Co-signing loans and credit applications: Will this affect my credit score?
The act of co-signing a credit application won't have any immediate affect on your credit score. However, once you co-sign on a loan or credit card, your rate will change based on the other person's payment habits. If he or she pays loan bills on time and in full, you have nothing to worry about. But if the borrower falls behind on payments, credit agencies will factor this delinquency into your traditional and alternative credit score.
"Co-signing on a mortgage does not entitle you to the property if the borrower defaults."
How co-signing works
You can take out personal loans, student loans, mortgages, credit cards and other types of loans with co-signers. If you agree to be a co-signer on an auto loan, for example, you are legally bound to repay the loan if the borrower does not, according to the Consumer Financial Protection Bureau.
Keep in mind, if you co-sign an auto loan, mortgage or credit card, that doesn't mean you own those products if the borrower falls behind on payments. For example, if you co-sign on a mortgage and the borrower defaults, you do not automatically own the property. You'll only gain the benefits and responsibilities of owning the home if you're a co-borrower, as noted by SF GATE.
The CFPB noted once you co-sign a loan or credit application, the lender may send you a document clarifying several points:
- You are responsible to pay the debt if the borrower is unable to do so.
- You're obligated to pay collection costs and late fees.
- The lender or creditor has permission to collect from you before contacting the borrower.
Each co-sign agreement is different. Make sure you understand all the specifics before entering the relationship.
What if the borrower makes payments?
When you co-sign a loan, the debt attached to the loan or credit card will affect your credit score. This is because traditional credit ratings factor in any open lines of credit and loans you may have in your name, in addition to the bill payment histories associated with those debts.
Basically, if the borrower makes all payments on time and in full, your credit rating will benefit as a result, even though you're not actually the one paying the monthly bills. In this case, co-signing on a loan and credit card application can benefit you if the borrower is financially responsible.
Deciding whether to co-sign
Before co-signing a loan or credit agreement, you need to look at the situation objectively. Chances are you're helping a family member obtain a home, a car or credit card. Maybe he's really young and has found it difficult to acquire credit because he has no credit history, a situation that would also warrant alternative credit solutions.
Whatever the scenario, take a hard look at the borrower's dependability. Does he spend money irresponsibly? Is he good about saving up cash and keeping his expenses under control? Ask these and other questions prior to becoming a co-signer - doing so may save your credit score.