Co-sign - Think before you do

For many people, it seems natural to have a joint account with a spouse or to co-sign for some kind of loan or debt if it seems necessary. Joint debt can be a useful tool when it comes to helping out family members or making purchases where you both intend to pay it down. But it is important to be aware of all the consequences. If the person with whom you are entering into this joint debt can’t live up to his or her end of the deal, the debt could fall completely on your shoulders.

When someone who applies for a loan or credit can’t qualify on his or her own merit, another person (who does qualify) co-signs for the loan. Often under the impression that the responsibility is a 50/50 split. This is not the case.

A scenario that seems common is in an instance such as a breakup or divorce. The couple gets a separation agreement agreeing to split up any joint debts and all seems legitimate. However, if one party (let’s say this is you, for the purposes of this example) then decides to apply for a loan, the lender could refuse, saying your credit report shows that you still have a debt with your ex. You can say ‘no, we’re split up. I have a separation agreement showing that my ex has taken responsibility for this debt’ until you’re blue in the face but it won’t matter. You signed for the debt and it’s yours, regardless of any separation agreement.
If, in this instance, your ex stops making the required payments, that responsibility falls on your shoulders. When you co-sign for any debt, that debt belongs to both of you, 100% and creditors will have the right to pursue you as well as your ex for payment. What would need to happen here is that, if you and your partner separate, you would have to apply to the creditor directly to see if one of you can qualify for the debt on your own. If not, you both remain responsible for that debt.

Another common instance is with a parent and college-age child. The parent will often co-sign on a joint line of credit or credit card to help the child through university or college and also help them build a credit rating. However, college students aren’t always the most responsible with money (I can speak from experience here – some harsh lessons were learned!) and if they can’t make their payments, the parent is 100% responsible for any money owed. Even if the child is being responsible and making payments, just having co-signed can affect the parent’s ability to obtain further credit such as a mortgage or some kind of other loan (like a car loan) because the creditor has to work it out according to worst-case scenario. This means, they think about the debt as if it belongs completely to the parent and may refuse further credit to the parent based on worst-case style thinking – if the child stops making payments, the parent may not be able to cover all the debts if the new mortgage is included. Basically, co-signing for someone’s loan is the same thing as getting a loan yourself – only without the bonus of actually using the money.

Most people who co-sign for a loan or line of credit end up paying the debt off themselves. A good way to approach things is to consider all the risks – for instance, what are the reasons the primary borrow didn’t qualify for the loan alone? You also should consider what kind of damage might be done to a familial relationship if you end up being responsible for a relative’s debt. When you co-sign for a loan or for credit, be aware of these dangers because you will essentially have to consider this your loan until it is paid off.
If, conversely, you are considering asking someone to co-sign for you instead of being the co-signer, these are still some important things to consider. Do you need the loan or credit badly enough to risk ruining a relationship with a family member or spouse? If you are unable to get credit and simply want to build your credit rating, an idea would be to apply for a secured credit card and build from there. If you need credit or a loan and have a bad credit rating, ask yourself if you will truly be able to make the payments. After all, there’s a reason your credit rating is bad. Taking out more credit is not the answer.

If you are using more and more credit to make ends meet and are having trouble making even the minimum payments, the answer is probably not more credit. Debt negotiation can help you if you are in a position of financial hardship. After enrolling in a debt negotiation program, instead of paying your creditors the (somewhat futile) minimum payments, you will pay money into a set-aside fund and accumulate a lump sum. Debt negotiators will use this lump sum to negotiate with creditors, resulting in them agreeing to take much less than you owe as ‘payment in full’.

This will negatively affect your credit, as with any debt relief option. However, if your balance is even nearing your credit limit, chances are you are already damaging your credit, even if you’re making your payments on time. Debt negotiation will allow you to start fresh and begin to rebuild your credit more quickly than any other debt relief option, so if you have been struggling due to any kind of financial hardship, look into debt negotiation as a viable option for reducing your debt by about 50% and giving you that fresh start you need.