How will co-signing a loan affect my credit score?
It's a common practice for parents to cosign loans for their children. This is especially true when the children are young and just getting started in life. Perhaps the most common situation that a parent or other relative may cosign a loan is for a college. While cosigning a loan may help the student, there are things that every cosigner needs to be aware of.
Cosigning a loan is a simple process. You essentially visit the lender with the person whom you are helping and sign an agreement that you will ensure the loan is paid. However, there is a little more to it than that, and some people are shocked when they see the impact a cosigned loan can have on their credit report.
Many people who act as a cosigner ask, How does cosigning affect my credit score? The good news is that just cosigning a loan has little effect on your credit score. Unless by cosigning it your credit utilization ratio is changed, cosigning should not affect your score. You do not take on the other person's credit score, but only those credit facts related directly to the cosigned loan. However, if the person you've cosigned for fails to make payments, your credit score is immediately affected. This is why it is so important to teach young people the value of paying their bills on time. By being responsible with credit, they can help build their own credit score so that they do not need to have a cosigner in the future.
Monitoring Your Credit Score
If you are asked to cosign a loan, you may want to preview your credit scores to see exactly where you stand. Look at your credit utilization and the amount of debt you are being asked to sign for. If it causes your credit score to be affected by more than a few points, you may need to decline the agreement to cosign. You can get a copy of your credit report from one of the national credit bureaus. You can request your credit report from just one of the credit bureaus or all three. It is best to examine all three as they can contain varying information. If you have cosigned for someone, it may be a wise idea to monitor your credit score throughout the life of the loan. By having a credit score check on a regular basis, you can protect yourself from the negative effects of a cosigner not paying his or her loan on time.
Things That Affect Your Credit Score
Knowing how your credit score is calculated can help you see what things affect your credit. That way, when you get your credit reports checked, all of the information provided will help you analyze your current credit situation. Here are some of the primary things you should be aware of.
• Payment history
Your credit report includes a record of your credit payments for the past seven years. If you have cosigned a loan and the loan is not paid on time, this information will be reflected in this portion of the credit report. Making payments on time is essential for maintaining a good credit score.
• Utilization ratio
Part of your credit score is determined by how much credit you have used versus how much is available. When you cosign for a loan, this utilization ratio may be affected. Ideally, keeping your utilization around 30 percent won't have a negative impact on your credit score.
• Age of credit accounts
The longer you have a credit account, the better it is for your credit score. If you have already opened up some other credit accounts, cosigning for a loan may give you too many new accounts, which can actually harm your credit score.
Cosigning for someone is a great way to help them build their own credit score. Just be certain that the person you cosign for understands the risk that you are taking for them. By monitoring your own credit report, you can see if the loan you cosigned for is affecting your credit.