Does Having a Cosigner Build Your Credit?
Explore how a cosigned loan influences the credit standing of all parties and its role in building a robust financial history.
A cosigner is an individual who legally agrees to share responsibility for another person’s debt, such as a loan or credit account. This arrangement typically occurs when the primary borrower may not qualify for credit on their own due to a limited credit history or a lower credit score. The cosigner provides an additional assurance to the lender that the debt will be repaid.
How Cosigning Influences the Primary Borrower’s Credit
Having a cosigner can help a primary borrower establish or improve their credit profile. When a loan or credit account is cosigned, it is reported to major credit bureaus under the primary borrower’s name. Payment activity on that account directly contributes to the primary borrower’s credit history.
Timely payments on the cosigned account are beneficial, as payment history is a significant component of credit scoring models, often accounting for 35% to 40% of a FICO or VantageScore. Consistent on-time payments demonstrate financial reliability, which can lead to a positive impact on the primary borrower’s credit score. The establishment of this new account can also positively influence the primary borrower’s credit mix, showing their ability to manage different types of credit.
The length of the credit history, which includes the age of the cosigned account, also plays a role in credit scoring. An older account with a consistent record of on-time payments can contribute to a robust credit profile over time. For revolving credit accounts, maintaining a low credit utilization ratio—the amount of credit used compared to the total available credit—can favorably impact the primary borrower’s score.
How Cosigning Influences the Cosigner’s Credit
The cosigned account also appears on the cosigner’s credit report, reflecting their legal commitment to the debt. This means the cosigner’s credit profile is directly affected by the primary borrower’s payment behavior. Timely payments on the cosigned account contribute positively to the cosigner’s payment history, which is a major factor in credit scoring.
The presence of the cosigned debt on the cosigner’s report can influence their credit utilization ratio and debt-to-income (DTI) ratio. Even if the primary borrower makes all payments, the outstanding balance of the cosigned loan is considered part of the cosigner’s total debt obligations. This can affect the cosigner’s ability to secure additional credit or loans, as lenders evaluate their overall debt burden and repayment capacity.
Lenders calculate a cosigner’s DTI ratio by adding all monthly debt payments, including the cosigned loan’s payment, and dividing that sum by their gross monthly income. While the DTI ratio itself does not directly impact a credit score, it is a significant factor lenders consider when assessing an individual’s financial health and their eligibility for new credit. The cosigned loan can consume a portion of the cosigner’s available borrowing capacity.
Understanding Shared Account Obligation
A cosigned loan establishes a shared legal and financial obligation between the primary borrower and the cosigner. Both parties are equally responsible for the repayment of the debt. Payment activity, whether positive or negative, is reported to credit bureaus for both the primary borrower and the cosigner.
If payments on the cosigned account are made on time, this positive payment history benefits the credit reports of both individuals. Conversely, if payments are missed or the account defaults, it negatively impacts the credit reports and scores of both the primary borrower and the cosigner. A single late payment, especially if 30 days or more past due, can significantly lower credit scores for both parties.
In instances of default, the lender can pursue collection efforts against either the primary borrower or the cosigner, or both. This shared liability means the cosigner may be required to cover the entire outstanding balance, including any accrued fees or collection costs. Negative information from missed payments or default can remain on both credit reports for up to seven years, affecting their ability to obtain future credit.