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credit & debt

Say No to Co-Signing

Helping someone get a loan can affect your credit score and your ability to borrow money.

If I co-sign a loan for someone, will it show up on my credit report as a debt, or adversely affect my credit score?

Co-signing a loan can certainly affect your credit score and your ability to borrow money, even if the loan is always paid on time.

The loan you've co-signed for can show up on your credit report, just like any other debt you have. "Whatever the lender reports each month about the status of that account will be reported for each individual whose name is associated with the account," says Maxine Sweet of credit bureau Experian.

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As a result, the loan you've co-signed for can increase the size of your outstanding debt -- added to your mortgage, credit-card balances, car loan or student loans -- when lenders are deciding whether to let you borrow more money. You might have a tough time taking out other loans if the lender decides that your debt-to-income ratio or balance-to-credit limit is too high -- even if the payment history is perfect.

Any late payments can show up on your credit report, too, sometimes without warning. Some lenders may notify co-signers and give them an opportunity to pay before reporting it as late but generally aren't required to give any notice. And if the borrower defaults on the loan, it can destroy your credit -- showing up as a default for you, too.

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Because so much is at stake, it's usually a good idea to say no if asked to be a co-signer. And even if you'd really like to help, first step back and assess the risk -- even if it's your child or a close family member who is asking. "Think like a lender," recommends Pamela Rooney, director of retail credit products for Wachovia. "Think about whether that person has the wherewithal to repay it. From a consumer perspective, it's your money as well as your credit history on the line."

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If you still decide to co-sign, study the terms of the loan and the notification rules before signing. Make sure you're getting the same documents as the person you're co-signing for, and require the borrower to provide you with proof of payment each month or give you access to the online account information so you can check the balance and payment status yourself, recommends Sweet. Make sure the lender has your most recent contact information for notification.

Then monitor your credit report by getting free copies from the three bureaus through AnnualCreditReport.com. Because you can get a free copy from each bureau every 12 months, stagger your requests so you can check your record every four months.

Once you sign up as a co-signer, you usually can't get off as long as the loan exists. 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 -- and close out the old loan or card.

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