What Happens to a Credit Score When Co-Signing?

Debt co-signing is a way for those with poor credit to get approved for loans or credit cards by having someone with good credit back their debt obligation. The person with good credit, or "co-singer," agrees to pay the debt if the person with poor credit fails to pay, which gives creditors an extra guarantee that they will be paid. Co-singing can have several effects on credit scores for the co-signer and the person seeking the loan.

Credit of Borrower

Getting a debt co-signed can be beneficial to the credit score of the person with bad credit in the long term. When you have bad credit, it can be hard to get a loan, but paying off debts faithfully is a way to build credit. Getting a cosigner can be a way to secure a loan to start making payments toward building up credit. The danger for the borrower is that co-signing implies that they may not be financially stable or responsible enough to pay for the loan themselves. Borrowers that get cosigners often start off with good intentions but end up missing payments so the debt falls to the co-signer to pay. If there is no adequate communication between the borrower and co-signer, payments may be missed or late, which can hurt the credit of both parties.

Credit of Co-signer

Cosigning a debt can harm the credit of the co-singer. Any co-signed debt is considered to be part of the co-signer's total debt load, which may harm credit after the loan is issued. Another problem is that co-signers often end up paying for some or the entire amount borrowed by the person they sign for. If the co-signer expects the borrower to be responsible and pay for the loan, they may unexpectedly find themselves unable to pay for all of their debts, which can harm their credit. While the borrower is likely to have bad credit to begin with, missed payments will have a more dramatic impact on the credit of the co-singer.

Considerations

Co-signing is an inherently risky practice, which yields little financial benefit to the co-signer. From a purely financial standpoint, it is best never to co-sign a loan if your goal is to protect and increase your credit score. Most people co-sign loans for personal reasons, such as to help a friend or family member through a tough time. Co-signers should be aware that there is a good chance they will end up paying for some or all of the cosigned debt. Co-signing can, however, help borrowers with poor credit establish their credit, especially if they have a short credit history and are otherwise financially responsible. For instance, recent college grads often need loans but have short credit histories despite good income potential. It should also be noted that co-singing can introduce tension into personal relationships, which can cause more harm than the loan is worth to either party.