Warning: Cosigning Can Be Hazardous To Your Credit

Warning: Cosigning Can Be Hazardous To Your Credit

Everyone needs a little help at some time in their life. Sometimes that help is financial and we need some money. Other times we just need someone to vouch for us. One way you can vouch for someone is to be a cosigner for them on a loan. If you have not been asked to be a cosigner by a friend or relative, the odds are good that it is just a matter of time before you are asked.

What is a cosigner? A cosigner is someone who guarantees to pay back a debt if the borrower cannot or does not pay. Someone may be asked to get a cosigner for the following reasons:

  • they do not meet the minimum income requirements for a loan
  • they do not have established credit
  • they have bad credit
  • their debt-to-income ratio is too high

If someone falls into one or more of these categories and they need a cosigner, then they will usually ask a close friend or family member to be a cosigner for them.

The cosigner can benefit the borrower in two ways. First, they can help them to get approved for the loan. Second, if the loan is paid as agreed it can improve the borrower’s credit score. How does the cosigner benefit? Unfortunately, there are big risks for the cosigner. If the borrower does not pay the loan as agreed, then it is the cosigner’s responsibility to pay the loan. Also, the payment history for the loan is reported on the cosigner’s credit report as well as the borrower’s credit report. So, it will mean a derogatory credit rating if the loan is not paid as agreed.

Although the cosigner is given this information up front and the borrower swears they will make the payments as agreed, they still choose to cosign. It’s their choice. Unfortunately statistics show that three out of four cosigners, at least 75%, end up paying money on loans.

Therefore, it is highly suggested that you do not cosign on a loan unless you are in a position to pay off the loan. Your good friend or relative may not be happy with your decision not to cosign on a loan for them, but you should do what is best for you. This is a very sensitive issue and you may lose some friends, but you have to be very careful when it comes to your money and your credit score. All the best.

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