Impact on Your Credit Report
Loans usually appear in your credit reports when you’re a co-signer. After all, you’re 100% responsible for repaying the loan—equally as responsible as the person you’re helping—even if you don’t ever plan to make payments. Credit reports help lenders understand how much you might potentially owe to all other lenders, and there’s a very real possibility that you’ll have to pay off any loans for which you co-sign. The borrower might have good intentions, but things happen. For example, events like job losses, natural disasters, and auto accidents could affect the borrower’s ability to repay. Co-signing can make it harder for you to borrow for your own needs. Credit scores evaluate several criteria, and co-signing will most likely affect your credit scores. For example, the Amounts Owed category in your FICO credit score, which makes up 30% of your score, evaluates:
How much total debt you haveHow much of your available credit you’re currently using—the lower, the better, but the borrower has control of thatThe number of accounts with balances (too many credit card loans can look bad)How much you still owe on any installment loans (brand new loans will still have high balances)
Co-signing affects all of those factors and not necessarily in a good way. If you have solid credit (for example, a FICO score above 800, and you’ve been problem-free for years), the effect might be minimal. But if you have fair credit or if you’ve never established credit accounts at all, be careful. That said, co-signing for a loan can potentially help you build up your credit. Lenders evaluate how likely you are to repay based on several factors, in addition to your credit score. For example, they look at how much of your monthly income is available to pay off new loans, often with a debt-to-income ratio. A loan you’ve co-signed on will reduce the lender’s view of how much you can afford for loan repayments you have under your name.
Benefits of Co-Signing
On-time Payments
Your credit improves when you make loan payments on time. Being associated with—and responsible for—a loan that is in good standing should generally be helpful. However, if there are any late payments, or if you and the other borrower(s) default on the loan, you’ll pay the price on your credit as if you were solely responsible for the loan.
Credit Mix
Another way that co-signing helps you build credit is in the Credit Mix category of your FICO credit score. While that category only makes up 10% of your score, every little bit helps. The Credit Mix category looks at which types or a mix of loans with which you have experience. If you only borrow with credit cards or co-sign for credit card accounts, you won’t see much improvement. But if you’re helping with installment loans like auto loans and home loans, you might enhance the mixture of accounts in your credit reports, which should be helpful.
Monitor Your Accounts
You’re just helping a borrower, and then you should mind your own business, right? On the contrary. Whether your goal is to protect your credit scores or build your credit, all payments must get made on time. If you’re a co-signer, this is very much your business, and it’s your problem if the borrower misses payments. Keep tabs on the borrower—at least enough to verify that the loan stays current. Get duplicate copies of statements and log in periodically to review the loan’s progress. If you see anything you don’t understand, contact the borrower and ask what’s going on. The sooner you address problems, the better off you’ll be. It’s also wise to see how the account appears on your credit reports (and if any late payments appear). You can check your credit score and report for free with each credit bureau once per year. Lenders are not required to keep co-signers informed of changes in terms and conditions on products like credit cards and another important reason to stay informed as a co-signer on revolving accounts. You may co-sign on a $1000 credit card for a year or two, and then the credit line could be increased to $10,000 without notification to the co-signer, who is still liable for any increases in debt.
