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Will Co-signing On a Loan Hurt My Credit Score?

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Mark Cappel
UpdatedNov 29, 2022
Key Takeaways:
  • Co-signing a loan comes with great risk.
  • It is difficult to remove yourself as a loan co-signer.
  • Co-signing will increase your DTI ratio.
My boyfriend has terrible credit. Will it affect my credit if I co-sign a loan with him?

My boyfriend has horrible credit due to non-payments and a mortgage foreclosure. His debts have been settled recently. If I co-sign a loan with him, will it affect my credit?

Co-signing a loan with someone could harm your credit rating, especially if the primary borrower fails to make the loan payments as required. It can also affect your ability to get a loan in the future because your debt-to-income ratio will include this loan. Let us discuss each of these in detail.

Co-Signer Liability

As a co-signer, you are guaranteeing payment in case the primary borrower defaults. The lender will report the account as a derogatory item on your credit reports if the primary borrower fails to pay.

Your co-signing allows the primary borrower to obtain more favorable loan terms and to begin rebuilding a credit rating by offering the opportunity to establish new accounts with positive payment histories.

However, if the primary borrower does not repay the loan as agreed, the co-signer shoulders the debt. If the co-signer is unable or unwilling to pay it, the co-signer's credit will likely drop significantly. A drop in credit score may not only make it more difficult to obtain new credit, but can result in increases in the interest rates on current debts, as creditors may decide the co-signer has become a higher default risk.

Debt-to-Income Ratio

Depending on the co-signer's credit history, co-signing a loan could lower the co-signer's credit score even if the primary borrower makes all payments on time, as this new debt will increase the amount of outstanding debt in the co-signer's credit profile. This, in turn, increases the co-signer's "debt-to-income" or "debt-to-available-credit" ratio (different lenders use different phrases), which is one of the major factors used in calculating a credit score.

Do Not Co-Sign on a Loan

Because of the risks associated with being a co-signatory on a loan, I generally discourage it. In my capacity at Bills.com, in my personal life, and elsewhere, I have seen too many people who have co-signed loans for people whom they trusted end up in serious financial hardships when their friend or loved one failed to pay the debt as promised. Co-signing for your partner could put a serious strain on your relationship, especially if he is unable to repay the loan. Also, if the social relationship ends, you two would be tied together financially until the loan is repaid. There is no "we broke up so I'm not a co-signer anymore" clause excusing you from the contract in any loan document I have seen.

Think twice before co-signing a loan. Are you really prepared to make the payments should the primary borrower stop making the payments for any reason? That is what co-signing a loan obligates you to do. It is not a just a convenience. It is not an empty gesture. It is a legal liability hanging over you as long as the debt is unpaid.

Go Ahead, Co-Sign on a Loan

On the other hand, helping loved one improve his credit rating could benefit you both, especially if you and he are planning to purchase a home together in the near future, as his current weak credit score could make obtaining a joint mortgage loan more difficult.

Recommendation

Because I do not know the details of your situation, your histories, the reasons why the primary borrower's credit is in disarray, or the dynamics of your relationship, I cannot tell you whether it makes sense for you to co-sign a loan. However, you should not co-sign a loan without carefully considering all possible consequences to your credit, your financial health, and your relationship with the primary borrower.

If the primary borrower's goal is to improve his credit rating, he may want to consider alternative methods such as opening a small credit card and paying it off each month. If he cannot find a credit card due to his current credit problems, he could open a secured credit card. A secured credit card requires the cardholder to deposit the account balance with the card issuer before the account is opened. Each month, the cardholder replenishes the account balance to that it always shows a positive balance. Secured card issuer's report on-time payments just like any other credit card bank, so this is a good option for people with poor credit who wish to establish new positive trade lines on their credit reports.

To learn more about credit reporting, and various methods that may help your boyfriend improve his credit score, I invite you to visit the Bills.com credit resources page. Though the process of building a positive credit history can take several years or longer, and once he has rebuilt his credit rating, he will hopefully be able to borrow the money he needs without needing you to as a co-signer on the debt.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Debt statistics

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Auto loan debt was $1.50 trillion and credit card was $0.89 trillion.

According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in New Mexico, 32% have any kind of debt in collections and the median debt in collections is $1651. Medical debt is common and 16% have that in collections. The median medical debt in collections is $700.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.

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