Cosigning 101

The holiday season is a time when some feel extra generous with their money and their credit. Some may even feel extra generous with their name.

Cosigning on an account so that someone who is not creditworthy (according to the lender) may obtain something is a dangerous stretch of ice to walk across.  

If a person has not demonstrated solid, sensible financial management, then that person may be a direct threat to the cosigner's good credit rating.  

Consigning should be done for someone who has demonstrated consistent improvement in financial management including stability, progressively increasing income, and verifiable steps to increase their credit so that way they will be able to open up future accounts under their own good name.

There is also a risk. Although the person has demonstrated great ability in increasing their income and proving their credit worthiness, things can happen. If that person should no longer be able to bring in income or just plain refuse to pay, then ultimately that cosigned account becomes the cosigner's responsibility. In fact, on Day One when the cosigner signs their name on the account, they have already told the world that they are responsible for that account no matter what. So if the account is never paid, it will go into collections under the cosigner's name and ruin the cosigner's good credit.

Lastly, cosigning to an account causes the debt side of the debt to income ratio to rise which may cause difficulty for the cosigner to obtain something for their own household in the future.

tnd

Graphic source: Capitol One