The Responsible Person’s Guide to Getting a Cosigner
There may come a time in your life when you want to borrow money, open a credit card, or apply to rent an apartment, but you can't get approved on your own. While the reasons may vary – you're just striking out for the first time on your own or have bad credit history in need of repair – the bottom line is the same: your options are limited.
This is where having someone cosign for you comes in. But before you ask for that kind of commitment, it's important that you understand the implications of this arrangement for the person you're asking to cosign, as well as for yourself.
What is a cosigner?
Very simply put, a cosigner is somebody who applies with you for a loan, credit card or lease and agrees to pay off your debt if you default. To do that, the cosigner must sign the application with you, either in person or electronically.
The #1 thing you must know: you're affecting your cosigner's credit score.
Asking someone to cosign for you is not something you should do lightly, as what you are asking him or her to do is to assume responsibility for your debt. So the account appears as a tradeline not only on your credit report, but also on your cosigner's. And depending on how large the credit or loan is, it can bring your cosigner's credit score down right off the bat. This is because your new debt affects his or her credit utilization ratio (used credit vs. allowed credit), so if you're asking your cosigner to vouch for you for a large sum (i.e. a student loan), then his or her debt-to-income ratio may become too high. This could potentially ruin your cosigner's chances to obtain a future loan or open a credit card in his/her own name.
It's not all gloom & doom: if you make all of your payments on time, it can actually help boost your cosigner's credit score…
Being responsible and paying your debt on time consistently is smart to begin with, and because it's also on your cosigner's credit report, that positive behavior can theoretically extend to that person's credit score as well. (Although, if that person is able to act as your cosigner in the first place, chances are his or her score is strong and not necessarily in need of a boost.)
… but if you make late payments, it can (and most likely will) affect your cosigner's credit history and relatedly, their credit score.
Your cosigner is responsible for your debt, period. The biggest contributing factor to a low credit score is late or delinquent payments, and again, a stain on your credit report is the same on your co-signer's report. And if your cosigner doesn't monitor their credit history on a regular basis, it may take a while before they catch on — at which point it, may be too late for either of your credit scores to be salvaged.
If you default altogether, your cosigner is 100% responsible for your debt – which could put a serious strain on your relationship.
Imagine being in your cosigner's shoes when a collections agent comes knocking at his or her door. Depending on how deeply in debt you become, you drag that person down with you. If you default altogether, that person is then solely responsible for your debt, which could lead to lawsuits, bankruptcy and worse. Now, think about the damage that would be done to your cosigner's trust and faith — and that may be even more impossible to repair than the ruined credit.
4 tips for asking someone to cosign for you:
Before you even ask, do your homework. And after you have the conversation, be sure to put all you've discussed and agreed upon in writing, for both parties to sign.
1) Have a firm grasp on all expenses associated with the loan or credit card you are applying for.
Be sure you know how it works, the amount of monthly payments, total interest costs, and any other pertinent information. You may also be able to negotiate with the lender a release for your cosigner after you've made a series of on-time payments, so see if you can get that information up front.
2) Make a monthly budget: This serves two purposes: it helps you be sure you're not biting off more than you can chew, and it is also a responsible way to demonstrate to your potential cosigner that you will be able to comfortably make all of your monthly payments. Your budget should show your net income, fixed expenses (i.e. rent, cell phone, utilities, etc.) and an informed estimate of your variable expenses (i.e. groceries, entertainment, eating out, etc.), plus the monthly payment for the new debt you're incurring that your cosigner will be backing.
3) Be ready to demonstrate you have resources: A savings account, investment account or other assets, even if they're not liquid, is a good way to show to your cosigner that you have the means to cover your debt if anything goes wrong.
4) Come up with a plan for financial curveballs: What if you lose your job or a large, unexpected expense comes up? Make sure you have a contingency plan to cover the monthly payments your cosigner is guaranteeing.
Moral of the story: Know what you're getting into, and make sure your co-signer is on the same page.
Now that you understand the implications of asking someone to cosign for you, you can see how important it is that you fully understand all angles of the loan you're taking or credit card you're opening. Because in the end, unlike a joint loan or credit card, your cosigner is assuming all of the risk with none of the benefits. Do your best to demonstrate that you are responsible and worthy of your cosigner's trust – and support.