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How Does Co-Signing A Loan Affect Your Credit?

10/16/2008

Co-signing can affect your credit both positively or negatively because it is reported in your credit report as “your loan”. In this post, we will explain the how and why it affects your score, as well as other relevant issues. Below is a brief “table of contents” on how we will address co-signing questions.

Table of Contents

1. How Cosigning Can Positively Affect Your Credit?
2. How Cosigning Can Negatively Affect Your Credit?
3. How To Set Up Arrangements With Co-signee to help protect your credit?
4. Understanding Implications of Co-signing
5. Understanding Federal Rules for co-signers?
6. FTC’s Suggestions For Questions To Creditors and Precautionary Measures
7. Questions You Should Ask About Co-signees

How Co-signing can positively affect your credit? – Because co-signing a loan (whether it be a student loan, car loan or mortgage) is reported in your credit report2, it can actually positively affect your credit (assuming the co-signee fulfills his or her obligation and pays on time all the time).

How? Because co-signing appears on your credit report as if “you took” the loan, you get the benefits of it. For example, co-signing for a revolving credit like credit cards increases your “credit availability”. And if the co-signee uses that credit availability sparingly, then you get the benefits of “increased credit utilization ratio”.

Co-signing for someone could also potentially increase your “mix of credit” and your credit score could potentially increase because of the better credit mix. For example, co-signing for a car loan when all you have are credit card reporting to your credit report increase your “credit mix”.

If the co-signee pays on time, you also get the full benefits of that.

How co-signing can negatively impact your credit? – Co-signing can negatively impact your credit score in two ways. Just can it can improve your credit utilization ratio, a co-signee who max out his or credit limit on a revolving credit like credit cards can hurt your credit utilization ratio (and potentially your score).

But the area where it really hurts is if the co-signee pays late. That is the biggest worry for a co-signer because late payments do hurt your credit score.

How To Prevent Late Payments – Arrangement With Co-Signee – One way to prevent co-signees late payment from affecting your credit is to actually pay the loan yourself. And then get the co-signee to pay you.

For example, you co-sign a credit card for your son or daughter. Instead letting him or her pay the credit card issuer directly, you pay the credit card issuer instead. You then ‘collect the bill” from your child. That way, if he or she is late, the payment is still on time because it is paid by you. You then deal with your child (the co-signee) directly. Your credit score will then not be affect if your child has the occasional payment problems.

The key for this arrangement to work is to make sure you have the financial capability to pay for the co-signee in case they face financial difficulties. Because if you have problems paying the bill if the co-signee has problems, then that is not going to help the situation.

Understanding Implications of Co-Signing – If you co-sign a loan for someone, you are liable for the debt1,2. That means that if the co-signee does not pay, you are liable for the full amount. You could also be liable for late fees and interest charges. In certain states, creditors can come after you for payments before they approach the co-signee.

Because you are liable as a co-signer, the loan you co-sign is reported to the credit bureaus as though it is yours (even though you get no “tangible benefit or service”)1,2.

Federal Law and Co-signers – Under the guidelines of the Credit Practices Rule3, banks and financial institutions have to give you a notice that explains your obligation as a co-signer BEFORE you co-sign the loan. According to the FTC, this is a typical language:

Federal Law: typical co-signing language

FTC’s Suggestions For Questions To Creditors and Precautionary Measures – The FTC has the following suggestions for potential co-signers that might help you in the event that the co-signee is unable to pay the loan.

  • Negotiate Specific Terms For Your Obligations – The FTC suggest before co-signing that you ask the creditor to calculate the amount that you might owe them in the event the co-signee cannot pay. Once you have the figures, try negotiating the specific terms of your liability and obligations. That means you should try to limit your liability to the principal of the loan, or perhaps exclude late charges, courts costs and attorney fees. The FTC suggest asking the lender to include a clause in the contract that reads something like this “The cosigner will be responsible only for the principal balance on this loan at the time of default.”
  • Request For Notification of late payment – The FTC also recommends asking the creditor to agree in writing to notify you of any late payments so you have time to deal with it.
  • Request for documentations – You should also request for all important papers including loan contracts, Truth-In-Lending Disclosure Statements. Creditors may not be obligated to give them to you. So ask for them and keep them in the event of a dispute.
  • Check your state law for additional cosigner rights – Some states require that creditors try to collect money from the co-signee first before they could come after you. Regardless of which state you are in, having knowledge of this is important
  • Questions You Should Ask About Co-signees – Before making the decision, ask yourself the follow questions:

    Remember also that co-signers can be sued in court, just like the person who took out the loan in the first place. In fact, if you co-sign for someone, and they are late on their payment, lenders have the right to call you to collect the money, garnish wages, and seize property. Unfortunately, once you co-sign, you cannot just ask to have your name removed from the account if things go badly.

    The last thing to consider is that co-signing on a loan for your friend or family member may not actually help them in the long run. Although it will help them now by securing the loan for a house or credit card, statistically, when people have poor credit and the banks see a co-signer for a loan, they are more likely to ask that person to get a co-signer again. By helping them out now, you could actually be making it more difficult for them (and you) to obtain loans in the future.

    Whatever you decide, do not feel badly. Just be informed. If you go into a co-signing situation, be aware and prepare yourself for the risks that are involved. It is possible that co-signing can result in a winning situation. If you are unprepared, you run the risk of losing your own good credit history and owing the money that the other person borrowed.

    Considering that on average 3 out 4 people that co-sign on a loan end up paying it themselves, one would think that consumers would be extremely cautious when making this type of decision. Oftentimes it is against our better judgment that we sign our names on another person’s loan, but yet it is natural to want to assist a family member or close friend by helping them secure a loan and hopefully repair or build their own credit scores. Depending on the person and the circumstances, choosing to be a co-signer on a debt is not always the wisest decision.

    References
    1. FTC: Co-signing a lona
    2. Experian Forum: Being a co-signer can help your credit
    3. Federal Reserve Board: Staff Guidelines on Credit Practices Rules

    RELATED POSTS
    20 Comments
    NickFadz
    October 16, 2008 @ 3:21 pm

    This is a good example of the negative aspects of co-signing with someone whose financial house may not be in order and who is expected to make payments.

    An alternative would be to have Dan (the father) add James as a co-signer to his mortgage or car payment and to try to help James build his credit back up. This is much less risk for Dan (since he is responsible for making payments and his ability to make payments is under his control) and has a positive outcome for James (his credit rating increases however slowly).

    I have been considering doing the same thing for my children, adding them as co-signers to my loan which I feel comfortable I can pay regularly to help build their credit.

    Reply
    jhon
    December 11, 2008 @ 1:41 am

    Thanks for this information, nice article. I need information to reffinance my home because I read at http://home-refinance-mortgage–loan.blogspot.com/ , the global crisis will make the rates increase, so it’s to hard to apply credit for my home now. can you help me??

    Reply
    Bob McIvor
    January 22, 2009 @ 5:44 pm

    How would I determine if someone used me to co-sign a loan without my knowing ?

    Reply
    Bob Howard
    March 13, 2009 @ 4:32 pm

    I co-signed for a mortgage with my daughter in 2006.. I regulary check my credit report and her mortgage never showed up on my credit report until 3 weeks ago.. when a 120 day lated NOD was filed.. needless to say my FICO dropped from low 700’s to high 500’s.. I called the loan servicer and asked why I had never been notified.. surprised they said they did not have my contact info..bull.. they have my loan app.

    Do I have recourse against them?

    Reply
    Tracy Seaton
    April 2, 2009 @ 5:41 pm

    I co signed for my wife on a loan does this effect my debt to income ratio?

    Reply
    Vivian
    April 14, 2009 @ 7:21 am

    How about a car loan. I co-signed for my daughter. I’ve made several payments but can”t keep doing this. What’s going to happen to me?

    Reply
    June 25, 2009 @ 12:56 pm

    As a co-signer, will I still be liable if something happen to my child or person deceased (hope nothing happen just a curiosity)?

    Reply
    Alan Tomaso
    July 22, 2009 @ 11:52 am

    I stupidly co signed a loan, while in a separation with my Ex Wife. We were seperated, and separation papers said i was not supposed to enter any agreement of any type for a loan with her. I did. 6 months later, we divorced, and on the Court agrement, the part that suggest, PROPERTY AND DEBT, the vehical that the loan was attached to, was said to be hers. Now she has defaulted, claimed bankruptcy, on the older law, where as the debt was cleared from her name. Now i have a $17,000.00 debt on my credit. Am i responsible for this?

    Reply
    patricia
    September 9, 2009 @ 3:08 pm

    how soon after I’ve co signed for my daughter’s car loan, can I remove myself from the loan….???

    Reply
    Jacqueline J. Hostetler
    May 21, 2010 @ 2:55 pm

    I need some help please! Approximately two years ago, I signed some loan paperwork for my daughter’s career training. She borrowed almost $10,000.00 from Sallie Mae. She went to school to become a dental assitant, she did graduate, but up until now still can’t find a job and she’s still without a job. According to my daughter, she has been making payments to Sallie Mae for what ever amount that she can afford, and of course Sallie Mae is very unhappy about it. They recently changed the loan into my name as a primary person instead of a co-signer; which I have no clues why and they have also threatened that they will turn me into at least one of the credit bereaus. Now, what I worry is are they going to have any rights to take anything that I have or own away from me without my permission or knowledge? Is there anything that I can do, since I feel that I shouldn’t be responsible for this loan and I wasn’t the borrower? Please help! Thanks!

    Reply
    Brenda
    June 22, 2010 @ 2:01 pm

    where can I get a legitimate bad credit car loan?

    Reply
    Justin
    November 8, 2010 @ 6:18 pm

    Dear,

    I cosigned for my Ex-wife, and after a while she gave up the mobile home without my knowledge. Now the bank goes after me for the large amount of money. What do I need to do?. I do not have that much money to pay them.

    Thanks,

    Reply
    Eve
    August 6, 2011 @ 7:40 pm

    I have been asked to co-sign for a college loan for my niece. As my brother has bad credit and was denied the loan he turned to me. Although he does not need to re-pay the loan till after she graduates, not until 2013, does my credit rating immediately get downgraded because I co-signed today or does my credit rating go down when he has to start re-paying the loan and it exists for the life of the loan? I mean from 2011 till 2013 is my “excellent” score “excellent” or am I immediately lowered because his score is low? Thanks.

    Reply
    Regina
    September 21, 2011 @ 11:26 am

    I wish I had read this before I helped my sister.But I have a question since I co-signed she has been late on every payment and sometimes I wonder if she is going to pay!Let me explain the only way I would sign,I make the payment and she has to pay me that way I know the payment is on time and not late.What rights do I have?Can I go get the car that I am paying for,she refuses to pay full amount plus is extremely late every month if she pays at all!I hate to waste my money on something I don’t have,times are to hard.It’s a shame!!!

    Reply
    Peter
    February 3, 2012 @ 2:10 pm

    I’ve cosign for a friend back in the 2008 and that loan got default in late 2010. I was unemployed for a while so i could not make the payment on it, so the loan got default. This really kill my credit score (585). At this point wat step can I take to improve my credit score? and how long would the loan stay on my credit record? or is there a way I can take it off the record? Either by repaying for that loan or what are some recommendation?

    Reply
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  • Grace
    October 7, 2012 @ 4:09 pm

    I have a question!when my mom and dad bought the house my name is included but when they refinance the us bank took out my name. But now how come on my credit score I still owe 350$ for the home mortgage of my parents ? Is there possibility that my name will be clear and not gonna show I still have mortgage to pay?

    Reply
    Virginia
    March 31, 2013 @ 12:12 am

    I married my husband not knowing he had not paid a bill in 20 yrs (about 7 yrs ago). He told me the day of our marriage (this was after a 13-yr history together, not living together however). I had been sick & had fresh surgery so it blew me away! In any event, he said he had inherited his mother’s lake home & he needed to fix it up before we could move in it. He sat on everything claiming he could not get it insured. I made a phone call to my car insurer & got the home insured over the phone immediately. He signed over as co-owner of the home (home unseen by me) to me via gift or wife rights. I didn’t apply for loan for equity to fix it up, but was asked by mortgage co to sign or he wouldn’t get loan. He’s a CPA, but couldn’t pay a bill. Well, 7 yrs later nothing has been done on the home, the money vanished, I vanished long before that & I quit-claimed his home last summer back to him w/the sole understanding he would get a new loan in his own name. The paperwork was filed by the court and ownership removed. He is 66 yrs old, me 1 yr older. I have been unable to work the entire marriage though no divorce, just have not lived together. What I am going to do is go back to the court & ask them to ORDER him to get his own loan. I have the proof I did not know what this “shack” was or the condition or “lack of condition” it was in. Rats, critters, mold, holes, rust, & asthma for me when I saw it. I tried to hire someone to fix it up about 3 mos after he got the loan b/c I knew he was a procrastinator. He threatened me. I have it in email. I personally am going to the court first to see if they will make an ORDER & if they don’t do it, I am going to take out a civil suit for marriage fraud. He was late one time that messed my credit up b/c it was a home payment (the worst kind of mess up). I still can’t forgive this supposed man! Time is passing. I have a home now. I lost a parent unfortunately & this was part of trust I had long before I met him, but I want my name OFF his loan & him to take his responsibility & get a loan ALONE. I called the lender & they said they could do that, that all he had to do was to sign their form taking me off the loan. As I said, I never applied for the loan. I am sick. Stress makes me sicker. Daughter, son, HUSBAND…it doesn’t matter! DON’T DO IT!! This ruined any chance of a normal marriage for us & I literally despise him for it, but I will take him to court just because he ruined my credit, we’ve never lived in the home, nor has he even though he gives that address to everyone. It is 3 hrs away from where he works. In any event, trust no one when it comes to your credit. If he does not get his own loan in the next week, & I told him so, I will take him to court & the lender for telling me something & not following up on it.

    Reply
    Tom
    April 10, 2013 @ 8:41 am

    What effect does a co borrower release have on my credit report? i am also thinking of settling the defaulted loan, would that increase my score more than a release? what notation will apear on my report after either is completed?

    Thanks Tom

    Reply
    SomeoneWhoCards
    July 15, 2013 @ 9:31 pm

    Co-Signing is not a bad thing. First make sure you can afford the payments yourself. Second, make the payments yourself and have your friend/family member pay you back. If your doing this for someone that has bad credit, think twice! If your doing this for someone who has Zero credit, think twice! If you can help a good person establish their own credit, and trust that person it can be both rewarding and terrifying. But mostly…make sure its a small amount that you could. I am cosigning on a small $6000 loan. I could have just given my friend the money, but I elected to make co-sign a loan instead to help build his credit. He didn’t have bad credit, he had zero credit, but he also had my confidence. But…don’t be stupid. Don’t co-sign on a loan for more money than you have cash on hand and are willing to gift. And, make the payments yourself. If you put yourself in the mindset that you’ve gifted the money, and can afford to do so, then you’ll sleep better at night. Of course, there is a risk of a tainted relationship. But that is where the trust comes in. Just be careful. Not everyone is a troll.

    Reply

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