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Danger: Co-Signing Loans Can Hurt Your Credit

[Thursday, June 16th, 2016]

People who struggle with no credit, bad credit, or limited credit often try to figure out what went wrong to put their credit in the red zone. It could have been a divorce, a job loss, an illness with unexpected medical costs, or some other unpleasant circumstance. But something else that puts many people on a bad path, credit-wise, is co-signing on a loan.

A recent survey showed that 38% of folks who co-signed a loan for someone ended up losing money. Twenty-eight percent had their credit negatively impacted when the person they co-signed for defaulted on the loan, or paid late. Twenty-six percent of people said co-signing a loan resulted in damage to their relationship with the person.

Signing for kids is most common, followed by friends

If you need someone to co-sign a loan for you, who do you go to? If your parents are still around, they might be the obvious choice. Forty-five percent of co-signers stood up for a child or stepchild, guaranteeing their loan when they needed it. Twenty-one percent co-signed for a friend, 14% signed for a spouse or partner, and 7% signed on the dotted line for a parent. Siblings, grandchildren, and boyfriends or girlfriends came in last, tied with 6% each.

Co-signing is risky business

A survey analyst said co-signing on a loan seemed like a pretty poor idea. “With a 38% chance of losing money and a 26% chance of damaging a relationship, co-signing doesn’t sound like a very good bet,” the analyst concluded. “If you absolutely have to co-sign, then at least be aware that there’s a sizeable chance you’ll lose some money and/or get your feelings hurt.”

Still, about one in six adults in the U.S. have co-signed a loan or credit card application for someone else.

How to repair credit if co-signing damages it

Basically, no matter how bad your credit report looks, there’s no reason to give up hope. You can still rehabilitate your credit. And within seven to ten years, you’ll have a completely clean history—provided you’ve addressed the problem dragging your credit down.

Credit scores are calculated according to five factors: length of credit history, amount of new credit applied for, debt-to-credit ratio, payment history, and types of credit/mix of credit. Co-signing a loan that’s defaulted on or paid late can mean a ding to your credit history, so make sure your co-signer is a close enough friend or member

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