When you don't have a credit score good enough to get a loan, it's easy to feel stuck. It takes credit to build credit, after all. Some borrowers turn to friends and family to help. Specifically, they may ask someone in their life to co-sign for them.
When someone co-signs for an account on your behalf, they're essentially allowing a lender to come after them for any outstanding balance if you default on your debt. They're on the hook if you don't pay, and that account will appear on their credit report as well as yours.
But what about the beneficiary of a co-signed account? You're also responsible for the loan payments, and your credit scores will suffer if you default as well. So will a co-signed account impact your credit scores any differently than an account you have on your own?
A commenter, Caitlin K, recently asked us whether a mortgage lender would frown upon a co-signed account:
If my mom co-signed on a credit card with me a few years ago for a limit of $5K and is still on the account, will this look bad if I am now trying to purchase a home? My score is at a 691. I've also got a credit card on my own for $3,300. I've heard different responses whether it matters to have complete standing credit vs having a co-signer on an account.
First, it's important to understand the difference between a co-signer and an authorized user. If Caitlin's mom had made her an authorized user on a credit card, there's potential that, yes, depending on the credit scoring model used for her mortgage application, this credit card account could impact her ability to get the loan. Why is that?
In the past, some people with no credit or bad credit have tried to pay people with good credit to make them authorized users. The practice is called "piggybacking," and it's controversial. Parents often use it to help their college-aged kids build credit early so they can get approved for accounts on their own, but the "pay for play" scenario is frowned upon by lenders. That's why some of the newer credit scoring models (FICO 8 is a prime example) have changed their algorithms to figure out who is legitimately piggybacking and who is paying for someone else's good credit.
There's good news here for Caitlin. First off, she says she's on her mother's account — which, were she an authorized user, would be likely viewed as legitimate. (Legitimate authorized users include spouses, parents and children; anyone who would have a legitimate relationship with the primary account holder and a reason to share access on their account.)
More pointedly, co-signed credit accounts aren't authorized user accounts when it comes to credit scoring.
"A co-signed account is treated no differently by any of the scoring models than an account held either individually or jointly," said Barry Paperno, a credit scoring expert who worked at FICO and now writes for SpeakingofCredit.com.
If you're wondering how your co-signed accounts are impacting you, you can see where your credit scores currently stand for free on Credit.com.
Next Steps for Caitlin
Just because the credit scoring model won't consider her co-signed account differently for credit scoring purposes doesn't mean that Caitlin doesn't have some things to think about before applying for her mortgage. First off, she should check her credit reports and make sure all the information on there is accurate. Not every lender will disclose the credit scoring model they'll use for your mortgage approval, or even which credit bureau's data will be their source. So it's a good idea to get a copy of your credit reports for free from each of the major credit reporting agencies (you can get a free copy from each once a year at AnnualCreditReport.com).
If you see an error on your credit reports, you can dispute it with the bureau, which can take 30 days to get resolved. So it's best to do this as early in the home-buying process as possible. If you find multiple errors or just don't want to go through the process yourself, you can also hire a credit repair company to help. (Here's a quick guide to picking a good one.)
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