The hazards of co-signing
Co-signing on a loan can help you get a better deal, but can also cause some financial turmoil down the line. Follow these steps to make sure it is a good idea to co-sign:
1. Know what you are getting into – Co-signing on a loan or credit card is a serious matter that should not be entered into lightly. Essentially, when you co-sign on a loan you are taking on legal responsibility for the account. Should the other person miss payments or default on the loan your credit profile will show the damages and the creditor may require you to pay.
2. Do the math – Depending on your financial situation, co-signing may or may not be a good idea when you apply for a loan. Work with your lender to calculate what rates you could receive alone and what rate you could receive with a co-signer. Does it still make sense to co-sign?
3. The buddy system – If you choose to add a co-signer make sure that you pick a person who is trustworthy, you will be in contact with for a long time and who understands their responsibility. Family members, spouses and close friends are good options. Co-signing with coworkers or people you barely know can lead to trouble.
4. Breaking up is hard to do – Once the account is opened it is very tough to remove a co-signer off the loan. You will need to close or refinance the loan in order to break the co-signing agreement. Divorce decrees that separate responsibility for the account payment are not legally binding for the creditor or the credit reporting agencies and will not stop the account from being reported on both people’s credit profiles.
5. Keep an eye out for trouble – If you have co-signed on a loan, check your TransUnion credit profile regularly to see how the other person is maintaining the account. If you start to notice a series of late payments, call the person and talk about their financial situation. Addressing a potential problem early can help prevent a more serious record, such as a foreclosure, from appearing on your credit profile.