When your credit score is low, lenders might ask you to get a creditworthy co-signer for your loan. The co-signer is a person who signs the loan documents with you as a pledge to pay back the loan if you do not. The lender then gives you the loan based on the co-signer's good credit history. Having a co-signer does not directly affect your credit score, but you might experience a few indirect effects.
Credit Reporting
Each of your credit accounts, including loans, credit cards and lines of credit, appears on your credit report if the lender provides the account information to the credit bureaus. When an account appears on your credit report, it can raise or lower your credit score. Accounts with co-signers are not reported any differently than other accounts, so having a co-signer on an account as opposed to not having a co-signer will not change the way your credit score calculates the account data.
Getting Credit
The major benefit of having a co-signer is that this person can help you get credit that you otherwise would not have been able to qualify for. You need to have credit accounts to have a credit score, and if your score is low because of credit problems and bankruptcy, opening a new account and using it responsibly is one of the best ways to improve your score. Therefore, the co-signer can indirectly increase your score just by making it possible for you to get a credit account, which you can then use to improve your credit.
Interest Rates
Another perk of having a co-signer who has better credit than you do is that this person can help you qualify for lower interest rates. This is because the lender bases the rate on the co-signer's creditworthiness, not yours. A lower interest rate means lower monthly payments than you could have gotten on your own. The lower payments will be more affordable, which means you should be less likely to miss the payments. Making payments on time helps your credit, so this is another way that your co-signer indirectly helps your credit score.
Financial Support
Your co-signer should be interested in making sure you make your payments on time because all of the account data appears on the co-signer's credit report as well as yours. Because of this, your co-signer might be willing to help you make a budget, set up automatic payments or remind you to make sure you pay your bills. If you are in a tight spot financially, the co-signer might even be willing to make a payment for you so neither of you feel the negative effects of a missed payment.
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