Thinking of Co-signing? You May Want To Think Again!

To Co-sign or Not To Co-sign!  That is a serious question you need to ask yourself

Who hasn’t been in a situation with a friend or family member that needs a co-signer?  It’s incredibly common especially since co-signing can help someone with bad credit rebuild their credit. Co-signing for someone is never advisable.  The reason they need a co-signer tends to be that they don’t pay their bills on time.  While it’s a nice thing to do for someone, it can land YOU in deep financial problems if they are unable to pay.    It will also impact your credit.  

But no matter how sincere they seem or how much begging they do.  You need to remember a few things!

When you co-sign for someone, you are giving your PERSONAL GUARANTEE that the lender will get their money.  If not from the person you are signing for, but from YOU!

Consider the risks.

First, ask yourself.  Why do they need a co-signer?   If they are irresponsible, then just don’t do it.  If it’s a child looking for help building credit…..be cautious.  If it’s your child, you should have taught them some fiscal responsibility.  But make sure there are safeguards in place to make sure they don’t get too deeply into debt.

An Example Of When NOT To Co-sign And How It Impacted A Past Clients Credit

A few months ago, I was helping a client with his credit.  I saw he had over $12,000 worth of medical surgeries on his credit report.  They had been paid for 6 months and then he just stopped paying.   When I asked him about it.  He advised me that he had co-signed for an ex-girlfriend for some cosmetic surgeries.   He made all the payments while they were together but stopped paying when they broke up.

He told her to pay.  She had bad credit, to begin with, and didn’t care about the impact it made on her credit.  She told him to sue her.  And unfortunately, that’s all he can do.  He co-signed.  According to the contract they signed, he would pay if she didn’t.  He was getting lots of threatening collection calls and even a letter stating the surgeon was going to take him to court.  He wanted to dispute the charges.   I knew the dispute would be ignored.   So I told him the next time the collector called, to ask for a copy of the agreement.  They immediately faxed it to him.  All signed and initialed.

He still wanted to dispute it and I let him go as a client.  It’s a total waste of time to dispute things on your credit report that are well documented and you know you owe it.

Could your credit survive an 110+ point drop?

Before co-sgining he had good credit.  Almost 700 with all 3 credit bureaus.   When he came to me he was around a 580- 590 with all with all 3 credit bureaus because of this debt and a credit card he had gotten for her that was maxed out and she wasn’t paying on it.

Who are you vouching for and WHY are you co-signing.

So, before agreeing to co-sign, you should carefully consider how the person you are about to “vouch” for pays their bills.   Ask the following questions:

Ask the following questions:

• How much do I know about them?   Are they usually a responsible person and then something unforeseen happened?
• What is this for?  A car that gets them to work or something frivolous like cosmetic surgery or a fancy vacation.
• Can they afford the payments based on what the CURRENTLY make?  When a family member approached my mother to be a co-signer.  I advised her not to do it.  My family member wanted a  brand new car.  He “promised” to pick up more hours.  But since he was a part time stock clerk, I didn’t feel like it was a wise thing to co-sign for the brand new Chrysler 300 he wanted!
• What does their latest credit score reveal about their spending and payment habits?  If their credit report is full of unpaid bills.  Why do you feel they will pay off the debt you co-sign for?
• Can I afford to make the payments if they do not?   The car my family member wanted was almost $600 a month!   I asked my mother how she would make that payment out of her retirement income?

When you co-sign for someone, you are effectively telling the financial institution that if your friend/family member doesn’t pay.  YOU WILL!

Finally, take a close look at your personal finances.

Never co-sign if you can’t afford to step in and pay.  You are doing a very nice thing by even CONSIDERING being a co-signer.  But you need to make sure it’s an obligation you can really take on.

To be prepared, review the state of your personal finances and anticipate costs you may eventually incur, as a co-signer.

• Look at your monthly budget.  Is the money you are putting away in savings enough to cover this additional debt?
• Don’t just sign anything.  Your friend probably went to someone who works with bad credit and wants you to sign for a loan thru their lender.   But you have GOOD credit.  Negotiate to get a better rate for you and your friend/family member.
• Have an exit strategy in place BEFORE you sign.  When you are sitting there about to sign for your friend/family member.  Tell the lender you want a few stipulations put on the contract and get a copy for your records!  These stipulations can work if you are face-to-face w/ a lender.  I once had a client whose parents co-signed for an equipment lease and part of the contract they negotiated required us to send bills to both parties and all collection calls were to go to his mother first!  Our normal policy is to call the person with the equipment at 10 days past due and then after 2 collection attempts we then contact cosigners.
  • Ask them to allow you to call and close the account without the consent of the person you are co-signing for.  They probably won’t like this.  And it will only work if you are co-signing for a credit card.  If its a loan, they won’t do this.
  • Ask them at what point will they allow you to remove your name from the credit card/loan
  • Make sure that no credit limit increases are done without your prior written consent
• Set up paperless billing.  Recently when my nephew signed for his brother.  He signed up for paperless billing and the bank sent statements via email to both of them.  He was able to monitor his brother’s spending and payments.
• Set up payment alerts.  Make sure you get an alert 5-10 days before a payment is due.  If the payment hasn’t been made, get on the phone and find out why.   If the company allows you to pay online you usually have up to 24 hours before it’s due to pay.  But if it’s a company where you need to send a check, find out why they haven’t paid yet and be prepared to send a payment as soon as possible so that you don’t end up paying late. That late payment will appear on BOTH of your credit reports!
• Keep track of the payment activities of the actual borrower or credit cardholder.  If your friend/family member is constantly maxing out the card and it’s making you nervous.  Don’t be afraid to call the bank and request that they lower the credit limit.   Or tell them to get another co-signer because you are going to write to the finance company requesting they remove your name.  In most cases, this will cause the bank to close the account.

Communication between you and the person you are co-signing for should be friendly.

You don’t want the person you are co-signing for the feel like they can’t come to you if they run into trouble.  You want to encourage them to come to you immediately if there is a problem so you can contact the lender or card issuer and work out a more flexible payment arrangement.

If you are constantly having to call and make arrangements for your friend you may want to close the account as soon as possible and protect your credit from harm!