In this article:
Cosigning an account for somebody else can positively or negatively affect your credit, depending on how the primary account holder manages repayment. As with accounts you open for yourself, consistent, on-time payments may help your credit. However, if the account becomes past due or is sent to collections, that could hurt your credit.
Here's what to know so you can choose whether to cosign with a full understanding of how it might affect your finances.
When Can Cosigning Hurt Your Credit?
When you cosign a loan, such as a mortgage or auto loan, you take on a legal obligation to make payments if the primary borrower can't or doesn't follow through. It's also possible to cosign an apartment lease to help a tenant qualify for a rental apartment. Cosigning may hurt your credit if:
- A loan payment is over 30 days past due. The creditor can report late payments on loans to the credit bureaus. Every late payment can then appear in your credit reports for up to seven years and hurt your credit scores.
- A cosigned vehicle is repossessed. If the vehicle you cosigned for is repossessed, that can also hurt your credit regardless of whether you used the vehicle.
- The account is sent to collections. After the primary borrower has missed several payments, the account may go to collections. A collection account can hurt your credit even if you weren't aware that the primary borrower was behind on payments. This can happen with rental agreements, too, even when the landlord wasn't reporting the on-time rental payments.
Opening a new account can also hurt your credit scores as a cosigner since it adds a hard inquiry to your credit report and brings down the average age of your accounts. These are relatively minor scoring factors, but you may see a dip in your scores right after the account is opened and reported to the credit bureaus.
When Can Cosigning Help Improve Your Credit?
Being a cosigner on a loan can help you establish and improve your credit when:
- The payments are made on time. Payment history is the most important factor in your credit scores, so making all loan payments on time can have a big influence in boosting your credit.
- The loan is paid off as agreed. This shows future lenders you can manage credit responsibly.
- The new account adds to your credit mix. Managing different types of credit, such as installment loans and revolving credit, can help your credit scores.
In short, cosigning can help your credit as long as the primary account holder manages the account properly.
What Is the Difference Between an Authorized User and a Cosigner?
Most credit card issuers don't let you cosign for a credit card or apply jointly with another cardholder. But it's more common for the primary cardholder to be able to add someone as an authorized user to their account.
An authorized user receives a credit card with their name on it, and the card is linked to the primary cardholder's account. The authorized user can then make purchases and, if it's a rewards card, the purchases could increase the account's rewards balance.
However, unlike cosigners, authorized users aren't responsible for repaying the debt. You may have an informal agreement that the authorized user will pay for their purchases, but only the primary cardholder is legally responsible for the entire bill and balance.
Similar to cosigning, credit card issuers can report the authorized user account to the credit bureaus, which can help or hurt their credit. Paying the monthly bill on time and having a low credit utilization rate may improve both the primary and authorized users' credit. Missed payments and high balances could hurt their credit.
If you no longer want to be an authorized user on an account, you may be able to remove yourself from the account and have it taken off your credit report. Experian also automatically removes delinquent accounts from authorized user's credit reports, as they're not responsible for the past-due debt.
| Authorized User | Cosigner | |
|---|---|---|
| Account ownership | The primary account holder owns and manages the account | The primary account holder owns and manages the account |
| Ability to make purchases | Both the primary account holder and authorized user can make purchases | Only the primary account holder can make purchases |
| Payment responsibility | Only the primary account holder is legally responsible for payment | The cosigner is responsible for payment if the primary account holder falls behind on their bills |
| Credit impact | The authorized user may see an increase or decrease to their credit score depending on:
| Payment history always impacts the cosigner, either positively or negatively depending on the primary account holder's payment history |
What to Consider Before Cosigning
Beyond the potential impact to your credit scores, there are many reasons why it's important to be cautious before cosigning a loan.
- It may impact the relationship. Your relationship with the friend, family member or partner may be strained if they stop making payments.
- You need good credit to help. Generally, someone will ask you to cosign a loan because they can't qualify for a good offer on their own. However, you'll only be able to help if you have good credit, which corresponds to a FICO® Score☉ Θ of at least 670.
- Cosigning can affect your ability to get financing. In addition to the impact on your credit scores, lenders may include the payments you cosigned for when calculating your debt-to-income ratio (DTI). A high DTI can make getting your own loan or line of credit more difficult.
- You are legally responsible for the entire debt. Cosigners are also responsible for late fees and collection costs that accrue when a borrower fails to make payments. Creditors can sue you and may be able to garnish your wages or bank account balances to collect the outstanding debt.
- Divorce doesn't end your obligation. If you cosigned a loan or credit card with a former spouse, a divorce decree doesn't end your legal responsibility for the debt.
- The negative credit score impact can stick. Bringing an account current or paying off a defaulted loan won't necessarily fix your credit. The negative marks can stay on your credit reports and hurt your credit scores for up to seven years.
Alternatives to Cosigning
If you're understandably reluctant to cosign, here are some alternative ways to support a friend or family member looking for help:
- Add them as an authorized user. If you have good credit, you can add the person as an authorized user to your credit card account and give them the benefit of your positive payment history. That may help their own credit improve, but it won't necessarily mean they're more likely to get approved for a mortgage or other type of loan. Lenders still prefer to see that the applicant can responsibly manage their own primary credit account, not just an account they've been added to as an authorized user.
- Lend them money directly. When your friend or family member needs a cosigner for a loan, you could offer to lend them money as a contribution to the item they want to buy. When you lend money to loved ones, it's key to only offer money you can afford to lose in case it's not repaid, and to create a proper loan agreement so both parties know what to expect.
- Suggest a credit-builder loan or secured credit card. There are two potentially useful ways for your friend or family member to build credit for the future, and to show potential lenders they can manage credit on their own: credit-builder loans and secured credit cards. A credit builder loan requires monthly payments toward a secured account. You'll receive the funds back at the end of the repayment period, and you'll have on-time payments added to your credit report. A secured credit card typically requires a deposit that becomes your credit limit. You could qualify for an upgrade to a traditional credit card account after a period of on-time payments.
The Bottom Line
While cosigning can help a friend or family member qualify for a loan or rental they wouldn't otherwise be approved for, it can also lead to hardships in your finances and relationship. If you think you may want to be a cosigner, check your FICO® Score for free by signing up for an Experian account and determine if you'll be able to help. If you can, carefully consider whether you're willing to take on the risks before you agree to cosign.