What Is a Cosigner, and Does Co-Signing Impact Your Credit?

Cosigning a loan can be a lifesaver for someone in a financial bind. It can open doors for someone who cannot get approved on their own. However, it also comes with additional financial obligations for the cosigner, carrying legal consequences. Hence, before becoming a cosigner or asking someone to co-sign for you, it's crucial to understand how cosigning works, how it impacts your credit, and the financial risks associated with it. From credit score impact to future borrowing limitations, we’ll discuss the various implications of co-signing in this blog.

What Is a Cosigner?

A cosigner is someone who signs a legal agreement to share financial responsibility for a loan, lease, or credit line with the primary borrower. A cosigner usually has a strong credit history and can cosign to help someone who:

• Doesn't have enough credit history
• Has a low credit score
• Lacks sufficient income to get approved for a loan on their own

A cosigner can help them secure better terms, such as a lower interest rate, which can save the primary borrower money over time. 

Who Can Be a Cosigner?

A cosigner can be anyone (usually over 18) willing to guarantee payments for the primary borrower, including:

• Family members (parents, grandparents, siblings)
• A spouse
• Guardians
• Close relatives 
• Trusted friends 
• Business partner/coworker

Key Aspects for Cosigners:

To be able to cosign, the lenders may assess the character of the borrower and cosigner. Here are the key factors that need to be taken into consideration.

• Legal Age: Must be 18+ to cosign
• Excellent Credit Score: A good score demonstrates strong financial responsibility and credit management, which is highly favored by lenders/creditors.
• Stable income: The cosigner must have a reliable source of income and stable finances. Lenders use this to gauge if the cosigner will be able to pay off the debt if needed.
• Timely Payments: A strong credit history of paying bills, credit cards, and other loans timely by their due dates is highly favorable.
• Long Credit History: The longer their positive credit history, the better. This shows lenders that the cosigner is reliable and can cover payments if there is a risk of the primary borrower defaulting.
• Willing to Take Risk: The cosigner must be willing to cosign and understand that cosigning binds them to be legally held responsible for debt repayment if the primary borrower fails to do so.

Does Co-Signing Affect Your Credit?

Yes, co-signing affects your credit because when you co-sign a lease, a car loan, or any debt for someone else, you become legally responsible for the debt. This can impact your credit in many ways, both positive and negative. 

Here’s How Co-Signing Impacts Your Credit

• Immediate impact: 

When you cosign a loan for someone, it will also appear on your credit report, as you become legally responsible for it.

• Positive impact on your credit: 

If the primary borrower makes all payments on time, it can build positive credit history for you as well. This means that positive payment behavior by the primary borrower will be good for both of your credit scores. 

• Negative impact on your credit:
  1. Missed payment risk: Any late or missed payments by the primary borrower will be reported to the credit bureau and will also impact your credit history. This can lower your credit score, along with the primary borrower’s.
  2. Increased debt: When you cosign a loan for someone else, it also increases your debt load, as you are guaranteeing payment on their behalf. The co-signed loan counts against your debt capacity. Hence, it will impact your credit mix and will be considered by lenders when you apply for new credit for yourself.
  3. Difficult to get approval for future loans: This can reduce your ability to get approved for future loans or credit cards because co-signing increases your debt-to-income ratio, which can affect your future borrowing ability.

Important Considerations Before Cosigning a Loan

• Financial responsibility: You are obligated to make the payments if the primary borrower cannot, and if the account is sent to collections, they can contact you for recovery. A collection account on your credit report reflects poorly on your credit profile. 
• Impact on borrowing ability: A co-signed loan is generally treated as your own debt, as it becomes part of your total borrowing capacity. This means the available credit limit may be reduced, and it will also affect your ability to get approved for new credit. 
• No ownership: Usually, a cosigner doesn’t get ownership of the asset for loans such as a car.
• Relationship strain: Financial difficulties related to the loan can also spill tension into your life and strain your personal relationships.

Hence, it is crucial to carefully read the contract and understand the terms and obligations before cosigning any agreement.

What to Do if You’ve Been Added as an Unauthorized Cosigner?

1. Check Your Credit Reports: First, fetch copies of your credit report from Equifax, Experian, and TransUnion using the CoolCredit app or visiting AnnualCreditReport.com. Look for any new accounts or suspicious hard inquiries and investigate their legitimacy. 

2. File a Dispute: If you believe that someone has fraudulently added you as a cosigner, dispute it immediately with both the lender/creditor and the credit bureau. You can do this online from the official website of each credit bureau or use the CoolCredit app. The app lets you generate personalized dispute letters and instantly submit disputes with major credit bureaus. 

3. Gather Evidence: You need to back your dispute claim with strong evidence, so start gathering records of all communications and reports you may have filed with the lender. 

4. Contact Lenders/Creditors: You should also contact the lenders listed on your report who have opened the unauthorized account. Contact them directly to report fraud. Also, file a report with the Federal Trade Commission (FTC) at IdentityTheft.gov and take legal action if needed.

5. Place a Fraud Alert: Placing a fraud alert on your credit profile ensures that, before performing any hard inquiry, they will require your identity verification (usually by phone) before proceeding. 

6. Credit Freeze: You can also consider freezing your credit as a step beyond setting fraud alerts. This prevents access to your credit profile altogether without your authorization. This makes it much harder to add you as a cosigner without your explicit authorization or to open new accounts.

Conclusion

Cosigners can be a helpful support system for someone with no/limited credit history or low credit scores. But it often comes with shared financial risk for the borrower and cosigner. Cosigning a debt is treated as the cosigner’s own obligation and impacts their borrowing capacity. Additionally, missed payments negatively impact the cosigner’s credit, along with the borrower’s, which is why preparing a plan for repayment is a critical step before agreeing to co-sign. And if you did not authorize being a cosigner, you need tools like credit monitoring to detect the issue early and take preventive measures.

FAQs

Q: How Do Cosigners Work? 

A: Cosigners can help support someone who has poor credit or no credit history in acquiring credit by co-signing the debt. Cosigning works by providing what the primary borrower may lack in terms of a positive credit history, credit length, credit scores, and financial stability required to qualify for the loan they are seeking. 

Q: What Is the Correct Definition of Character for Potential Cosigners?

A: Definition of character for potential cosigners: It is the cosigner's payment history, i.e., their past record of on-time payments. An ideal cosigner’s “character” is determined based on various factors, including financial stability, excellent credit rating, steady income, and trustworthiness, i.e., the ability to afford to pay off the debt. 

Q: What Does a Cosigner Have to Do?

A: The cosigner needs to sign the contract along with the primary signer, who can be a spouse, family member, relative, or friend. The cosigner also has to make repayment if/when the primary borrower defaults or can’t pay. A cosigner also has the right to monitor loan payments, as they will be contacted by the lender if the primary borrower misses any payments.

Q: What To Do If You Are an Unauthorized Cosigner

A: An “unauthorized cosigner” is someone whose name has been used for obtaining a loan without the explicit permission. This means someone may have used your personal information and added you as a cosigner wrongfully. It involves identity misuse or breach of trust, requiring immediate action like checking your credit reports and contacting lenders and credit bureaus to dispute fraud or misuse. You also need to report the fraud and get yourself removed as an unauthorized cosigner.