How does co-signing affect my credit?

Your Credit Minute Show Notes:

 

  • 00:00                                   Guys, awesome credit question coming out of the Detroit, Michigan, today. We have, “How does cosigning hurt my credit score?” Okay. Probably the second biggest reason we get a phone call, aside from medical collections, is cosigning gone all wrong. Okay, let’s talk about what cosigning is, or co-guaran-, co-guaranteeing a loan, okay? Uh, you’re on it with them, okay? So, you could get called by a friend, and they say, “Just come and cosign for this car loan with me. I’m down at the dealership,” or, “Cosign for this mortgage,” or, “Cosign for a credit card.” It doesn’t matter. “Apply with me. Help we out this loan. I just need a signature, here.”
  • 00:39                                   Well, why would the bank just want a signature? They don’t just want your signature. They want a guarantee, okay? The way they … way more secure is by putting a … on the hook. So, first [inaudible 00:00:54] approve for it, okay? So, they say, “Bring on somebody that can sign with good credit,” and you get that phone call. Now, keep in mind, that item is gonna report to all three bureaus in the exact same way that it’s gonna report to the, uh, the primary borrow. If you cosign for your friends car loan, you’re getting that item the exact same way on your credit report, um, as a loan, as a- as a debt, okay?
  • 01:20                                   If you go to apply for something, you go to apply for your own home loan, and that liability is on there each month. Let’s say it’s a car loan and it’s $500. That $500 is gonna affect your income to debt ratio as well. Most banks and lenders, even if you tell them you’re paying it, they’re still gonna factor it into your income to debt ratio. Or, actually, let’s say you say, “My friend is paying it.” They’re still gonna factor it into your income to debt ratio. And, the reason for that is, they’re not sure if your friend’s gonna pay it. They don’t know who they are, so they’re gonna say, “Well, if you signed for it, you’re guaranteeing it, we’re factoring it into your income to debt ratio as well, which is gonna affect the amount you can borrow.”
  • 01:57                                   Now, that’s scenario one. That’s the biggest reason not to cosign, okay? But, there’s another big reason, and the other reason is, there’s no control. There’s zero control. Let’s say you cosign for your friends car loan, okay, and they default on that loan. What happens? Immediately you’re gonna get that late payment. They go into repossession status, you’re getting a repo on your credit. They send you to collections, that debt collector’s coming after you. That item becomes a judgment, because of your friend’s inability to pay. That judgment is coming to your credit report, okay? That’s gonna affect your ability to get approved for anything, and that’s a real big problem, okay?
  • 02:34                                   So, if you want to help out a friend, give them some money. Give them a ride, call them an Uber. There’s no reason you should be cosigning for them, because you’re getting on the hook for many, many years to come, and just like anything, you’re losing that control, and that control is everything. You work very, very hard to reestablish your credit, to build it up to a point where you can get started, or get started with approvals, um, and you don’t want to risk it, uh, for a friend. Help your friends, but in a different way. Thanks [inaudible 00:03:02]. Have an amazing day.

 

 

Co-Signing Loan Blunders

Co-Signing – Why to Never Do It

Credit isn’t exactly easy to come by these days. And if you happen to have a good credit score, there’s a chance that sooner or later you’ll be approached by a friend or family member and asked to co-sign on a loan or credit card for them. By doing so, the person with poor or limited credit is able to leverage your positive score for a better interest rate. But is credit a win for you, the co-signer, as well?

The answer: Not necessarily. While you agreeing to be a co-signer is likely done with nothing but good intentions, the outcome could turn out to be far from favorable for you. We’re talking a decreased credit score, collection agencies coming after you and even potential lawsuits. Here’s a closer look at why you should think twice about co-signing on a loan:

  • Lower credit limit: Like we said in the opening, credit is limited these days. So if you co-sign on a loan, you’re debt ratio might get too high. Not only is this unfavorable for your financial situation – after all, you’re responsible for the debt – but it can lower your overall score, resulting in credit repair to get your score back up to what it was.
  • Missed payment: Is the person you’re co-signing for reliable? We ask because if the person misses a payment, the collection agency can come after you for it. It’s not what a lot of people have in mind when they agree to co-sign, but unfortunately it becomes a common reality.
  • Lawsuits: As a co-signer, you’re just as responsible for the debt as the other signee. So if the other signee defaults on the loan payment, you could potentially be sued for the amount owed.

Simply put, if we’re offering credit tips, we’d advise you to co-sign with caution. If you’re approached by a reliable person who has a limited credit history or finances or you are trying to help out your child with his or her first car loan, that’s one thing. But if you’re approached by someone you know is shady and unreliable, that’s a whole different story. So co-sign with caution – because if you’re not aware of the consequences, you could end up on a lengthy quest to repair credit and enact a debt management plan to cover for someone else’s blunder.

For more information on how to repair your credit, please contact our office at 617-265-7900 or request a consultation below.