Will Co-signing a Loan Affect My Credit Score?

If you’re at all concerned about your current credit score and report (as everyone should be), you may find yourself wondering whether co-signing a loan for a friend or family member will cause your score to rise or fall. Many of us automatically want to help a loved one in need, but it is important to know what effect such a valiant action will have on your own personal finances.

First and foremost, why would you co-sign someone else’s loan in the first place? Well, the need for a co-signer typically arises with people who don’t have sufficient credit histories for a lender to offer them a loan on their own. These are often young adults just starting out on their own, or recent divorcees whose former spouse handled all of the finances. Neither group will likely have much on their credit report at all, which makes it difficult for lenders to make a decision about their credit-worthiness.

By co-signing a loan for someone with little to no credit history, you agree that if your friend defaults on the loan (fails to make payments), you would then become responsible for the balance. The vast majority of the time, co-signing goes off without a hitch; however, the only time you should even consider co-signing a loan for someone is if you trust them implicitly not to screw it up.

But, what will co-signing do to my credit score?

Now that you understand the fundamentals of when and why co-signing occurs, you need to know what (if anything) this type of action will do to your credit report, and ultimately, your credit score.

First things first. The simple act of signing your name on the dotted line as a co-signer will ding your credit report with a hard inquiry, which will cause your score to drop. The good news about this is that it should only drop a few points.

If you plan to apply for a home loan in the near future, co-signing on a loan for a friend or family member may not be wise, because your overall debt-to-income ratio will change. Essentially, even though you are only “co-signing” – you are making yourself equally responsible for the timely repayment of that loan. This means that your ratio of “available credit” to “used credit” will be affected, which may limit your own potential for a loan in the future.

With all of that being said, if the main borrower on the loan repays it on time and in full, your credit score will improve! So, initially your score will be negatively affected, but usually only negligibly. Over time, as the loan is paid back accordingly, it’s nothing but good news for your credit score.

The bottom line about co-signing a loan for someone is that you should put a lot of thought into all of the potential outcomes before making a decision. Get extremely familiar with your own credit report and score and look to your future as well.

If you are in a position to co-sign a NJ loan, whether mortgage, auto, or other – be sure that you trust the borrower with your life before making a final decision!

 Image credit: Casa Thomas Jefferson