Has a close friend or loved one asked you to cosign a loan or credit card? You may be tempted to help them out. But does cosigning hurt your credit? Becoming a cosigner may not immediately affect your credit. However, there are many circumstances when this type of financial agreement could impact your credit negatively.
Before you agree to cosign on a credit card, student loan, car loan, home mortgage, or any other credit account, it’s important to understand the advantages and disadvantages of becoming a cosigner and what impact it could have on your credit score.
What Is a Cosigner?
A cosigner is someone who guarantees that they will be legally responsible for paying back a debt if the borrower cannot pay. Some of the best people to cosign are trusted friends or family members with a good credit history and a solid income history.
How a Cosigner Helps
A loved one might ask you to cosign to help them qualify for a loan if they:
- Don’t meet the minimum income requirements for a loan
- Have no established credit
- Have bad credit
- Meet the minimum income requirements, but their debt-to-income ratio is too high
- Are self-employed
- Changed jobs recently or their income is variable
Getting a cosigner only helps, though, if they pay their cosigned loan as agreed. Doing so will help them to build a good payment history, which will also give their credit score a lift.
If they manage their cosigned loan payments responsibly, they can reap the benefits and watch their credit score climb over time.
How Cosigning Affects Your Credit
When you cosign a loan, credit card, or other credit account, you’re agreeing to be financially responsible for that loan. This means that if the primary borrower fails to make payments on the account, you’re legally liable for paying the remainder of the debt in full.
Although you’re the cosigner, lenders treat the loan as if it’s yours. Depending on the type of credit account or loan, it could impact your credit utilization ratio, which accounts for up to 30% of your credit score.
Does cosigning on a car loan for a family member affect your credit? Yes, lenders view this new loan as if it were your loan, affecting your credit utilization ratio. Depending on your specific situation, the new loan could lower your credit score almost immediately.
However, if the primary borrower continuously makes on-time payments, being a cosigner could positively impact your credit in the long run.
Does Cosigning Show up on Your Credit Report?
Once you cosign a loan or credit card, it’s likely to show up on your credit report. In fact, the only way the new credit wouldn’t show up on your credit report is if the lender fails to report it.
It’s important to note that most lenders report loans and credit accounts to the credit bureaus. Even if the new account doesn’t immediately show up on your credit report, the lender could report late or missing payments at a later date. If the loan goes into default or collections, this too could be reported on your credit report.
Not only is the new account likely to appear on your credit report, but it’ll show as if it’s your personal loan. Lenders don’t distinguish between your personal loans and those that you cosign.
Does a Cosigner Need to Have Good Credit?
The answer is yes. Lenders treat cosigners just as they do the primary account holder. They want to know that you can financially afford to pay for the loan and have a good credit history. Once you submit the application as a cosigner, the creditor will conduct a hard inquiry on your credit.
Before you agree to be a cosigner, you may want to check your credit score with Credit.com’s Credit Report Card. While each lender has its own credit requirements, most expect a cosigner to have good credit with at least a 670 credit score.
What Are the Disadvantages of Cosigning?
There are numerous risks involved in becoming a cosigner. The most crucial disadvantage is the impact cosigning can have on your credit. Not only can becoming a cosigner increase your credit utilization ratio, but late or missed payments, repossessions, and loan defaults can be detrimental to your credit.
If your credit score drops, you could have trouble securing new credit in the future. For example, you cosign a personal loan for a friend, and this friend stops making payments and defaults on the loan. This could damage your payment history and credit utilization ratio as well as lower your credit score. Depending on the impact on your credit score, it could affect your ability to secure a loan in the future, such as a car loan.
Most importantly, if the primary account holder fails to make on-time payments, it could destroy your relationship.
What Are the Advantages of Cosigning?
The biggest advantage of cosigning a loan is that it gives you the opportunity to help a loved one build their credit. You can also help a loved one reach their personal and financial goals. For example, cosigning a student loan for your child can help them obtain the degree they need for their career.
If all goes well, cosigning a loan may also boost your credit score. First of all, having a mix of credit accounts makes up about 10% of your credit score. If this is a new type of loan, it could help you improve that rating.
Secondly, if the primary account holder continues to make on-time payments, it can help boost your payment history.
| Disadvantage of cosigning | Advantages of cosigning |
| You’re responsible for repaying the loan if the primary account holder stops paying. | You can help a friend or family member build their credit and reach their personal or financial goals. |
| Late payments, repossessions, loan defaults, and increased credit utilization can negatively impact your overall credit score. | Adding new credit could increase your credit mix, which accounts for up to 10% of your credit score. |
| Cosigning a loan could impact your ability to secure future credit for yourself, such as a car loan. | If the primary account holder continues to make on-time payments, it could boost your credit score. |
| Issues with the loan and payments could destroy the relationship between the cosigner and the primary account holder. |
How to Remove Yourself as a Cosigner
Once you agree to be a cosigner, removing yourself from the account can be difficult, but not impossible. In almost all cases, you’ll need the primary account holder’s permission to remove yourself as a cosigner.
Some student loans and auto loans offer a cosigner release process. While this can make it easier, securing approval can still be very difficult. However, if the primary account holder has established good credit during the duration of the loan, it may be possible.
If the loan doesn’t offer a cosigner release option, it’ll likely require a new agreement with the lender to remove yourself as a cosigner. If the lender doesn’t agree to this arrangement, the primary account holder can consider refinancing the loan without a cosigner or taking out a consolidation loan. Since these would be new loans, both options will remove you from the cosigned loan.
Does Removing a Cosigner Affect Your Credit?
Removing yourself as a cosigner of a loan will also remove all the data related to that loan. So, if the primary cardholder made consistent on-time payments, removing yourself could actually lower your credit score.
If, on the other hand, that account has several missed or late payments, removing yourself from the loan could help repair your credit.
Questions to Think About
Before you agree to become a cosigner, there are several things you should consider, such as:
- Do you have good credit?
- Can you afford to take over the payments if necessary?
- Do you trust the primary account holder?
- Can the primary account holder afford the payments?
- Does the primary account holder have a steady employment history?
- Why does your loved one need a cosigner?
- Are there other options to help your loved one build credit?
Knowing the answer to these questions can help determine if being a cosigner is the right option for you.
