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Credit Score Myth: Will Co-Signing a Loan Hurt My Credit Score?

When I rented my first apartment in Toronto, my dad co-signed the lease. Despite having a full-time job and an excellent credit score, being a recent graduate and a first-time renter in a high-rise full of university students was apparently enough for management to require his assistance.

Parents co-signing for their kids (even if they’re adults) is fairly common. Spouses, siblings, relatives and friends with good credit can all co-sign on leases, loans, and credit cards when the main applicant doesn’t have a sufficient credit history or income to secure it themselves.

When you co-sign a loan, you’re essentially lending the other person your excellent credit rating to help them secure it. But if the primary borrower can’t pay it back, you’re 100% responsible for doing so. And if they’re late making payments, or don’t make payments at all, your credit score will get hammered.

Before taking on the responsibility of a co-signer, consider the financial risks:

Your credit report  

As a co-signer, the loan will appear on your credit report and increase your apparent debt load, lowering the ratio of credit available to credit used. Credit utilization is a key factor credit bureaus use to calculate your credit score, and a utilization rate of more than 35% can lower it—especially if you carry a high balance from month to month.

If you plan on applying for your own car loan or mortgage in the near future, this existing debt could potentially hurt your chances of getting approved or being offered the best rates.

Note that in the case of a lease, it would only appear on the co-signer’s credit report if the primary renter (in this scenario, me) failed to pay their rent and the landlord reported that to the bureaus.

Worst-case scenario

Payment history is by far the most important component of your credit score, and even one late payment can put a black mark on your credit report. If your co-borrower defaults on the loan, meaning they have no intention of paying it back (or can’t afford to), you have two choices:

  • Repay the loan yourself. Unfortunately, this is exactly what you signed up for. Here’s the rub: even though you’re the one paying off the loan, you don’t have any claim to the underlying asset—the car, house, or credit card, etc.
  • Let it default. If you refuse to pay, or can’t afford to, the default will leave a derogatory mark on your credit report for seven years and damage your credit score. This will seriously hinder your ability to obtain credit in the future.

If you’re considering co-signing a loan with someone, answer this question honestly: if you had to assume the loan repayment, would it hurt you financially? If the answer is yes, don’t do it.

The bottom line  

In my case, the situation worked out great—I lived in that apartment for two years, had no problem paying my rent on time, continued to build up my credit, and was able to secure a new apartment lease without needing a co-signer.

That being said, I know my dad wouldn’t have co-signed in the first place if he doubted my ability to pay rent. Communication is key—before you sign, have a clear understanding of how the account will be managed and the debt repayment plan.

Co-signing is a generous way to help someone out, but it’s a serious undertaking that you shouldn’t be pressured into. You will be equally responsible for repaying the debt, so review your financial situation and credit report carefully, and analyze the impact it will have on your credit score.

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