When you cosign any form of loan or line of credit, you are liable for the amount of money borrowed. This may impact your ability to borrow money for yourself because a lender for a larger loan, such as vehicle and home loans, will include the amount of the loan you cosigned on as part of your debt load when calculating your debt-to-income ratio.
Plus, the payment history on the cosigned loan or line of credit is reported on both the borrower and cosigner's credit reports. If you've agreed to cosign a loan for a friend or relative, but no longer want the responsibility of shared credit, how do you get your name off the loan? Fortunately, there are five key ways to do this.
With a loan with a larger balance, refinancing the loan under the person who is benefiting from the money is the best option. This rule applies to most loan types, such as personal loans, car loans, private student loans and mortgages.
Loans with larger balances are harder to pay off within a few months, so refinancing may allow the borrower to reduce the amount of his or her monthly payments. The person will also be borrowing a lower amount, assuming that a significant portion of the loan has been repaid, which can mean that he or she will be able to secure the loan without a cosigner.
You can also use a version of this strategy with credit cards by transferring balances to a new card under the person's name for whom you cosigned. Let's say the credit card that's under both of your names has a $1,000 balance. If your friend or relative can get approved for a card for more than $1,000, the money can be transferred. Then, both of you can decide to close the current credit card. This strategy, however, works mainly for smaller amounts of money.
Improve the Credit Rating of the Person Using the Money
Options are pretty slim if the person you cosigned for has not-so-great or minimal credit history. Help the person improve their credit with these five steps.
- Pull Credit Reports
Annualcreditreport.com allows individuals to pull their credit with all three credit bureaus once a year for free. Your friend or relative can purchase either the FICO score from TransUnion or Equifax at myfico.com. This will tell you what their starting point is. Plus, there's an explanation of what factors are causing a lower score. Once the person you cosigned for improves his or her score, they may be able to hold the loan on their own. (For more on the latest version of FICO scoring, checkout New Credit Scoring Forgives Small Debt.)
- Evaluate What Problems are Impacting Your Friend's or Relative's Credit Rating
Are there a lot of late pays on loans or credit cards? Are credit card balances above 50% of the available credit limit? Does the person have recent run-ins with collections? Are there accounts that should be reported in good standing that show a late pay or went into collections for non-payment? If yes, these need to be rectified in order to improve the score. (See How To Dispute Errors On Your Credit Report.)
- Focus on One or Two Issues That Are Currently Hurting Their Score
It could be to pay all bills on time for six months and dispute misreported information. If the person's credit history is comprised only of the loan on which you cosigned - and it isn't an outstanding credit card payment - then they need to open one credit card, keep the balance under 15% of the credit limit and pay on time. How revolving debt, such as credit cards is managed, is a large chunk of credit scoring. Therefore, the above strategy should improve the person's ability to obtain credit.
- Develop a Plan With a Time Frame
If the only problem is misreported information, credit report disputes can be solved in two months. Other actions should be given six months in order to make a noticeable impact on credit rating.
- Check FICO Score Again
Pay Off the Loan Faster
Another option for getting out of a cosigned loan is to ask the person using the money to make extra payments to pay off the loan faster. You may want to chip in on the balance so you can end the credit burden on your account.
Chipping in makes senses in two circumstances:
- If the balance is a small amount that you can afford to pay, and a late payment or non-payment has been or is expected.
- You are planning to buy a home or vehicle in the near future and cannot afford a ding on your credit score.
With certain types of loans, the best way to remove the person is to close the account. This is best when you are a joint account holder on a credit card or line of credit. If there is a remaining balance, it will have to be paid off or transferred first. Apartment leases can also be closed and reopened at the end of the lease under the person occupying the apartment.
If you or the other person is an authorized user instead of a joint account holder on a credit card or other line of credit, the authorized user can be removed at the primary account holder's request.
If you no longer want to have your name on someone else's loan, it can be removed. However, you have to take the appropriate steps depending on the cosigned loan type. Think carefully about whether you want to help the person pay off the loan. The goal is to create financial security and options for lending for yourself, not to hurt your own finances by giving someone else money you can't afford to give up.