Co-signing a credit card for a friend or family member is a big leap to take and one that could hurt your credit score if the person you sign with doesn't pay the card payments on time.
As much as you may love the person you sign with, it takes a lot of trust to be a co-signer on a credit card, because not only will your credit score be hit by missed and unpaid bills for the card, you'll also be on the hook to pay off the balance if the person you sign with (the consignee) doesn't.
What does it mean when you co-sign for someone?
Co-signing on a student loan or credit card means that you are taking responsibility for paying the loan or credit card balance in the event that the consignee is unable to do so. This can help a student, family member or friend with little or no credit history become approved for an application or obtain a more favorable interest rate.
Also, you might not have to be a co-signer forever. Depending on the credit card company or loan servicer policy, you may be able to remove yourself as a co-signer once a series of consistent and on-time payments are made. When it comes to student loans, however, you may have to wait until the consignee graduates and possibly goes through their loan grace period before they start making payments. Be sure to read your cardmember or loan agreements to find out if this option is available to you.
How does being a co-signer affect my credit score?
Being a co-signer itself does not affect your credit score. Your score may, however, be negatively affected if the main account holder misses payments. Here are some common ways your credit score could be affected if you are a co-signer:
- Missed or late payments: Co-signers are required to make payments on the account if the main account holder misses payments. If the consignee makes late payments, or misses them altogether, then your credit score could drop.
- Your credit score won't increase: Although having mixed lines of credit could help you look favorable to future lenders, it only makes up for a small percentage of your credit score. This is typically only useful if you've proven that you can handle those mixed lines of credit for a long period of time while making on-time payments and keeping balances low.
- You will owe more debt: Your debt could also increase since the consignee's debt will appear on your credit report. The amount of debt that you currently owe will increase and will be added to the "amounts owed" portion of your credit score.
When should I become a co-signer on a loan?
Before committing to becoming a co-signer, you should work with the applicant to ensure there is a plan in place to pay off their debt. You should also find out if you can be released from your responsibility as a co-signer once the consignee shows a history of making on-time payments and/or reaches the allowed age for being a sole account owner. Keep in mind that the consignee's debt may remain on your credit report for many years and it is important to ensure that a repayment plan is set in place to prevent negative consequences to both of your credit scores.
