How Does Cosigning Affect Your Credit?

How Does Cosigning Affect Your Credit? article image.

Cosigning an account for somebody else can positively or negatively affect your credit depending on how the primary account holder manages their obligation. As with accounts you open for yourself, consistent, on-time payments may help your credit. However, if the account becomes past due or is sent to collections, that could hurt your credit.

When Can Cosigning Hurt Your Credit?

When you cosign a loan, credit card or rental agreement, you take on a legal obligation to make payments if the primary borrower can't or doesn't follow through. Cosigning may hurt your credit if:

  • A payment is over 30 days past due. The creditor can report the late payment to the credit bureaus. Every late payment can then show up in your credit reports and hurt your credit scores.
  • The cosigned vehicle is repossessed. If the vehicle you cosigned for is repossessed, that can also hurt your credit regardless of whether you used the vehicle.
  • The account is sent to collections. A collection account can hurt your credit even if you weren't aware that the primary borrower was behind on payments. This can happen with rental agreements as well, even when the landlord wasn't reporting the on-time rental payments.

Opening a new account can also hurt your credit scores if it adds a hard inquiry to your credit report and brings down the average age of your accounts. These are relatively minor scoring factors, but you may see a dip in your scores right after the account is opened and reported.

When Can Cosigning Help Improve Your Credit?

Being a cosigner on a loan can also help you establish and improve your credit when:

  • The payments are made on time. Payment history is the most important factor in your credit scores, so making all loan payments on time can go a long way toward boosting your credit.
  • The loan is paid off as agreed. This shows future lenders you can manage credit responsibly.
  • The new account adds to your credit mix. Managing different types of credit, such as installment loans and revolving credit, can help your credit scores.

In short, cosigning can help your credit as long as the primary account holder manages the account responsibly.

What Is the Difference Between an Authorized User and a Cosigner?

Most credit card issuers don't let you cosign for a credit card or accept joint applications. But the primary cardholder may be able to add someone as an authorized user on their card.

An authorized user receives a credit card with their name on it, and the card is linked to the primary cardholder's account. The authorized user can then make purchases and, if it's a rewards card, the purchases could increase the account's rewards balance.

However, unlike cosigners, authorized users aren't responsible for the debt. You may have an informal agreement that the authorized user will pay for their purchases, but only the primary cardholder is legally responsible for the entire bill and balance.

Similar to cosigning, credit card issuers can report the authorized-user account to the credit bureaus, which can help or hurt their credit. Paying the monthly bill on time and having a low credit utilization ratio may improve both the primary and authorized user's credit. Missed payments and high balances could hurt their credit.

If you no longer want to be an authorized user on an account, you may be able to remove yourself from the account and have the account taken off your credit report. Experian also automatically removes delinquent accounts from authorized user's credit reports, as they're not responsible for the past-due debt.

What to Consider Before Cosigning

Beyond the potential impact on your credit scores, there are many reasons that you want to think carefully before cosigning a loan.

  • How will cosigning impact your relationship? Your relationship with the friend, family member or partner may be strained if they stop making payments.
  • You need good credit to help. Generally, someone will ask you to cosign a loan because they can't qualify for a good offer on their own. However, you'll only be able to help if you have good credit.
  • Cosigning can affect your ability to get financing. In addition to the impact on your credit scores, lenders may include the payments you cosigned for when calculating your debt-to-income (DTI) ratio. A high DTI can make getting a loan or line of credit more difficult.
  • You are legally responsible for the entire debt. Cosigners are also responsible for fees and collection costs that accrue when payments on an account get missed. Creditors can sue you and may be able to garnish your wages or bank accounts to collect the outstanding debt.
  • A divorce doesn't end your obligation. If you cosigned a loan with a former spouse, a divorce decree doesn't end your legal responsibility for the debt.
  • The negative impact on your credit scores can stick. Bringing an account current or paying off a defaulted loan won't necessarily fix your credit. The derogatory marks can stay on your credit reports and hurt your credit scores for up to seven years.

Check Your Credit and Consider the Risks

While cosigning can help a friend or loved one qualify for a loan or rental they wouldn't otherwise be approved for, it can also wind up being a disaster for your finances and relationship. If you think you may want to be a cosigner, check your credit—you can review your credit score for free through Experian—and determine if you'll be able to help. If you can, carefully consider what could happen in a worst-case scenario before you agree to cosign.

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