As a co-signer on a loan or credit card application, you're lending your good name and your solid credit history. You also make a promise to repay in full if the original borrower can't, doesn't, or just plain won't. You are legally responsible for repayment of the debt. And, co-signing may impact your own credit score.
Still, there are many valid reasons someone might consider co-signing, including helping to establish your young adult's credit. For those with little or no credit history applying for credit, having a co-signer may prevent them from getting turned down or from paying a higher rate.
Follow these three guidelines to make co-signing successful:
- Set up automatic payments. The best way to build a strong credit history is to make every payment on time. Before you co-sign for a loan, insist on establishing automatic monthly payments.
- Agree to limits. Know when you're getting out before you get in. For a loan, aim for three years or less. For a credit card, start with a low limit. As a co-signer, you'll be notified of any request to raise the credit limit. And once your young adult is 21, have your name removed from the account.
- Share payment notifications. As a co-signer, you have the right to see statements and payment notifications. Consider using shared online access. This gives you the opportunity to step in before an accidentally missed payment turns into a past-due problem.
By following these suggestions, you lay out your expectations before co-signing. Being frank will help protect your financial standing and can also maintain your positive relationship with your borrower.
For more information on loans to family or friends the Home & Family Finance Resource Center