The consequences of co-signing a loan, even if for a family member, can be devastating to your credit. Even if your heart is in the right place, don't sign anything until you've considered all the options and outcomes.
As parents, we want to help our kids -- maybe even some adult friends when times are rough.
But the folks at ClearPoint Credit Counseling Solutions said co-signing loans is a risky practice that can almost certainly mess up your credit.
For one, if you co-sign a loan, the three credit bureaus will list you as the main debtor. If the other guy misses payments or dies, the lender can sue you, file a lien on your home and even garnish your wages if you can't pay the bill.
Since the loan amount will be listed as your debt, it can hurt your debt-to-credit ratio. That could kill your credit score and make it harder to qualify for any new loans.
One absolute you should follow about co-signing: never co-sign on a credit card. Some cards have adjustable rates. The APR's start to soar over a few months. You have no control over what additional credit the card company may extend to the other guy. Suddenly, he has a larger balance he can't pay. Guess who's stuck with it?
Since the bill is going to the other guy's address, you may not even find out how bad things are until it is too late. Then you have no choice but to bail him out in order to save your own credit.
The best co-sign is no co-sign, unless it's a child who has no credit and needs a jump-start, and you are comfortable enough to cover the payments in an emergency.
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