Our local paper in Gilbert, Arizona carried a very informative article yesterday regarding your credit score. It listed the top five credit (and debt) misconceptions. The East Valley Tribune (citing Transunion) listed the top five credit misconceptions as the following:
- Co-signing a loan doesn't make you responsible for the account.
- Paying off a negative record will get it removed from your credit report.
- Paying off a debt will make your credit score jump 50 points right away.
- Checking your credit reports will lower your credit score.
- Closing old accounts will improve your credit score.
The first one is really the one that caught my attention. Remember this is a misconception we are talking about. This means people are under the assumption that doing things on this list will actually help their credit, when in fact these are some of the worst things you could do to your credit. So, to be clear on this if you co-sign for a loan you are responsible. In fact, whatever happens on that account affects your crdedit score. If that co-signer misses a payment, your score will be hit exactly as theirs.
Co-signing is probably the most controversial of the five misconcpetions because it oftentimes involves people you know and love. This can be an emotional issue, especially if you're a parent with young adult kids or a sibling with a struggling brother. I know a level of compassion determines who you will co-sign for, but at the end of the day you need to be prudent.
If you are faced with a co-signing situation, I recommend you do a type of credit check on your own. You could take a very common sense approach. For example, if the relative asking you to co-sign has had some serious money management problems in the past then you may want to stay away. However, if this is a one time situation where the person is in a jam, then you can consider doing something. This doesn't mean there aren't other ways of helping them besides co-signing. I suggest looking into other avenues. It's good to help, but you must be prudent.
My simple advice is to never co-sign. If the bank won't give them money neither should you.
Arizona Mortgage Guru
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