When you cosign any form of loan or line of credit, you become liable for the amount of money borrowed. This may impact your ability to borrow money for yourself because a lender 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's and the 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 four key ways.
- Your best option to get your name off a large cosigned loan is to have the person who's using the money refinance the loan without your name on the new loan.
- Another option is to help the borrower improve their credit history.
- You can ask the person using the money to make extra payments to pay off the loan faster.
- If you are a joint account holder on a credit card or line of credit, the best way to get out is to pay off the debt or transfer the balance and then close the account.
With a loan with a larger balance, having the person who's using the money refinance the loan 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 their 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 they 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 (or keep it open, but unused). This strategy, however, works mainly for smaller amounts of money.
Getting Your Name Off A Cosigned Loan
Improve the Main Borrower's Credit Rating
Options are pretty slim if the person you cosigned for has a not-so-great or minimal credit history. The five-step strategy outlined below focuses on helping the person improve their credit.
Step 1: Pull Credit Reports
Annualcreditreport.com allows individuals to pull their credit reports with all three credit bureaus once a year for free. Your friend or relative can also purchase FICO scores from TransUnion, Experian, 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 their score, they may be able to hold the loan on their own.
Step 2: Evaluate What Problems Are Impacting the Credit Score
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 payment or went into collections for non-payment? If yes, these need to be rectified in order to improve the score.
Step 3: Focus on a Few Issues Currently Hurting the Score
The strategy should improve the borrower's ability to obtain credit. It could be as simple as paying all bills on time for six months. 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 your cosigner needs to open one credit card, keep the balance under 15% of the credit limit, and pay on time. This is because a large chunk of a person's credit score is how they manage revolving debt such as credit cards.
According to Experian, the credit utilization rate accounts for about 30% of a person's credit score.
Step 4: Develop a Plan With a Time Frame
If the only problem is misreported information, you can resolve these credit report disputes in about two months. Other actions should be given six months in order to make a noticeable impact.
Step 5: Check FICO Score Again
After a few months, check the borrower's credit score again to see if your efforts have made an improvement. As we mentioned, you might begin to see results in as little as a few months, although it might take up to six months to begin to see credit score improvements. If you don't see much improvement, go back to the credit report to see if you've missed any areas that you can rectify to improve the score.
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 already occurred 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.
Close the Account
With certain types of loans, the best way to get out 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 by 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 request of the primary account holder.
The Bottom Line
One of the risks of cosigning a loan is that at some point you may no longer want to have your name on the loan. Fortunately, you can have your name removed, but you will have to take the appropriate steps depending on the cosigned loan type.
Basically, you have two options: You can enable the main borrower to assume total control of the debt or you can get rid of the debt entirely. Think carefully about whether you want to help the person pay off the loan. The goal is to create financial security and financing options for yourself, not to hurt your own finances by giving someone else money you can't afford—or that they'll just waste.