Does Co-Signing Build Credit?

A co-signer on a loan or credit account is someone who agrees to be held jointly responsible for repaying the debt. Co-signing can be dangerous because you are legally liable to repay the debt. However, it can also help you build credit if the primary borrower manages the account well.

Co-Signing Basics

The lender reports all of the account information, including the payment history, on both the primary borrower and the co-signer's credit report. Usually, the co-signer has a good credit score and signs the agreement because the lender will not allow the primary borrower to get credit. However, in some cases, someone with good credit will allow you, as a friend or family member, to co-sign so the payment history will appear on your credit report as well.

Primary Borrower Responsibilities

The primary borrower on the co-signed loan or credit card is the one who usually receives the bills and is expected to make payments. By co-signing, you are entrusting your credit history to this person. If the person manages the account responsibly, it will help build your credit. If, on the other hand, the person pays late or runs up a high balance on the credit card, your credit score will decrease.

What Builds Credit?

Your credit score considers five major areas, all of which a co-signed loan can affect. The most important way to build credit is to develop a consistent history of on-time payments, without collection accounts, bankruptcy or debt settlements. The amount you owe also affects your score, and paying down a balance and keeping a low ratio of debt to credit limit on credit cards both help this area. Having a long credit history and managing many different types of credit also helps your score, so getting added as a co-signer on a long-term loan of a type you haven't had before is helpful. Lastly, having new credit hurts your score, so you should not co-sign loans too frequently.

Alternatives

If you can't get credit on your own but feel like you are responsible and would like to start using and building credit, you should be the primary borrower. One way to do this is to get a secured credit card on your own by putting down a deposit. Another option is to have someone co-sign for you instead of you co-signing for someone else. When you are the primary borrower, you can be in charge of paying the bills on time and have a lot more control over what affects your credit score. As long as you pay on time and work to decrease the amount you owe, you will build up a good credit history.