Being a cosigner can improve your credit history through positive account management—but it also carries risks, such as financial liability for the debt and negative impacts on your credit score if the primary borrower misses payments.
Have you ever been asked to loan money to family? Cosigning can be a great way to help someone you care about get the financial help they need, but how does being a cosigner affect your credit? It’s important to understand the risks and responsibilities involved before you agree.
Before agreeing to cosign, consider factors like the borrower’s creditworthiness and your financial situation. Co-signers need a credit score of 670 or higher and a debt-to-income ratio of less than 50% to be approved for the loan. So, while cosigning can be a generous act, you should always weigh the potential consequences.
Cosigning is a legal agreement where you agree to be responsible for a loan or credit card account if the primary borrower fails to make payments. That means if the borrower defaults on the loan or credit card, the burden of repaying the debt falls on you.
Common scenarios where cosigning might be necessary include:
As a cosigner, you don’t receive any sort of ownership of whatever the loan is paying for, but you’re still obligated to pay the debt if the main owner can’t. This can have a significant impact on your credit score and financial health.
People often use the terms “cosigner” and “authorizer user,” but they have distinct differences. An authorized user is someone who the primary cardholder adds to a credit card account to use the credit card for purchases.
Here’s how they differ:
Cosigner:
Authorized user:
Does being a cosigner on a loan affect your credit? Cosigning can impact your credit score both positively or negatively. The outcome depends on how the primary borrower manages the account.
Here’s how cosigning can affect your credit score:
There are significant risks to cosigning that could negatively impact your credit. Here are some of the potential risks to be aware of:
While cosigning a loan carries risks, there are benefits to the person you’re cosigning for. As the cosigner, the main benefit is that it allows you to help a loved one achieve their financial goals.
Here are the main benefits of cosigning:
Cosigning a loan can be a big decision. Here are some tips to help you navigate the process and protect your credit.
Before cosigning, always set clear expectations with the primary borrower. Discuss your own financial situation and what you can afford to pay if necessary. Create a plan for payment management, including setting up automatic payments or reminders. Monitor the account regularly to ensure the borrower is making timely payments and properly managing the loan.
It’s also wise to discuss what to do if the primary borrower’s circumstances change and they want to remove you as the cosigner.
Consider alternative options that are less risky, like becoming an authorized user.
Becoming an authorized user of the primary borrower’s credit card can help them build credit without making you legally responsible for the debt. Explore other loan products, like secured loans or loans with lower qualification standards that may be available to the primary borrower without a cosigner.
If you choose to cosign, regularly monitor your credit reports for any signs of delinquency. Consider including protective clauses in the cosigning agreement, like a clause that limits your liability. If problems arise, take immediate action to protect your credit. This could include disputing errors on your credit report or exploring legal options like a lawsuit or bankruptcy.
Cosigning a loan can be a helpful way to support a loved one, but always weigh the risks and benefits carefully. By understanding your responsibilities, protecting your credit, and considering alternative options, you can make an informed decision about whether cosigning is right for you. Get your free credit score to find out where your credit currently stands before you decide.