When a person decides to co-sign on a loan, that means that you are essentially applying for the loan with the original borrower. You are making a promise to the lender to repay the loan if the original borrower stops making payments. This is an option that banks offer because it provides a safety net for them and allows them to take on less risk when providing loans. When you co-sign on a loan it can affect your credit for either better or worse.
What it Means for Your Credit Report
Your credit report will show your loans. The reason that your co-signed loan will show up on your report is because you are taking full responsibility of that loan. If you co-sign on a loan, then you may experience difficulty borrowing for your own personal matters. The reason you may experience some trouble is because now the total amount of debt you have, and the number of accounts you have has increased, and depending on where your score stands this can be more worrisome for lenders. However, co-signing isn’t all bad and in fact can improve your credit in some instances.
How Can Co-Signing Help Your Score?
If the original borrower is responsible with their payments, then that will translate on your credit. When the original borrower makes on-time payments every month, the amount of debt you owe reduces, the lack of missed payments is a plus, and you get closer to reducing the amount of active accounts you have! Not only can their responsibility improve your credit, but so can other aspects like the fact you have a better credit mix. You now have different types of loans that you may not normally have. This is better when you co-sign on loans opposed to credit lines.
Make Sure to Be Alert at All Times
Many people only co-sign for those that they trust, so that means you will be able to just relax and wait for the loan to paid off, right? WRONG! In fact, quite the opposite. Even though you trust this person, you still need to be vigilant of your accounts. Whether the person is irresponsible by choice or by outside factors like natural disasters, personal emergencies like a health crisis, etc., Sometimes the original borrower cannot continue to make the payments that they promised to make. They may not tell you and these late payments can end up affecting your credit. You want to make sure to always keep an open line of communication with the original borrower. Ask for monthly statements from the loan and/or proof that their payment was received.
Co-signing can potentially hinder your borrowing ability for a little bit, and even negatively impact your credit. However, it also runs the possibility of improving your credit! You want to make sure that you are co-signing for someone you trust that will provide open communication during their repayment period. As long as you and the original borrower are responsible, then co-signing can be a great way to help out someone you care about!