Posts Tagged ‘Co-signer and credit score’

Co-Signing A Loan Can Affect Your Credit Score

Co-signing a loan can affect your credit score both positively and negatively depending upon an array of factors. When you co-sign a loan, you actually become a loan guarantor (co-signer is another term), which means you promise that if the primary borrower fails to make the repayment, you will pay off the loan. If you have any closed relative or friend who has very poor credit score, they may contact you and request you to help them by becoming a co-signer so that they can qualify for a low rate loan easily. If you have a better credit history, the lenders may agree to issue a low rate loan to your friend if you guarantee the loan. When you sign the agreement as a loan guarantor, you also become liable for the repayment of the loan in specific circumstances. The effects on credit score is similar to what happens to the credit score of the primary borrower when he/she makes the payment in time or when he/she fails to make the repayment. It can be risky but sometimes be rewarding too.

Your Score May Increase

Just by co-signing a loan can affect your credit score actually provides you an opportunity to increase your own credit worthiness without making any effort. However, it entirely depends on one thing – whether the primary borrower, your friend who you co-signed for, is making the repayment in a timely manner. If yes, you will get the reward. It is very important for you to keep in mind that when you co-sign for a loan, it is reported into your credit report also as a liability. Now, when the loans are paid in time, the same thing is again reported to your credit report as positive entries. This way, timely payments of such loans can actually help both the primary borrower as well as the co-signer to achieve a better FICO score.

Your Score May Decrease

Co-signing a loan can affect your credit score does provide you an opportunity to strengthen your credit, but at the same time, it can also be very risky. What if the primary borrower stops making the monthly payments? In that case, the lender will contact you and ask you to make those payments. Even if you make that payment, the last month default or the late payment thus made will negatively affect your credit score. This situation can be more complicated if you already have your own debts to pay off. Since the payment on the loan you co-signed for is now an additional liability on you, you may have to face problems in paying other debts that you owe. Any debt that you miss to pay off in time is going to have a negative effect on your credit report.

Overall, as you can see, whether co-signing a loan can affect your credit score is good or bad for the health of your credit report depends upon an array of factors, the most important of which is whether the primary borrower pays off the debt in time or not.

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