Advertisement
credit & debt

Should You Cosign a Loan?

If you put your name on the line, you risk dinging your own credit.

When all it takes to lend a hand to your child, relative or close friend is a few strokes of a pen, it can be difficult to say no. But cosigning for someone else’s credit card, lease or loan can pose a high risk to your hard-earned credit history.

Cosigners are on the hook for repaying the debt if the primary borrower defaults. Late or missed payments would appear on your credit report and ding your score just as they would with any other debt. Even if the payment history is flawless, your higher debt-to-income and credit-utilization ratios after cosigning can affect your ability to get a loan.

Advertisement - Article continues below

If the request comes from an adult child—say, to cosign a car loan—the answer depends on your philosophy of children and money. Are you willing to support them, or is it time to let them sink or swim? If someone other than your child asks you to become a cosigner, consider why that person hasn’t been able to secure credit.

“The bank is asking for a cosigner because it’s not comfortable doing business with that person,” says John Ulzheimer, president of consumer education at SmartCredit.com. The borrower may have a thin credit report, bad credit or not enough income to meet the repayment criteria.

Advertisement
Advertisement - Article continues below

Protect yourself. If you decide to take on these risks, review the documents before signing and discuss your expectations with the primary borrower. Ask the borrower to refinance the loan or close the credit card (the only ways to get your name off the account) as soon as the borrower’s credit score improves or income rises.

Advertisement - Article continues below

After signing, closely monitor the account (you should have online access to statements) to ensure that payments are being made. If the primary borrower misses a payment, the lender typically contacts both borrower and cosigner almost immediately, says Ulzheimer. (It won’t affect your credit scores until the payment is more than 30 days overdue.) If the borrower stops making payments, be prepared to repay the debt completely in order to avoid marring your credit.

Parents may be able to avoid the cosign question in the first place by helping their children build a solid credit record. For example, adding a child as an authorized user to one of your credit cards builds credit in the child’s name, even if your child doesn’t use the card, says Ulzheimer. Other ways to build credit are with a secured card, which generally requires a deposit of $300 to $500 (usually equal to the card’s credit line), or with a retail credit card in the child’s name.

Advertisement

Most Popular

HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020

Recommended

Banks Canceling Credit Cards, Cutting Limits
credit & debt

Banks Canceling Credit Cards, Cutting Limits

If you haven’t used a card in awhile, make a small purchase with it to keep it open. It’s good for your credit score.
June 4, 2020
Milliennials Face Their Second Recession
credit & debt

Milliennials Face Their Second Recession

Forty percent of millennials say the pandemic will likely cause them to delay payments on their debts. Does that include you? Time to take action.
June 4, 2020
When Savings Bonds Make Sense
credit & debt

When Savings Bonds Make Sense

Series I savings bonds are safe options, but don’t go all in.
June 3, 2020
Which Rewards Credit Card Is Right for You?
credit & debt

Which Rewards Credit Card Is Right for You?

Kiplinger's contributing editor Lisa Gerstner joins our hosts Ryan Ermey and Sandy Block to chat about the best rewards credit card picks for every ty…
May 18, 2020