Does Financing With a Co-Signer Help Credit?

It is a paradox of lending and credit. You can not borrow money without a good credit history, but you cannot establish a good credit history without borrowing money. It can be a challenge to break through this loop and establish credit. A co-signer can help you in the process.

Function

A co-signer is a person who guarantees payment on a loan or credit card if the primary borrower does not pay. People usually co-sign for someone who cannot get credit on his own, often a close friend or family member.

Considerations

If you finance a loan with a co-signer you will generally improve your credit, particularly if you have a very limited credit history or no credit history. You can use the co-signer's good credit history to get you approved for a loan. After you are approved, the lender will report your positive payment history on your credit report. This will build your credit history.

Types

Just as having someone co-sign for you can help build credit, so can being added to another person's account as an authorized user. If you are named as an authorized user, you generally do not have any liability for charges made on the account, but you have the ability to use the credit account. Being an authorized user may cause the payment history on the account to report on your own credit report. This may or may not have an effect on your credit score depending on the scoring model that is used and the relationship between the authorized user and account holder.

Benefits

Sometimes a co-signer is also considered a co-owner of the account. This is particularly true with credit card accounts. When someone adds you as a co-owner of his account, the credit reporting agencies may add his history to your credit report. This may instantly give you a good credit history based on timely payments. But any negative payment history could end up on your credit report as well.

Warning

A person co-signing a loan for another person is taking on a risk that a professional lender will not take on for themselves. If you are considering cosigning for another person, think about why they cannot get credit on their own. If they are young and lack credit history, then you may be comfortable cosigning and only exposing yourself to minimal risk. If the person you are co-signing for has bad credit, much more risk is involved. Consider carefully if the person has learned how to use credit wisely, and if he is able to pay his bills on time. If he does not use this account wisely, his bad credit may soon become your bad credit.