CO-SIGNING ON A LOAN OR
CREDIT CARD APPLICATION

Co-signing a loan is not a mere formality, as many people seem to think. It's a joint obligation. Both the borrowers are liable.

A primary borrower may not qualify for credit -- perhaps because of insufficient income, previous credit problems or the lack of credit history. Taking everything into consideration the lender believes that the co-signing applicant can be relied on to repay.

Cosigners substitute their own income and credit history for that of the applicant. You are saying to the lender, "If you don't trust my co-signee, trust me."

And the lender does. Your credit will be examined as if you yourself were the primary buyer. The loan is carried in your name as well as the name of your co-signee. But payment history shows in the co-signer's credit report.

Even slow payments, a month or two late, hurts the co-signer's credit reputation. A four or five month delinquency is a serious blot.

Any delinquency at all can damage a co-signer's access to credit cards. These applications are checked by computer and there is no soul in that machine. The lenders that offer low interest rate cards don't want customers who show as a slow-pay even on just one line of credit.

It does no good to argue that the co-signer didn't know that the other borrower was behind. The co-signer is expected to keep track of this debt. High rate lenders will generally accept co-signer, under two conditions. The rest of the co-signer's credit has to be clean and the co-signer can't allow that co-signed delinquency to go on too long. The co-signer should the debt up to date and argue with the primary debtor later. The co-signer should be sure to make all future payments on time.

The co-signer will be left in credit hell if she or he lets the lender write off the loan, even if co-signer eventually pays in full. The co-signer promised to make those payments. Co-signers should ask the lender if they can get a copy of each monthly bill. That will show whether each monthly payment is made on time. Cosigners should not co-sign if they are not prepared to pay if the other party doesn't.

Co-signers should tell the other co-signee about the risk they are going to run. They may not realize that their payments will show on the co-signer's credit report. Co-signers should ask the primary debtor to tell them immediately if they can't make a payment.

If co-signers find out too late that the loan is in delinquency, they should take over the payments immediately. Then contact each of the three major credit bureaus to see if they have a credit record in co-signer's name, if they do, the co-signer should add a statement to the record, explaining why the loan was late. Of the three major credit bureaus, Experian (formerly TRW), 800-422-4879 and Equifax (800-685-500) make it easy, their reps will tell you how to put in a statement. TransUnion (316-636-6110) make you order a credit report for $8 and dispute the loan before the statement is allowed (you have to be persistent; TransUnion is tough to deal with).

Credit card issuers pretty much ignore the statements in the credit reports, but if a co-signer applies for a mortgage or a personal loan, the lender will see the explanation and give the co-signer a chance to make a case.

Before you decide to co-sign a loan for anyone, make sure that you understand that as far as the lender is concerned, you are a borrower.