Finance Globe

U.S. financial and economic topics from several finance writers.
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Cosigned Debts in Good Standing Still Affect You

Cosigning is generally discouraged because of all the things that could go wrong. For example, the other person might not keep up with the payments. If that happens, the late payments are added to your credit report and the creditor will eventually come after you for payment. If the other cosigner files bankruptcy, you’re left on the hook for the entire debt.

Even if things go as planned, cosigned debts can still affect your credit score and your ability to get approved for future credit cards and loans. Timely payments on a cosigned loan will boost your credit score, true enough. But, that’s not the only thing banks consider when they qualify you for a credit card or loan.

How Cosigned Loans Can Affect You

Loans you’ve cosigned will typically appear on your credit report, regardless of whether you’re the one making payments or not. Thirty percent of your credit score is based on the amount of debt you have. A high balance on a joint credit card or a cosigned loan could cost you credit score points in that area. Of course, your credit score will improve over time as the debt balance goes down, but your score may suffer temporarily.

When you apply for a major loan, lenders typically consider your amount of debt compared to your income to see if you can handle another debt payment. Having too much outstanding debt makes you a risky borrower and lenders are not eager to loan you more money. That you cosigned on the loan doesn’t necessarily make your debt load look lighter. After all, when you cosigned the loan, you basically guaranteed that you’d assume the payments if the other borrower couldn’t afford them. That could happen anytime.

Getting Off the Hook for a Loan You Cosigned

Cosigning can sound like a good idea in the beginning. You can help a loved one achieve a goal they may not be able to do on their own. But, it may not be long before you realize that cosigning for someone else can keep you from accomplishing your own goals.

Removing your name from a cosigned loan isn’t the easiest thing to do. The lender would much rather have two people on the hook for a debt than one. Plus, you’ll need the other borrower’s cooperation. If you lent your good credit history for a credit card, the other borrower may be able to transfer the balance to a credit card in his or her own name. Then, you can close the joint account once the balance transfer is done.

Or, the borrower may be able to refinance a mortgage or auto loan but this time using only their name and credit history. Some lenders may let you remove your name from a cosigned loan after several months or years of timely payments. Or, depending on the loan amount, the other borrower may be able to consolidate with a home equity loan, a consolidation loan, or sometimes even an unsecured personal loan, if their credit history is good enough.

And, if everything fails and you’re unable to remove your name from the loan, the final option is to pay off the account as quickly as possible. It’s not the most ideal solution, but sometimes it may be the only one.
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Tuesday, 20 August 2019

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