by Anza Goodbar
(last updated November 22, 2011)
Credit is an essential part of today's society. It is necessary when renting an apartment, buying a car or applying for a mortgage. A co-signer may be required if there is an insufficient credit history or a low credit score.
Before co-signing on a financial obligation keep in mind that you, as the co-signer, are 100% responsible for the debt if the purchasing party defaults. Auto loans, school loans, and mortgages all report to credit tracking agencies so it is important that each payment is made on time. Rental history does not report to credit unless the lease goes into default and collection efforts are employed to collect the balance of the lease.
More than 80% of all financial obligations that have a co-signer go into default. Before agreeing to co-sign on a loan or other financial debt, be certain that you can absorb the additional monthly payment into your budget. If not, your credit rating could be in jeopardy. Any payment that is more than 30 days late will record a negative item on your credit report.
In order to prevent late payments on a debt you have co-signed for, set up an auto payment to be deducted from a checking or savings account each month. If this is not possible, you may want to make the payment yourself and have the purchasing party make payments directly to you, so you can monitor the payment history.
Credit reporting agencies do not factor in the difference between your personal debt and the debt you have co-signed for; negative entries all report the same. Once an entry is attributed to your credit report, it can remain on your report for up to 10 years.
Removing negative entries on your credit report can be time consuming and frustrating. If payments fall behind, once they are caught up, you can make your case to the debt holder and respectfully request removal of the negative entries; however, this is totally up to their discretion.
Protecting your credit rating is on of the most important aspects of your financial life. Lower credit scores result in higher interest rates on loans and can cost you thousands of dollars over the course of a mortgage. Be careful before agreeing to take on additional debt by co-signing for a friend or family member. If the loan defaults and the creditor cannot collect from the purchasing party, they have every legal right to pursue payment from you.
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