Cosigning a loan, credit card, or rental agreement involves taking on a legal obligation to make payments if the primary borrower cannot or does not fulfill their responsibility. While cosigning can have both positive and negative impacts on your credit, it is crucial to proceed with caution and carefully consider the potential consequences.
Key Facts
- Positive Impact:
- Consistent, on-time payments on the cosigned account can help improve your credit.
- Paying off the cosigned loan as agreed shows future lenders that you can manage credit responsibly.
- Having a mix of different types of credit, such as installment loans and revolving credit, can help improve your credit scores.
- Negative Impact:
- If the primary borrower becomes delinquent on payments, it can negatively affect your credit. Late payments can be reported to the credit bureaus and appear on your credit reports, potentially lowering your credit scores.
- If the cosigned vehicle is repossessed, it can hurt your credit regardless of whether you used the vehicle.
- If the account is sent to collections, it can also hurt your credit, even if you were not aware that the primary borrower was behind on payments.
- Considerations before cosigning:
- Cosigning can strain your relationship with the borrower if they stop making payments.
- You need to have good credit yourself in order to help as a cosigner.
- Cosigning can affect your ability to get financing, as lenders may consider the cosigned payments when calculating your debt-to-income ratio.
- As a cosigner, you are legally responsible for the entire debt, including fees and collection costs.
- Cosigning with a former spouse means that a divorce decree does not end your legal responsibility for the debt.
- Negative marks resulting from cosigning can stay on your credit reports and impact your credit scores for up to seven years.
Positive Impacts
Improved Credit Score
Consistent, on-time payments on the cosigned account can positively impact your credit score. This is because payment history is a significant factor in determining your creditworthiness.
Responsible Credit Management
Paying off the cosigned loan as agreed demonstrates your ability to manage credit responsibly. This can improve your credit score and make you more attractive to future lenders.
Credit Mix
Having a mix of different types of credit, such as installment loans and revolving credit, can enhance your credit scores. Cosigning can contribute to this mix and potentially improve your overall credit profile.
Negative Impacts
Delinquent Payments
If the primary borrower becomes delinquent on payments, it can negatively affect your credit. Late payments can be reported to the credit bureaus and appear on your credit reports, potentially lowering your credit scores.
Repossession
If the cosigned vehicle is repossessed, it can hurt your credit regardless of whether you used the vehicle. Repossessions are considered severe negative marks on your credit report.
Collections
If the account is sent to collections, it can also hurt your credit, even if you were not aware that the primary borrower was behind on payments. Collections can significantly lower your credit scores.
Considerations Before Cosigning
Before agreeing to cosign, it is essential to consider the following:
Relationship Strain
Cosigning can strain your relationship with the borrower if they stop making payments. It can lead to financial disputes and damage your personal connection.
Creditworthiness
You need to have good credit yourself in order to help as a cosigner. Lenders will evaluate your credit history and score before approving a cosigned loan.
Financing Impact
Cosigning can affect your ability to get financing. Lenders may consider the cosigned payments when calculating your debt-to-income ratio, which can make it more difficult to qualify for loans or lines of credit.
Legal Responsibility
As a cosigner, you are legally responsible for the entire debt, including fees and collection costs. If the primary borrower defaults, you may be held liable for the outstanding balance.
Divorce
Cosigning with a former spouse means that a divorce decree does not end your legal responsibility for the debt. You remain obligated to make payments even after the marriage has ended.
Long-Term Impact
Negative marks resulting from cosigning can stay on your credit reports and impact your credit scores for up to seven years. This can have long-term consequences for your financial well-being.
Sources
- How Does Cosigning Affect Your Credit? – Experian
- What is a Co-Signer? Pros & Cons of Co-Signing Loans | Equifax
- How does co-signing a credit card affect your credit score? | Chase
FAQs
1. What is cosigning?
Cosigning is taking on a legal obligation to make payments on a loan, credit card, or rental agreement if the primary borrower fails to do so.
2. How can cosigning help my credit?
Cosigning can help your credit if the primary borrower makes all payments on time and in full. This can improve your payment history and credit mix, which are both factors in your credit score.
3. How can cosigning hurt my credit?
Cosigning can hurt your credit if the primary borrower misses payments or defaults on the loan. Late payments and defaults can be reported to the credit bureaus and appear on your credit report, which can lower your credit score.
4. What should I consider before cosigning?
Before cosigning, you should consider your relationship with the borrower, your own creditworthiness, the potential impact on your ability to get financing, and the legal responsibility you are taking on.
5. Can I remove myself as a cosigner?
In some cases, you may be able to remove yourself as a cosigner if the primary borrower has made a certain number of on-time payments and has established a good credit history. However, this is not always possible, and you should check with the lender to see if it is an option.
6. What happens if the primary borrower defaults on the loan?
If the primary borrower defaults on the loan, you, as the cosigner, are legally responsible for the outstanding balance. This means that the lender can come after you for the money, even if you did not use the loan proceeds.
7. Can cosigning affect my ability to get financing?
Yes, cosigning can affect your ability to get financing. Lenders will consider the cosigned debt when calculating your debt-to-income ratio, which can make it more difficult to qualify for loans or lines of credit.
8. How long does a cosigner obligation last?
A cosigner obligation typically lasts until the loan is paid off or the primary borrower is released from the debt. However, even if you are released as a cosigner, the negative impact of the cosigned debt on your credit report can remain for up to seven years.