Just Say No to Co-Signing (Your Credit Will Thank You)

There is no shortage of mistakes you can make when it comes to your credit. Missing your payments, running up large credit card balances, and never checking your reports are just a few you’ll need to avoid if you ever want to achieve the type of credit scores that make qualifying for a loan a breeze.

Yet one of the most dangerous credit mistakes often occurs when you’re just trying to help someone out of a bind. It might make you feel good inside to agree to help a friend or family member, but co-signing a personal loan or line of credit is very dangerous for your credit scores. Here’s why.

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In this article

    You are liable for payments

    Whenever you co-sign for someone else, you’re actually agreeing to take full responsibility for the debt in the event the primary borrower fails to keep up their end of the bargain. In fact, you’re just as responsible for the debt as if it were yours alone. The debt will even show up on your credit reports, for better or worse.

    You’re taking a risk the lender was unwilling to take

    Lenders and credit card issuers rely on credit scores and credit reports to help them determine whether applicants are an acceptable credit risk. If a lender is requiring a co-signer for your loved one’s loan, then the lender’s research told them that it wasn’t a good risk to lend money to your friend or family member. This is usually because that person has bad credit.

    In other words, a lender found the odds of your loved one not paying back the loan according to the terms of the agreement uncomfortably high — yet you’re willing to step in on their behalf? Not a great idea.

    Late payments or default could be a huge problem

    When you co-sign for a loan or credit card, it’s almost certain to find its way onto your credit reports within a few months. Once the account is on your reports, the lender will most likely update the account and its payment history monthly.

    If the primary borrower pays late, misses payments altogether, maxes out the card, or goes into default, then you can kiss your good credit scores goodbye. Neither FICO nor VantageScore credit scores discount the impact of harmful credit information simply because you’re the co-signer.

    Even well-managed accounts can still hurt your credit applications

    Sometimes co-signers get lucky and their loved ones manage their accounts well. However, even if your loved one makes every payment on time and pays off the balance in full every month (in the case of a credit card), the simple presence of the account on your credit reports could still potentially cause you problems, even if it’s in good standing.

    There mere act of applying for the account (the inquiry) and the new account’s appearance on your credit reports (which lowers the average age of your accounts) might have a negative impact on your credit scores. Additionally, whenever you apply for future loans, the debt will be counted against your debt-to-income ratio (DTI) — which could cause you to qualify for a lower loan amount than you would have had you not co-signed for someone else’s debt.

    The problems that arise when you cosign a loan

    If the primary borrower misses payments or does something else problematic with the account, you do have a few options:

    • You can try to convince your loved one to refinance the loan into his or her name only, which is a long shot since they couldn’t qualify for the account on their own when it was originally opened.
    • You can ask them to sell the property or car if it’s a secured installment loan. That will dispose of the loan and end your relationship with it.
    • And finally, if it’s a credit card, you can ask that it be closed. At least that way no new debt can be incurred on the account.

    Or, you can just say no if anyone ever asks you to co-sign, and you’ll never have to deal with the mess.

    John Ulzheimer

    Contributing Writer

    John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.