Archive for the ‘co-signing on loans’ Category

Co-signing for a loan could destroy your credit

Sunday, December 28th, 2008

Your credit rating is one of your most valuable assets – and when you “lend it out” you’re taking a chance on losing it for a good long time.

Right now lenders are leery of taking on new accounts – one report said that only 15% of home loans are being approved in this new, “fearful” marketplace. That means that some people who would have been considered an excellent credit risk just a year or so ago are now being denied credit.

It’s frustrating and maddening, so of course you want to help when someone you care about is being treated in this manner. But think twice before you jump in.

When you have outstanding credit and someone you love or respect can’t manage to get a mortgage – or even a credit card – there are ways to help, but co-signing for them could turn out to be a disaster.

Consider this real life scenario: A gentleman helped his friend get a credit card – but the friend instead got 2 credit cards from the same bank. And after a while he defaulted on both.

Because the paperwork all went to the friend’s address, the “helper” had no idea that payments were behind until after the credit card company had gone to court and gotten a judgment against both of them! The amount due: $10,000.

The friend, of course, has disappeared – leaving him with the debt.

Of course your family members wouldn’t do this, but they might be too embarrassed to tell you if they get behind on payments – and let it go long enough to destroy your credit as well as their own.

Another gentleman co-signed a business loan at a bank several years ago, knowing that all would be well. It was, and the loan was repaid. Then later the business wasn’t doing well so the owners went back to the same bank to get a second loan. This time the co-signer declined to step in, because he saw some business practices he felt would lead to failure.

Little did he know that when he signed the first loan, it gave the bank the right to keep him as additional security for the second loan. He ended up holding the bag for a $50,000 unpaid note.

So if you’ve ever co-signed a bank note for someone, this is something you should look into. Also, credit card accounts can go on forever, so think about college roommates, romantic partners, and past business associates. Check your credit report and make sure none of their accounts are still showing on your report.

If you really feel compelled to give financial help, you can go about it in a safer manner.

You can take out a loan yourself and lend the money to your friend or relative – letting them make payments to you that you use to pay the loan. Or, you can make sure that all the statements and receipts are coming to your address, so that you can monitor the progress of repayment.

It sounds hard-nosed, but in today’s economy, the slightest blip on your credit report could prevent you from doing the things you want to do.

Marte Cliffe
CreditScoreQuick.com

Disclaimer: This information has been compiled and provided by CreditScoreQuick.com as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.