You already know how important a good credit score is for getting mortgages, student loans, or even a job. And if you've got a good credit profile, a friend or family member may have already asked you to cosign their loan, rental agreement, or credit card application. Does cosigning hurt your credit score?
Cosigning can help a friend or loved one qualify for something they could otherwise miss, though for you, it means legal responsibility to repay the cosigned debt if the primary borrower fails to do it. Therefore, deciding whether to cosign a loan requires a careful consideration, and you should only do it for people you trust.
Does cosigning hurt your credit score?
The impact that cosigning a loan would have on your credit profile depends on the behavior of the person you’re signing for. If they keep their side of the agreement, cosigning can actually benefit your credit score, but if they don't, you could be in trouble.
When cosigning can hurt your credit, and when it can help
When it comes to calculating credit scores, payment history is the most important factor. Therefore, your credit may be impacted if the primary borrower fails to make timely payments on the cosigned debt. For example, if you cosigned an auto loan and the vehicle gets repossessed because of defaults in payments, your credit would be damaged. A cosigned account that goes into collection would also hurt your credit.
However, if the primary borrower maintains timely payments on the cosigned account and pays off the debt as agreed, the good payment history can help your credit score.
What to consider before you cosign a loan
When you cosign a loan, it’s not just your credit at stake—your relationship with the borrower will also be tested. Consider that if it’s a friend or family member, their default on the cosigned debt may strain or even ruin your relationship.
Additionally, before you cosign a loan, make sure you can control the damage if the worst happens. Ask yourself if you’re in a position to cover the debt should the primary borrower default. Otherwise, creditors could seize your paycheck or savings to pay the debt.
Minimize your cosigning risk by obtaining an option to get out of the arrangement at some point in the future. For some cosigned credit types, you can withdraw as a cosigner after the primary borrower has made consistent payments for some time. It's worth checking if this option is available before cosigning.