How Does Being a Cosigner Affect Your Credit?

Being a cosigner can improve your credit history through positive account management—but it also carries risks, such as financial liability for the debt and negative impacts on your credit score if the primary borrower misses payments.

Have you ever been asked to loan money to family? Cosigning can be a great way to help someone you care about get the financial help they need, but how does being a cosigner affect your credit? It’s important to understand the risks and responsibilities involved before you agree.

Before agreeing to cosign, consider factors like the borrower’s creditworthiness and your financial situation. Co-signers need a credit score of 670 or higher and a debt-to-income ratio of less than 50% to be approved for the loan. So, while cosigning can be a generous act, you should always weigh the potential consequences.

What Is Cosigning?

Cosigning is a legal agreement where you agree to be responsible for a loan or credit card account if the primary borrower fails to make payments. That means if the borrower defaults on the loan or credit card, the burden of repaying the debt falls on you.

Common scenarios where cosigning might be necessary include:

Student loans
Auto loans (although cosigners won’t be listed on the vehicle title)
Credit cards

As a cosigner, you don’t receive any sort of ownership of whatever the loan is paying for, but you’re still obligated to pay the debt if the main owner can’t. This can have a significant impact on your credit score and financial health.

Cosigner vs. Authorized User

People often use the terms “cosigner” and “authorizer user,” but they have distinct differences. An authorized user is someone who the primary cardholder adds to a credit card account to use the credit card for purchases.

Here’s how they differ:

Cosigner:

Legal responsibility: Cosigners are legally responsible for the debt if the primary borrower defaults.
Credit impact: A cosigned loan appears on both you and the primary borrower’s credit reports. It can positively or negatively impact your credit score, depending on whether the primary borrower manages the money responsibly or not.

Authorized user:

No legal responsibility: Authorized users aren’t legally responsible for any debt on the credit card account they’ve been placed on. They can use the credit account, but they don’t own it.
Credit impact: An authorized user’s credit can be positively impacted if the primary account holder makes timely payments. It can be a good way to build credit for the first time and is a common way to do so if you have limited credit history.

How Cosigning Affects Your Credit Score

Does being a cosigner on a loan affect your credit? Cosigning can impact your credit score both positively or negatively. The outcome depends on how the primary borrower manages the account.

Here’s how cosigning can affect your credit score:

Potential negative impact: If the primary borrower misses payments or has many late payments, it will be reported to the credit bureaus and can cause your credit score to drop.
Potential positive impact: If the primary borrower consistently makes on-time payments, this positive payment history can strengthen your credit history and potentially boost your credit score.
Impact on debt-to-income ratio: Cosigning a loan can increase your debt-to-income ratio, and a higher debt-to-income ratio can negatively impact your credit score.

Potential Risks of Cosigning

There are significant risks to cosigning that could negatively impact your credit. Here are some of the potential risks to be aware of:

Financial liability for the debt: As a cosigner, you’re legally responsible for repaying the debt if the primary borrower fails to do so. This means you could be on the hook for the entire loan balance (which is why you should think carefully before cosigning for a house, for example).
Impact on credit utilization and available credit: Adding a cosigned loan to your credit report can increase your debt-to-income ratio and decrease your available credit. Depending on your current credit score, this could make it more difficult to qualify for other loans or credit cards in the future.
Long-term credit score implications: The negative impact on your credit score if the primary borrower defaults on the loan can have severe long-term consequences, like higher interest rates on future loans and difficulty obtaining credit.

Possible Benefits of Cosigning

While cosigning a loan carries risks, there are benefits to the person you’re cosigning for. As the cosigner, the main benefit is that it allows you to help a loved one achieve their financial goals.

Here are the main benefits of cosigning:

Improved approval chances: Cosigning can drastically improve the chances of loan approval, especially if the borrower has a limited credit history or low credit score.
Lower interest rates: Lenders may offer a lower interest rate on loans with a cosigner.
Access to larger loans: Cosigning can help borrowers qualify for larger loans than they might otherwise be able to obtain on their own.
Building credit: Cosigning can help borrowers build credit as long as they make timely loan payments.

Tips for Cosigning

Cosigning a loan can be a big decision. Here are some tips to help you navigate the process and protect your credit.

Managing the Cosigning Relationship

Before cosigning, always set clear expectations with the primary borrower. Discuss your own financial situation and what you can afford to pay if necessary. Create a plan for payment management, including setting up automatic payments or reminders. Monitor the account regularly to ensure the borrower is making timely payments and properly managing the loan.

It’s also wise to discuss what to do if the primary borrower’s circumstances change and they want to remove you as the cosigner.

Alternatives to Cosigning

Consider alternative options that are less risky, like becoming an authorized user.

Becoming an authorized user of the primary borrower’s credit card can help them build credit without making you legally responsible for the debt. Explore other loan products, like secured loans or loans with lower qualification standards that may be available to the primary borrower without a cosigner.

How to Protect Your Credit When Cosigning

If you choose to cosign, regularly monitor your credit reports for any signs of delinquency. Consider including protective clauses in the cosigning agreement, like a clause that limits your liability. If problems arise, take immediate action to protect your credit. This could include disputing errors on your credit report or exploring legal options like a lawsuit or bankruptcy.

Understand Cosigning Before Proceeding

Cosigning a loan can be a helpful way to support a loved one, but always weigh the risks and benefits carefully. By understanding your responsibilities, protecting your credit, and considering alternative options, you can make an informed decision about whether cosigning is right for you. Get your free credit score to find out where your credit currently stands before you decide.