If the loan is approved, the account will show up on both your credit reports. That means the payment history and the balance will also be factored into your score. As long as the person you cosigned for is paying the loan on time, then there may not be any negative consequence to your score. If they skip out on paying, however, then you could quickly end up in poor credit territory.
There are several different credit scoring models but one thing they have in common is the fact that payment history carries a lot of weight in score calculations. When you have multiple late payments on your credit because the person you helped to get the loan defaulted, that can wreak havoc on your score. Having an account go to collections or worse–end up as part of a court judgment–can be even more devastating. Negative items can stay on your credit report for seven years, meaning you have to deal with the after effects of cosigning over the long term.
Even if you step in and begin making payments on a loan that the primary borrower defaulted on, you can’t erase any late payments that are already on your credit report. Besides that, having an extra loan on your credit history can also affect your chances of getting approved for new credit down the line. If you’re planning to buy a home, for example, the lender will include the cosigned loan in your debt-to-income ratio (DTI) calculations. If the loan pushes your DTI too high, you could have trouble getting approved for a mortgage.
Reality #3: Cosigning can ruin more than just your credit
There are few things that can sour a relationship faster than an argument over money and cosigning can be a fast track to financial disagreements. If the borrower isn’t holding up their end of the bargain by making the loan payments and making them on time, you may start to resent having cosigned in the first place and before you know it, you’ve wrecked your credit and your relationship.
Adding someone to one of your credit cards as an authorized user is one alternative to consider if they’re simply trying to build credit. Again, though, you have to remember that you’re the one who’s on the hook for any purchases they make. In that scenario, you might suggest that they look into a secured credit card instead. A secured credit card requires a cash deposit up front but you don’t need a cosigner to get approved for one of these cards. That way, there’s no pressure on you to let someone else borrow money based on your good credit.
A good way to think about cosigning is to ask yourself whether you’d be willing and able to make the loan payments if the other person either can’t or won’t. If you’re comfortable shouldering that responsibility, creating some type of accountability or at least making sure that you have full access to the loan account can give you a measure of protection. Just be aware that it doesn’t completely eliminate any risk you may be taking on by cosigning.