If someone asked you to do something that had a 38 percent chance of costing you money, a 28 percent chance of hurting your credit score and a 26 percent chance of damaging your relationship with your child, friend or spouse, would you do it?
Chances are your answer is no. However, people are doing exactly that — whether they realize it or not — every time they agree to co-sign on a loan. That’s according to a new survey from CreditCards.com showing that 1 in 6 American adults has co-signed a loan or a credit card, and a large number of them has suffered fallout from doing so.
[See: 11 Expenses Destroying Your Budget.]
Why do people do it? Surely most people go into co-signing with the best of intentions. It’s a father co-signing a car loan with his newly graduated daughter to help her get a better deal. It’s a mother co-signing with her son to help him get a credit card without an astronomical APR. There are countless other circumstances and they typically involve an older person agreeing to co-sign with a younger person who needs to jumpstart his or her credit.
Here’s the problem: Many, many folks don’t fully understand what they’re getting into when they co-sign and that can lead to big trouble. The road to hell, as they say, is paved with good intentions, after all.
So what should you do if someone asks you to co-sign with them?
1. Understand what you’re getting into. Co-signing is no joke. When you co-sign, you’re agreeing to be responsible for the amount borrowed if the primary borrower drops the ball. (And they definitely do sometimes.) That’s a big deal and it’s something that not all co-signers understand. Also, if the primary borrower pays late or makes some other mistake with that loan, that mistake will hit your credit the same way it would if you were the only person on the account. That makes co-signing an incredibly risky proposition that should not be entered into lightly. And it is important that both parties understand all of these risks.
[See: 10 Simple Ways to Raise Your Credit Score.]
2. Trust — but verify. Again, most people go into co-signing believe that the other person will do a great job of paying their bills on time every time, but the reality is often different. That’s why it’s absolutely vital for co-signers to get as much access to the account as they possibly can. Before you agree to co-sign, talk to the lender to find out your options. Will you be told if a payment is late? Can you get balance information? If there’s a credit line increase, would the issuer tell you? The sooner you know these sort of things, the easier it will be to handle any problems that might arise.
3. Realize there’s not an easy exit. Ending a co-signing relationship is not simple. Typically, both sides have to agree to end the relationship. If you co-signed for a credit card, it’s possible that you may not be able to end the relationship until the card’s balance is paid off. If you co-signed for a different type of loan, the person with whom you co-signed will likely need to refinance the remainder of the loan in his or her own name in order to end the relationship. This can get messy — for both your finances and your relationship. However, it’s important that you ask your lender about your options for ending the co-signing relationship long before you agree to start the relationship in the first place. Better safe than sorry.
4. Explore other options. When someone asks you to co-sign, ask if other options have been investigated. If they haven’t, help that person do so. For example, instead of co-signing on a credit card, consider making the person an authorized user on one of your current cards. That’s a way to give your loved one a leg up, credit-wise, while minimizing your own risk. Secured credit cards are also an option. You could provide the security deposit to help open the account — typically a few hundred dollars — and that would allow your loved one to have his or her own credit card that works like any other card, except for the presence of the security deposit. It’s another way to help without all the risk and commitment that comes with co-signing.
[See: Best Credit Cards: Find the Right Card for You.]
To be sure, co-signing isn’t always a bad thing.These arrangements often go off without a hitch, pleasing both parties. But that’s not always the case. That’s why anyone considering co-signing for a friend or relative should not do so without serious forethought. Do your homework. Ask your lender all of your questions. Have uncomfortable conversations with the other borrower so he or she understands the responsibilities and your expectations. Consider alternatives to co-signing. And finally, be prepared to just say no. After all, as much as you might like to help your loved one, risking your own good credit to do so probably isn’t a good idea.
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How to Keep Co-signing From Ruining Your Relationships and Your Finances originally appeared on usnews.com
