At some point in life, you may be asked to co-sign a credit card or loan for a loved one. It might be a child wanting you to help him credit card or a girlfriend needing your good credit to buy a car. Because you want to help someone you care about, you might be inclined to offer your signature without realizing the risks involved. Before you sign your name or give away your social security number, make sure you understand why you shouldn’t co-sign for others.
There’s a reason your loved one can’t credit approval on his own – because his credit history (or lack thereof) or income indicates he’s not responsible enough with credit to qualify alone. Creditors and lenders do a pretty good job of predicting an applicant’s likelihood of repaying. If the creditor requires a co-signer, they don’t believe your loved one can or will pay on time. Remember, their conclusion is based on solely on facts and data about your loved ones spending habits.
The Risks of Co-Signing
Their payment history affects you. When you co-sign, you’re just as responsible for the debt as if it were yours alone, only you don’t get the tangible benefit of what the debt is used for. If your loved one is late on payments, it’s just like you were late. The late payment will be reported on your credit report like all your other accounts. It will impact your credit score.
Your level of debt raises, too. The debt you co-signed will increase your debt-to-income ratio, affecting your ability to get approved for your own credit cards and loans. When creditors and lenders consider any application you may for a credit card or loan, they'll consider that co-signed loan just like all your other debts. If the debt makes your debt-to-income ratio too high, your loan applications may be denied.
You're on the hook for payments if the other borrower defaults or files bankruptcy. By co-signing, you essentially state you would be responsible for the bill if your loved one doesn't pay on time. If the account gets too delinquent, the creditor or its third-party collector will come after you. You can be sued for the debt and have a judgment entered against you (a judgment is one of the worst entries for your credit report). If your loved one happens to bankrupt the debt, he’ll be let off the hook for it. You, on the other hand, will be solely responsible for repaying the debt.
Your loved one likely isn’t asking for your signature with the intention of missing payments and hurting your credit. However, things happen. If you choose to co-sign, you should realize the risk that you are taking on and what could happen if you offer up your signature.
Co-signing is rarely a wise move. A better choice would be to help your loved one improve his own credit and build good spending habits so he can get credit on his own. Those good habits will provide a longer lasting benefit.