Budgeting & Saving

How Can Cosigning Impact Your FICO® Score?

Financial blogger Thom Fox recalls the first time he needed a cosigner, and offers options to approach a cosign opportunity carefully.

When I turned 19, it became apparent that I needed a car. There wasn't much in the way of employment options within walking distance of where I lived, and forget about any local social life. I didn't have a lot of savings but figured I could finance the purchase. Then I was laughed out of every dealership in town.

With a virtually non-existent credit history, I needed a cosigner. When I began asking friends and relatives to do me the favor, I didn't understand the magnitude of what I was suggesting.

When you approach someone to cosign your loan, you're asking them to make a binding joint financial commitment with you. If you're unable to make the payments, the creditor can go after your cosigner for payments. That's right; both of you — the primary borrower as well as the cosigner — are equally responsible for the loan. That's a worst-case scenario, but it's not unheard of, especially with young borrowers. Also, a cosigner's credit scores can be impacted, too. Because both parties share equal responsibility for repayment of the loan, the activity associated with the loan factors into the credit scores of both parties, not just those of the primary borrower.

Credit scores are calculated from the information contained in credit reports. Each aspect of that information carries a different weight. The FICO® Score powered by Experian considers five factors:

  • Payment history is the most important: it represents 35 percent of the total mix
  • How much you owe represents 30 percent
  • The length of time you've been borrowing comes in at 15 percent.
  • The pursuit of new credit affects your FICO® Score powered by Experian by 10 percent
  • The types of credit you carry represent 10 percent of your FICO® Score using Experian data

The cosigned debt increases the amount the cosigner owes. And, if you — the primary borrower — are late with a payment, it counts against the cosigner's payment history.

Any misstep on a primary borrower's part could not only have a long lasting and negative impact on their own credit but also on their cosigner's, who was just trying to help someone in need. I've seen instances where people haven't spoken for decades because of a foreclosure or repossession associated with a cosigned loan. If you're thinking about asking someone to cosign a loan with you, give it more thought than I did. Understand that you're asking for more than a favor; you're asking for a major commitment and you're potentially putting their credit at risk.

On the flip side, if you're thinking of cosigning a loan for a friend or family member, give some thought as to how it will impact your credit if things go wrong. Consider what you'll do if the primary borrower fails to repay the debt. Are you in a position to pay off the loan if the other person defaults? In the end, it comes down to confidence — the borrower's confidence in his ability to repay the loan and the cosigner's confidence that he will do so.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Experian.