If your credit history is not good enough to meet lending standards, one option is to get a loan with a co-signer. This is a person with good credit who agrees to sign the loan agreement as well. Because this person will repay the loan if you fail to do it, the creditor has enough security to allow you to borrow. Depending on how you manage the loan, it can help you build credit.
Initially Hurt Credit
Getting any type of loan will initially ding your credit, regardless of whether or not you have a co-signer. This is because a new loan counts against you in the parts of your credit score that consider new credit and your average age of accounts. In addition, each time the lender checks your credit in response to a loan application, this hurts your credit score. If you applied for a loan and were denied before applying with a co-signer, this will hurt your credit twice.
Potential to Benefit
The most important factor in determining your credit score is your payment history. If you don't have any loans, you can't have any payment history. Therefore, having a co-signer help you get your first loan gives you a chance to finally start building a positive payment history. If you pay on time every month, this will improve your credit. In addition, as you manage more different types of credit, including both credit cards and installment loans, potentially with co-signers, this will also increase your credit score.
Potential to Hurt Credit
A co-signer does not act as a guarantee that you will not damage your credit score. If you miss a payment, this will count against both you and your co-signer in the payment history portion of your credit reports. You are the one with primary responsibility until the lender gives up on you and demands payment from your cosigner. However, if you know you are in trouble financially one month and let your co-signer know before the payment is due, she might help you make the payment so neither of you see credit score damage.
Warning
Your actions with regard to your co-signed loan will not only affect you, but also your co-signer. This is great if you make payments on time because it will increase both of your credit scores. However, if you are irresponsible and miss a payment, it will lower both your credit score and your co-signer's credit score. Consider the weight of this responsibility before asking a loved one to co-sign. Especially if your co-signer wants to buy a house or a car soon, your irresponsibility could make it impossible for your co-signer to get a loan on his own.
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