What if someone asks you to co-sign?

When family or friends ask to borrow money, they’ve placed you in a very difficult and almost unfair situation.  You want to help your relative so they can qualify for student loan, car loan or credit card.  The person can be new to credit or have poor credit and can’t qualify for a loan unless someone co-signs for them. Financial institutions request a co-signer for loans that are beyond their acceptable risk level.  If the bank won’t loan them the money, should you?

Co-signer responsibility

First you need to consider, what is the responsibility of a co-signer?  When you co-sign for a loan or credit card, you are responsible for payment if the responsible party does not pay. In essence, you are backing up the loan.  In addition, this account is reported to the credit bureau on the responsible party’s credit report and your report as the co-signer.

If the responsible party is behind on payments and cannot pay, the co-signer (you) is usually not aware of this until the account is severely past due of 120 days or more and the damage has been done to your credit. If the account is an installment loan, it will remain on the credit report 10 years after it is closed.  If it is a credit card account and is still open, the negative information remains for ten years from the date the account first became delinquent.  If you don’t pay off the account and it is turned over to a collection agency, the information remains on your report for seven years from the date it first became past due. Over time the negative data has less impact, and has the most during the first 2 years.

It is usually a good practice not to lend money to friends or relatives because relationships can be destroyed due to borrowing money. I know this seems cruel, but it is reality.  If you decide to co-sign for the loan, you need to make sure you can monitor the account to make sure it is paid on time each month. It may be better off if you give them the money and they pay you back.  They don’t get the credit history, but you don’t get the negative history either.

If someone asks you to co-sign…run.

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.