Co-signing for a loan is a big decision. Before taking the plunge there are a few things you should know about how co-signing can affect your credit. The short answer is that co-signing on a loan can improve your credit if the loan is in good standing.
When you co-sign on a loan, you and the primary borrower will share the responsibility. The most important thing to keep in mind when co-signing for someone, regardless if it’s a loved one or a friend. While one is responsible for making the payments, both of you are ultimately responsible for the loan itself.
In the event that the person you’ve co-signed for is diligent about making payments and is on time for the duration of the loan, your credit score will go up! That’s because of the joint responsibility. Meaning if their credit score goes up from paying off the loan, yours will too.
As a co-signer on a loan that have been paid off successfully and without incident, you will enjoy spikes in your credit score.
On the other end of the spectrum, if the primary borrower misses payments or defaults on the loan entirely, your own credit score will suffer considerably. Being a co-signer isn’t like being a silent partner, it’s a joint responsibility. If you have any doubts about the individual that you’re thinking about co-signing for, tread carefully. That individual might not be worth risking your own credit score for.
Missed Payments
One of the main things to be cautious of when co-signing on a loan is the fact that if the primary borrower misses a payment, you won’t get any immediate notification of it. Your credit score will drop, but unless you’re monitoring it constantly, you won’t notice the dip right away. Being the co-signer, means you won’t receive the monthly statements.
Income To-Debt-Ratio
Additionally, when co-signing on loans it will limit your own access to credit until the loans are paid off. For example, when you act as a co-signer on a loan for your cousin and then try to take out a car loan for yourself, you may be denied because of the disparity in your income-to-debt-ratio.
You’ll be happy to know that there are some things you can do to protect yourself and improve your chances of coming out on top as a co-signer. For starters, you’ll want to ask for some things early on in the process. When co-signing, you can and should request that the primary borrower supply you with copies of payment receipts throughout the duration of any loans.
Final Thoughts
As long as you are provided with the payment receipts, you won’t have to worry about your credit being knocked down. When you take proactive steps like this to safeguard your credit, you will dramatically increase your chances of success as a co-signer.
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