I want to help my son build his credit. Is cosigning for a car loan a smart way to do it? Cash flow is not an issue, and I have excellent credit.
There are always risks associated with cosigning for any credit account, even when cosigning for your son or daughter. When you cosign a car loan for your child, you are assuming full responsibility for the debt. If your son misses a payment or pays less than the minimum due, the late payment will be reflected on his credit report and yours.
Risks Associated with Cosigning a Car Loan
Although your name would be on the loan, the bank may not notify you if your son gets behind on payments, at least not right away. It is your responsibility to make sure he is making each payment on time. Otherwise, by the time you are made aware of the default, the damage to your credit report and scores may already be done.
If your son were to stop making payments altogether, you would be responsible for the remaining balance on the loan. The creditor may then contact you to attempt to collect the debt.
If the account is sold to collections, the collection account will most likely be reported to your credit report as well your son’s.
Even if all payments are made on time, every time, your lenders will factor in the amount of the loan when evaluating your credit report for credit purposes. The debt will be included in the total amount you owe when credit scores are calculated.
The increase in your total debt could negatively affect your credit scores.
Benefits to Cosigning a Car Loan
Risks to your credit aside, cosigning a car loan for your child can certainly help them begin establishing a strong credit history for themselves. Because you have strong credit scores, having you as a cosigner will likely make it possible for him to receive better rates and terms than he would if he was applying on his own.
Just be certain that your son fully understands the role of a cosigner and that his actions, good or bad, will impact you directly. You would be doing him a great favor and he has a serious responsibility to you as a result.
Other Options for Helping Your Child Build Credit
If your son does not yet have a credit card in his name, adding him to one of your credit card accounts as either a joint account holder or an authorized user is another option that can help him build credit.
As a joint account holder, he would not only have the ability to use the credit card, he would also be responsible for the payments. This means that both of your credit histories would be affected by any late payments on the account, just like cosigning for a car loan.
As an authorized user, he would be able to use the credit card, but would not be responsible for making payments on the account. You would be responsible for any charges he made, but you also would control the account and could use it to teach him about credit and how to use it wisely.
Not all lenders report authorized user accounts, so ask them if they do before adding an authorized user to your account.
Thanks for asking,
The “Ask Experian” Team