How Can Being A Cosigner Hurt Your Credit?

How can being a cosigner hurt your credit? Entering into a loan agreement is risky business and you should consider carefully the impact that a negative mark on your credit report can have. Cosigning a loan...

Cosigning a loan for someone can help them establish good credit and obtain loans that they would not be able to get on their own. While cosigning can help someone with their lending needs, it can also potentially hurt your own credit. Entering into a loan agreement is risky business and you should consider carefully the impact that a negative mark on your credit report can have.

If you cosign a loan and the borrower defaults on his payments for any reason, it will be reflected on his credit report and yours. You may not even know that the loan is in default until it is too late. Many times a cosigner finds out that the borrower has defaulted by being denied credit that he himself is trying to acquire. Some lenders will notify the cosigner immediately when the loan is in default, but others do not. When you are negotiating the loan you may ask the lender to notify you in writing in the event of a missed payment. If a loan goes into default, it will be reported to your credit bureau as your bad debt. Your credit rating can be severely damaged and the only way to repair it is to bring the loan up to date and pay any arrears and fees associated with it. You may even be sued for the money that is owed and incur costly legal fees to sort out what started as a good hearted favor.

Anne Reed of Acceptance Mortgage in Sparta, New Jersey is a loans expert.

"The cosigned debt may be included in the cosigner's debt-to-income ratios if the cosigner decides to apply for new credit on their own," Reed said. "Some lenders will allow the cosigned debt to be 'backed out of' their debt-to-income ratios providing that the co-signor can provide proof such as 12 months cancelled checks from the borrower showing that the cosigner is not paying the debt. However, not all lenders will allow this so the cosigner should not only consider the possible negative credit risks, but also the possible negative debt to income ratio effect."

A debt-to-income ratio is calculated by adding up all of your monthly debt payments and then dividing your yearly income by 12. Divide your monthly debt by your monthly income and then move the decimal point two places to the right. This formula will give you your debt to income ratio percentage number. Any loan payments that you cosign will need to be included in the calculation even though you yourself are not making the payments.

Consider the reasons why a person might need a cosigner. If it is because he is a first time borrower it is a better risk to cosign for him than if he has poor credit. Remember that there is a reason why some people have bad credit and it isn't something that can be changed just because you are a friend or family member. Don't let someone else's bad credit ruin your hard earned good credit.

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