At a Glance
Cosigning a loan or credit application for someone else is a common practice that can have both positive and negative implications for your credit. While being a cosigner can potentially help improve your credit under certain circumstances, it can also pose risks to your creditworthiness.
In this article, you’ll learn:
The delinquency rate on consumer loans at commercial banks as of Q1 2023.
When cosigning can hurt your credit?
Cosigning can negatively impact your credit in several situations. Here are some instances when being a cosigner can hurt your credit:
- Late Payments: If the primary borrower fails to make timely payments, it will reflect on both their and your credit reports, potentially lowering your credit score.
- High Credit Utilization: The additional debt from the cosigned loan can increase your overall credit utilization ratio, which may negatively impact your credit score.
- Loan Default: If the primary borrower defaults on the loan, it becomes your responsibility to repay the debt. A loan default can severely damage your credit and make it challenging to obtain future credit.
When can cosigning help in improving credit?
While cosigning typically carries risks, there are scenarios where it can have a positive impact on your credit:
- Building Credit: If the primary borrower consistently makes timely payments, it can help establish a positive credit history for both of you.
- Credit Mix: Cosigning for a different type of credit, such as a car loan or mortgage, can diversify your credit mix, potentially benefiting your credit score.
Things you should consider before cosigning
Before agreeing to be a cosigner, it’s essential to evaluate the following factors:
- Trust and Responsibility: Only cosign for someone you trust and believe will fulfill their financial obligations.
- Financial Impact: Consider how cosigning may affect your own financial situation, including your ability to take on additional debt if needed.
- Communication and Documentation: Ensure you communicate clearly with the primary borrower and have all the necessary documentation to track the loan terms and progress.
How to protect yourself when cosigning?
To protect yourself when cosigning, follow these steps:
- Review the Contract: Understand the loan or credit agreement terms before signing and ensure you have a copy for your records.
- Communication: Maintain open lines of communication with the primary borrower to stay informed about the loan’s status.
- Monitoring: Regularly monitor your credit reports to identify any potential issues promptly.
Cosigner vs. authorized user
It’s important to differentiate between a cosigner and an authorized user:
- Cosigner: A cosigner has legal responsibility for the debt and is equally liable for repayments. The loan appears on both the cosigner’s and the primary borrower’s credit reports.
- Authorized User: An authorized user can use someone else’s credit account but is not responsible for repaying the debt. The account may appear on the authorized user’s credit report, but they are not legally liable for the debt.
Related: Do Authorized Users Affect Credit?
Yes, cosigned loans typically appear on both the cosigner’s and primary borrower’s credit reports.
Both the cosigner’s and the primary borrower’s credit scores are relevant when considering a cosigned loan application.
Yes, being a cosigner increases your debt obligations, impacting your debt-to-income ratio. Lenders may consider this when assessing your creditworthiness.
The main risks for a cosigner include damage to their credit if the primary borrower fails to make payments, the potential need to repay the debt, and difficulties in obtaining future credit if the loan defaults.