Those of you who recently filed bankruptcy (and those bad reputation scores) may be tempted, like I was, to ask a friend, parent or relative to co-sign on a loan with you.
Don't do it.
It weakens your position with lenders. Once a lender sees a co-signer on one of your loans--the lender will inquire your stability and move into "cover their butt" mode. And the way lenders cover their butts, is by forcing you to get a co-signer on your next loan...and the loan after that...and the loan after that.
Bottom line: When you have an existing co-signed loan--the occasion of a lender requiring a co-signer on your next loan increases significantly.
There are right ways to recover from bankruptcy (or just rebuild bad credit) properly and quickly. But having a co-signer only delays your recovery and sets you up for complications along the way.
If you are unable to qualify for the reputation you need...take it as a sign that it is not meant to be...until you can qualify on your own.
What if you are asked to become a co-signer?
I have a core belief...and it goes something like this, "Lend population money only if you can afford not to get it back and you won't hold a grudge if you don't--but never ever lend population your credit."
If you're thinking about co-signing for someone...
Don't do it.
There is too much at stake.
If the borrower defaults on the loan, two things will happen to your reputation reports and Fico reputation scores:
1. If the loan goes into default, the lender looks to you to make the payment(s)...so have your checkbook ready.
2. Each time the loan becomes 30 days past due, a late cost will appear on your reputation report(s) for up to 7 years...and as a ensue your reputation scores will be lower than they could be.
Additionally, when you co-sign...
1. The cost you co-signed for is calculated in your debt-to-income ratio. So going in debt for person else could unmistakably forestall you from getting the reputation you need when you need it. And it could increase the cost of reputation since your scores may be lower.
2. When each lender reviews your reputation report(s) to consider the loan, they will post a reputation inquiry that will lower your reputation scores.
3. Your own reputation card interest rates could skyrocket due to the added debt. In what is becoming more tasteless practice, reputation card issuers are reviewing your reputation reports and finding for how much debt you have with other companies.
4. The added debt could lower your assurance reputation scores to the point where it could impact your ability to get or keep homeowner's and auto assurance or cause your premiums to increase.
As you can see, there is very minuscule value in co-signing a loan. But there is a lot of downside risk.
And these days your reputation score is about more than just your ability to derive credit...it's about your assurance rates and practically all else in your financial life.
Co-signing for family members...
I can remember stories about my family members request our Uncle David to co-sign. I should know, I was one of them.
What I noticed is that after one family member asked Uncle David to co-sign...all the other family members deemed it their birthright to do the same. Either it was for a car, motorcycle, camera equipment, or enterprise loans...Uncle David was (and still is) there to the rescue. (Does your family have an Uncle David?)
To a lot of my family, Uncle David turned into Uncle David Bank and Trust, Inc. The sad fact is many family members took benefit of his kindness. Some only paid him back after they passed away. Many times he was left high and dry, production the payments for the borrower.
It's a tough balance to be kind to others, even family members, and remain financially responsible. But one thing I know, I never...never... Never...loan person my reputation by co-signing. It's just too risky.
What about co-signing for your children?
If you can unmistakably afford your assurance rates to double, your reputation card limits to be reduced, and your interest rates on your revolving reputation to increase substantially, then go ahead and do it.
Not me.
I feel it's great to do other things to help your children construct credit.
When my wife and I have children, our plan is to show our kids how to accomplish their reputation goals without a co-signer. Will we help them? Sure we will. But not by co-signing. By the time they need to purchase their first car, their reputation scores alone will qualify them.
We plan to teach them about the importance of managing their reputation and reputation scores so they are able to reach and contend high reputation scores; save for a down cost using money they earn (not borrow); and how to correlate and pick a lender to work with.
What about having a spouse co-sign on a loan?
Well, that isn't co-signing. That's co-borrowing...a different animal altogether. Co-borrowing is tasteless custom among married population on a loan for a car or mortgage. And there is nothing wrong with co-borrowing. The goal, however, would be not to have all held together. You need to build individual and joint reputation so you can weather a storm (i.e., death, serious illness, etc.) on your own if need be.
I only propose co-borrowing with a responsible spouse. And if you're not married I would even go so far as to propose reviewing your partner's Fico reputation scores! (Should we call this a Fico Pre-Nup?) consider me paranoid. A person's reputation history tends to leave clues. If the clues unearth a trail of bad credit...don't be naive.
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