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.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.