Lenders often require people with poor credit or no credit to get someone to cosign for a loan. However, before you sign, you need to carefully consider how cosigning could lower your credit score.
Outstanding Debt
Your credit score suffers when you cosign a loan because the formula considers you to be responsible for the debt. Your outstanding debts account for 30 percent of your credit score.
Payment History
Since you are legally liable for the loan, your credit report will contain whether the payments on the loan were made on time or late. If the person you cosigned for makes all payments on time, your credit score will improve because of the positive payment history. However, any late payments will decrease your credit score, even if you did not know about them.
Collections
If the person you sign for fails to repay the loan, the creditor can turn over the account to a collections agency, which can then come after you for repayment of the loan. Even if you pay off the debt as soon as you find out about it, the collections will still appear on your credit report, which will lower your credit score.
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