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credit & debt

Are You on the Hook?

Co-signing for a loan can gut your finances and sink your credit.

What's one of the fastest ways to wreck your credit score? Co-sign for a loan or a lease.

Karen Laubinger discovered that the hard way after co-signing a lease for a house for her 27-year-old son and his family. An unpaid bill from the landlord for $3,000 in repairs eventually went to Karen, and legal papers were served at her workplace -- where she happens to be a credit counselor. "I've been telling clients forever not to co-sign for a loan," says Karen, who lives in Phoenix. "Now I couldn't co-sign for a $2 bill."

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Despite their best intentions, co-signers often end up being dragged down by the friend or relative they're trying to help. "Anytime you co-sign, assume you might have to pay off the loan," says Mike Sullivan, director of education at Take Charge America, a credit-counseling agency. "And you won't have much notice."

A default can destroy your credit, and even a late payment can show up on your credit report. "The status of the account is reported for each individual associated with the account," says Maxine Sweet, of the credit bureau Experian. Lenders might notify co-signers in advance and give them the opportunity to pay up, but don't count on it.

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Co-signing also increases your outstanding debt, says Sweet, which can make it tougher for you to qualify for a loan even if the borrower makes prompt payments. Or the balance could bring you close to your own credit limit. Once you're on record as a co-signer, you usually can't get off the hook as long as the loan remains outstanding.

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Just say no. If you're asked to be a co-signer, "think like a lender," recommends Pamela Rooney, director of retail credit products for Wachovia. "Ask yourself whether the borrower has the wherewithal to repay."

If not, the answer's easy: Just say no. If you still feel obliged to help out, at least take steps to protect yourself.

For example, study the loan terms and notification rules before signing on. Laubinger wishes she had gone on the walk-through with her son because she believes most of the damage her son was billed for happened before he moved in.

Sweet recommends that you require the borrower to provide proof of payment each month or give you online access so that you can check the status yourself. Also give the lender your most recent contact information.

As soon as the borrower's credit improves, have the borrower apply to refinance the loan or get a new credit card on his or her own. Close out the old loan or card, and check your credit report at www.annualcreditreport.com.

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