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.

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.

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.

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.

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