Dangers of cosigning credit applications

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 requires that people under 21 have a co-signer or a job in order to open a credit card. Further, the same law requires lenders to confirm an applicant’s capacity to pay their debt for any other loan. This has thrust the prospect of co-signing for loans (or asking for someone to co-sign for you) into a new light of popularity.

When you co-sign for a loan or a credit card you are taking on equal responsibility and equal liability for the repayment of the debt. This means you are essentially responsible for payments if the loan goes delinquent. And, your credit reports will reflect the status of the account, which can include any negative credit reporting.

There’s a fairly popular misconception that you can co-sign for a loan and not be liable for its repayment. This so-called “co-signer for credit only” designation doesn’t exist in any legitimate lending environment and is not recognized by lenders. You either are or are not liable for payment, and when you co-sign you are definitely liable.

Notwithstanding the dangers of the debt going into default, co-signing can be problematic even if the debt’s payments are always made on time. Simply being in debt is half the problem when you co-sign. Almost all lenders pull your credit reports and credit scores when you apply for credit and co-signed debts will appear on your credit reports. This means they will influence your credit scores and can cause them to be lower than if you had not co-signed.

Your debt to income ratio, the amount you owe relative to the amount you make, is also a key factor in mortgage financing. The more you owe the less attractive you’re going to look to other lenders, even if all of your payment have been made on time.

There’s a reason why someone has asked you to co-sign for them. They either don’t make enough money to qualify for the loan on their own or their credit isn’t good enough to stand on its own. Either way, you’re getting involved with a co-applicant who isn’t an acceptable credit risk on their own. Keep this in mind before you sign the dotted line because once you do, you've fully committed.

This guest post was written by John Ulzheimer.  John is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.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.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Financial Counseling Association of America Financial Counseling Association of America
    MMI is a proud member of the Financial Counseling Association of America (FCAA), a national association representing financial counseling companies that provide consumer credit counseling, housing counseling, student loan counseling, bankruptcy counseling, debt management, and various financial education services.
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.9/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Department of Housing and Urban Development - Equal Housing Opportunity Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.