A:

Cosigning for a loan does not affect a credit score unless the other person defaults on the loan and the cosignor does not pay it back. When someone needs a cosignor, it is usually because the person does not have the credit score necessary to get the loan. This means either that the person has been irresponsible with credit in the recent past or that has little to no credit history. Either way, a cosignor is promising responsibility for the debt if the person defaults. If the item is a very high-value item, such as a new car or a house, the cosignor can fall into debt very quickly.

If the original borrower defaults, the lender looks to the cosignor to take over the debt. If the cosignor cannot afford it or does not continue paying the debt for any reason, then the lender will send it to collections just as if the debt was incurred by the cosignor. At that time, the collection agency begins collection activities that can include obtaining a judgement and putting the debt on the cosignor's credit report, which drastically reduces the cosignor's credit score and ability to obtain new credit.

If there is a charge-off, collection and judgement, then a cosignor might be looking at up to three new negative accounts on his or her credit report from one defaulted account. For these reasons, it is important to be careful about cosigning on a loan for someone else unless the cosignor knows that the borrower has the ability and willingness to pay the money back.

RELATED FAQS
  1. Why don't I have a credit score?

    Learn about some of the reasons why you might not have a credit score, and find out how you can build a good credit score ... Read Answer >>
Related Articles
  1. Personal Finance

    Getting Your Name Off A Cosigned Loan

    If your friend or relative has proved to be irresponsible, getting out of the cosigned loan can improve your financial security and options for borrowing.
  2. Personal Finance

    What Do Credit Score Ranges Mean?

    Take a closer look at what credit scores in each range mean for your financial future.
  3. Personal Finance

    A Good Credit Score: Why Do You Need It?

    Your credit score can affect your ability to borrow money, buy a house or even get a job.
  4. Personal Finance

    What Credit Score Should You Have?

    We break down credit scores by age to see what your score should be and how it will affect your major purchases.
  5. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  6. Personal Finance

    Build Your Credit Score

    Here are four good ways to build your credit score when you're starting from scratch. Do it right and you'll end up with excellent credit.
  7. Personal Finance

    New Credit Scoring Forgives Small Debt

    FICO 08 means that certain types of old debt won't affect your credit score, but it's not all good news.
  8. Taxes

    What Is The U.S. Government's Credit Score?

    If the U.S. government were treated like a regular person, how would lenders view it?
  9. Personal Finance

    How Bad Is My Credit Score?

    You've seen the number, but what does it mean? Here's how to assess your credit score and get to a better place if needed.
  10. Investing

    Millennials: Prevent a Bad Credit Score

    Here are five ways to help prevent getting a bad credit score that could affect future loan, credit card or mortgage approvals.
RELATED TERMS
  1. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
  2. Good Credit

    A qualification of an individual's credit history that indicates ...
  3. Negative Information

    Data in a consumer’s credit report that lowers his or her credit ...
  4. FICO Score

    A type of credit score that makes up a substantial portion of ...
  5. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...
  6. Credit Limit

    The amount of credit that a financial institution extends to ...
Trading Center