To Co-Sign or Not to Co-Sign? That is the Question!

Last week I had a buddy send me The Ten Commandments of Buying a Home. They go something like this:

1. Thou shalt not change jobs, become self-employed or quit your job.
2. Thou shalt not buy a car, truck or van (or you may be living in it)!!
3. Thou shalt not use credit cards excessively or let current accounts fall behind.
4. Thou shalt not spend money you have set aside for closing.
5. Thou shalt not omit debts or liabilities from your loan applications.
6. Thou shalt not buy furniture.
7. Thou shalt not originate any inquiries into your credit.
8. Thou shalt not make large deposits without checking with your loan officer.
9. Thou shalt not change bank accounts.
10. Thou shalt not co-sign a loan for anyone.

I know this list is somewhat facetious – but maybe not by much. Notice commandment number 10? It’s ironic that I would get this list this week. If you remember last week, we reviewed how recent credit is much more impactful to a credit score than older credit is.

What I didn’t tell you is that both of those scenarios came about because the potential borrower had co-signed loans with someone else. One of the two would be a mortgage borrower co-signing with one of his children on some student loans and a car lease. The other co-signed with her son’s girlfriend on a car loan. The scary thing is that neither of these two had any idea of how badly their own credit score could be wrecked by the person they were willing to co-sign with. The term “co” in this case means equal – as in equally liable.

I understand the intent to help out when co-signing a loan, particularly with a family member. And now that my own kids are getting older and approaching the ages when they may need help with certain purchases, where financing is involved, I can see even more clearly why the natural instinct we have is to help them. And it is no different with a child than a brother, sister or best friend. But I think the main thing we need to ask ourselves in that situation is “are we really helping them?” In other words, have we taken into consideration why they need us to co-sign? I’ll take a guess and say that at least 8 times out of 10, co-signing winds up being a short term bail out versus a long term change in action for the person receiving the benefit of having a co-signer.

So, while I’m not a huge fan personally of co-signing, I am a big advocate of helping a child get a start with their credit early in life (like college age), by co-signing a credit card for them to help them build a credit rating. But guess who is going to manage those payments? You got it, ME! And if I ever went against my better judgment and co-signed for some other reason than that, I can assure you that I’ll be making the payment to the creditor while my co-signer pays me. No way am I trusting my credit to someone else.

I’m not going to answer the question for anyone as to whether he or she should co-sign a loan with someone else. But if asked, I’m going to make sure that the person doing the co-signing is fully aware of all the ramifications that go along with it – particularly the potential it carries to wreck their own credit.