It may be tempting to help out your husband or your child by co-signing a loan for them. For instance, let's say your husband has a low credit score and yours is higher, he might ask you to sign with him to get a loan with a lower interest rate. Or perhaps your child wants to begin establishing a credit history but needs a co-signer to get a credit card You think it's a good idea and are willing to help.
However, before co-signing for a loan you must be aware of the consequences and possible negative outcomes that could haunt you for many years. Below are four major points you must consider:
1. This is the most important fact to realize- being a co-signer means you have joint liability or responsibility for paying back all of the debt. If the other signer doesn't or can't pay then you will be totally on the hook. Therefore, when you sign the paperwork for the loan commitment you should be prepared to pay the full amount of the loan back, or else don't sign on the dotted line.
2. The joint debt will appear on your credit report, too. Even if the other person agrees to make all of the payments, it's important for you to closely monitor your credit report to know the status of the loan and whether monthly payments are being made on time. Delinquent payments can cause an increase in the loan interest rate plus penalty fees and consequently the balance owed will rapidly expand.
3. In addition, if loan payments aren't made in a consistent and timely manner, it will negatively affect your credit score. Debt payment history is 35% of a credit score calculation. A few late payments or a missed payment can bring your score down by 100 points and negative information will stay on your credit report for seven to ten years. This might affect your ability to get an individual loan in the future and could cause an increase in the interest rate you're charged. A lower score might also impact your ability to get a job or rent an apartment.
4. If you're going through a divorce and have loans with your spouse, it's difficult to untangle the joint debt. Having a settlement agreement that divvies up payment responsibility on joint loans does not legally transfer the ownership of the accounts. For example, if per your agreement your husband is supposed to pay the credit cards, and you agree to make payments on the mortgage, but the marital account titles are still technically joint, you will still remain legally responsible for all the joint debts in the eyes of the creditors. It's better for the creditors to have two people on the hook instead of just one, so they won't be thrilled at the idea of removing one of the responsible parties. If possible, the best action is to close all joint debts and lines of credit while you're married and reopen new ones under the name of the individual who is going to be responsible for paying off the debt when the divorce is finalized.
Co-signing for a loan is a dangerous proposition. Someone else's bad payment behavior can have a negative ripple effect on your finances, credit score, career and lifestyle. So even if it seems to be a good idea at first glance, think twice and review these four considerations. You can get a free credit report once per year from each of the three major credit bureaus by going to www.annualcreditreport.com
This article was written by Hollis Colquhoun. To get more great advice from Diva Toolbox Media Diva Hollis Colquhoun, visit her website at: HollisC.com