Agreeing to cosign a loan for someone isn’t something to take lightly, but it can be a great opportunity for both parties. Not only will cosigning help you build trust in the relationship, it can also help your credit scores in the future. By being proactive, you can help someone while helping yourself. Here are some things to know when you cosign a loan or credit card.
Cosigning can affect your credit
It’s well known that cosigning for someone can affect your credit, but that’s not always a bad thing. Typically, a primary borrower needs a cosigner because they are either recovering from a difficult financial situation or they simply haven’t established enough credit to be loan-worthy on their own. This is where you come into the picture.
Ensure that you both understand what the cosigning arrangement means and the ways in which it can affect both of you. Cosigning can pose a risk to your credit if the primary borrower isn’t responsible, but it’s also true that you can both benefit from this partnership.
For example, if you cosign a car loan with your child, you are helping him or her establish a history of on-time payments, and proof that he or she is financially responsible. In return, this history will also show up on your credit report, so the same factors will positively affect your credit scores as well.
One way to prevent missed payments — which would harm both of your credit scores — is to have the bills sent to your address, so you can pay them directly. Then send the statements to the borrower and have him or her repay you. By doing this, you ensure that the payments are made on time, that you’re reimbursed and that you both help your credit scores.
If you don’t want the responsibility of paying another bill each month, there are other options. You can easily set up automatic payments through PayPal, indicating that the bill amount will be withdrawn from the primary borrower’s checking account monthly, or as frequently as payments should be made.
Tips to successfully cosign
Communication is the key to making sure you and the primary borrower are both successful in this joint financial decision. After you cosign, you should stay in touch with that person regularly. You can make it clear that you’re there to help on his or her financial journey and that her or she can talk to you if there is any trouble repaying the loan or staying on track.
As the cosigner, it’s a good opportunity for you to help educate the person seeking your assistance — and there’s no age limit on when this can happen. For example, if you have a teenage daughter and want to help her establish a positive credit history, cosigning a credit card may be a good choice. Be clear about what this card is going to be used for, and why it’s important for her to be responsible with it. Check her credit scores, and teach her what factors affect them.
Then, every month when the bill comes, sit down, go over it together and make the payments. After a year, check her score again. This is an actionable way to teach her that over time, being financially responsible pays off. In return, you’ll have more available credit on your own report, which will help your scores as well. Providing this support system can strengthen your personal relationship as well as your financial one.
Evaluating other options
If you’ve decided you don’t feel comfortable cosigning a loan for whatever reason, that’s okay. However, there are other ways to help the person who asked you to cosign. One option is to help the person asking you to cosign to review his credit report. Highlight areas that can be improved, and assist him in building a strategy to raise his scores. If there are things that need to be disputed, you can help him find the right people to call and make the process a little easier.
Suggesting financial books, blogs and magazines to continue the financial education of your primary borrower is also a good idea. By sharing your knowledge instead of your finances, you can teach someone lifelong financial skills to improve their future prospects.