co-sign for someone else.
They Need a Co-Signer Because They Can't Qualify Alone
There's a reason your loved one can't credit approval on his own — because their credit history (or lack thereof) or income indicates they're not responsible enough with credit to qualify alone. If the creditor requires a co-signer, they don't believe your loved one can or will pay on time. While you might consider co-signing because of your personal feelings, remember that facts and data are a better indicator of someone's likelihood to repay.
There's No Real Benefit to You
When you co-sign for a loan, the other borrower actually gets the benefit of the loan. They drive the car, live in the house, or use the credit card. You might get a boost to your credit score — assuming all the payments are made on time—but it's not worth the risk. If you can qualify as a co-signer, your credit score probably doesn't need much help.
Payments on the Co-Signed Account Will Affect You
As a co-signer, you're just as responsible for the debt as if it were yours alone, only you don't get the tangible benefit of what the debt is used for. If your loved one is late on payments, it's just like you were late. The late payment will be reported on your credit report like all your other accounts. It will impact your credit score and your ability to get approved for your own accounts.
You'll have to keep a close watch on payment history for anything you've co-signed. It may be months before the creditor notifies you that payments are delinquent, which is too late for you to intervene and save your credit history.
Your Level of Debt Rises, Too
The debt you co-signed will increase your debt-to-income ratio, affecting your ability to get approved for your own credit cards and loans. When creditors and lenders consider any application you may for a credit card or loan, they'll consider that co-signed loan just like all your other debts. If the debt makes your debt-to-income ratio too high, your loan applications may be denied.
Your Responsibility for Defaults or Bankruptcy
Creditors will hold you responsible for any debts you've cosigned, even when the other borrower doesn't pay. Creditors or third-party debt collectors may come after you for delinquent debts and that could include having a lawsuit filed against you.
If your loved one gets the debt discharged in bankruptcy, they'll be let off the hook for it. You, on the other hand, will be solely responsible for repaying the debt or forced to include it in your own bankruptcy.
It's not just your credit and finances that could end up damaged if the co-signed arrangement falls through. Your relationship could also be damaged if the other borrower misses payments and hurts your credit.
Getting off the Cosigned Loan Isn't as Easy as Getting on It
You can't get out of a co-signed loan simply because you regret it. Once a contract has been entered, there are only a limited number of ways to get your name off the loan and the borrower has to prove that they can handle credit on their own. If you decide to co-sign with someone, go into it knowing there's a possibility that your name will be attached to the loan until it's paid off.
Your loved one probably isn't asking for your signature with the intention of missing payments and hurting your credit; they may not even realize how co-signing will affect you. If you choose to co-sign, you should realize the risk that you're accepting and what could happen if you offer up your signature.
Experian. "How Does Cosigning Affect your Credit? Does it Show as a Debt?" Accessed June 30, 2020.
Sallie Mae. "Student Loan Cosigner Responsibilities." Accessed June 30, 2020.