Can Cosigning Help Your Credit?

Individuals with good credit scores are likely interested in maintaining their prime rating. But if you manage credit well, someone may ask you to cosign an auto loan, rental lease or other financial contract. Doing so can help this person qualify for financing. But on the other hand, cosigning can also affect your credit rating.

Definition

When a creditor or lender agrees to approve an application if there's a cosigner, he requires a second signature or name on the application. Some people can qualify for loans without anyone's help. They generally have sufficient income to meet the monthly obligation, and good credit that reduces the chances of default. Cosigners assist borrowers with meeting a lender's loan or credit guidelines. Regrettably, cosigners take a risk by signing their name to the loan. They share responsibility for the loan with the primary borrower.

Improve Credit

Credit scores can fluctuate, and acquiring and paying off debts influences your score. For example, taking out a new loan or carrying a high balance on your credit card can reduce your FICO score. But if you were to pay off these accounts, your credit score would improve. Likewise, cosigning a loan for someone can bring down your personal score. But if the primary borrower pays the account as agreed or pays off the account completely, your score increases.

Possible Credit Damage

Cosigning a loan for someone can prove disastrous if the person has horrible credit habits. Understand that creditors/lenders report this account to the credit bureaus, and since your name and Social Security number are attached to the account, the account also appears on your personal credit record. Any action by the primary borrower affects your score. So, if this person makes a late payment or skips a payment, your credit score can decrease.

Considerations

Only agree to sign a credit or loan application for someone if you're prepared to make the payment yourself. The individual who needs a cosigner may likely already have bad credit because of poor habits. Thus, he may eventually default or stop paying. A decrease in credit score because of someone's bad decision can affect your ability to get a home loan and other loans.