Does Cosigning a Loan Affect Your Credit Rating?

Cosigning a loan involves a commitment to repay debt should the primary borrower fail to do so. Individuals often cosign to help a friend or family member secure financing they might not otherwise qualify for, or to obtain better loan terms. This action can have significant implications for the cosigner’s financial standing. Understanding these potential effects on one’s credit rating is crucial before making such a commitment.

Understanding How Cosigning Appears on Credit Reports

When an individual cosigns a loan, the loan is reported by the creditor to the major credit bureaus, such as Experian, Equifax, and TransUnion. This reporting applies to both the primary borrower and the cosigner. From the perspective of credit reporting agencies, the cosigned loan is treated as if it were the cosigner’s own debt. The cosigner assumes equal responsibility for the debt’s repayment. The loan amount, along with its payment history and the type of account, will be reflected on the cosigner’s credit report.

How Responsible Payments Influence Your Credit

When the primary borrower consistently makes on-time and full payments on the cosigned loan, this positive payment activity can benefit the cosigner’s credit rating. These consistent, positive entries contribute to a strong payment history, which is a significant factor in credit scoring models. A well-managed cosigned loan can demonstrate a cosigner’s ability to handle credit responsibly, even if they are not directly making the payments. The presence of a cosigned loan can also diversify the cosigner’s credit mix, which is another component of credit scoring. For individuals with a limited credit history, a new, well-maintained loan account can also contribute to the length of their credit history over time.

How Missed Payments Influence Your Credit

Conversely, late payments, missed payments, or a default by the primary borrower can severely harm the cosigner’s credit rating. A payment is typically considered late and reported to credit bureaus once it is 30 days past its due date. Such negative marks, including late payments or accounts sent to collections, can remain on a credit report for up to seven years from the date of the original delinquency. This can significantly lower the cosigner’s credit score, making it more challenging to obtain new credit, secure favorable interest rates, or even rent an apartment. Even if the cosigner later brings the account current, the derogatory marks from the missed payments can persist on their report for years, continuously affecting their creditworthiness.

Key Credit Score Components Affected by Cosigning

Cosigning a loan influences several key components of a credit score:

• Payment history is the most significant factor, accounting for a large portion of a credit score, and it is directly affected by the primary borrower’s payment behavior. Timely payments enhance this history, while missed payments cause substantial damage.
• Credit utilization, which is the amount of credit used compared to the total available credit, is also affected. The full loan amount adds to the cosigner’s total reported debt, potentially increasing their utilization ratio, which can negatively impact their score.
• The length of credit history is influenced; a new cosigned loan might initially lower the average age of accounts, but over time, it contributes positively to the overall length.
• The credit mix benefits from adding a new type of credit, such as an installment loan, to the cosigner’s profile.
• Finally, the initial hard inquiry performed when the loan is applied for can cause a minor, temporary dip in the cosigner’s score.

Monitoring Your Credit Report

Cosigners should regularly monitor their own credit reports and scores to stay informed about the status of the cosigned loan. This proactive approach allows for the timely detection of any missed payments or errors reported by the primary borrower. The Fair Credit Reporting Act (FCRA) grants consumers the right to access their credit files. You can obtain a free copy of your credit report from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once every 12 months through AnnualCreditReport.com. Regularly reviewing these reports helps cosigners identify potential issues promptly, enabling them to take necessary action, such as contacting the primary borrower or making payments to prevent further damage to their credit.