A co-signer, co-borrower, guarantor or co-applicant is an additional borrower on a loan, credit card or other credit product, who becomes liable for payment of debts should the primary borrower fail to pay. A co-signer is often required by credit grantors to strengthen the application if the primary borrower does not have adequate income or credit history to qualify individually. The co-signer’s income and credit history are added to the application to meet the lending criteria.
A common misconception regarding co-signers is that the secondary applicant will only be responsible for half the debt. This is not true. The full debt will appear on the co-signer’s consumer credit report, as well as the payment history. This means that should the primary borrower make a late payment, it will be reflected on the co-borrower’s credit report as well. Furthermore, should the primary borrower fail to properly service the debt, the co-signer is responsible for paying the full remaining balance.
Most lending and credit companies will not allow a co-signer to simply “remove themselves” from the account. If the debt is too high for the primary borrower to qualify for alone, the co-signer can only exit the account by reducing the balance to zero and closing the account. If, however, the balance has been paid down sufficiently that the primary borrow qualifies for the remainder without a co-signer, most lenders will transfer the debt to an individual account, thus freeing the co-signer of the obligation. Otherwise, a co-signer’s status will continue for the life of the account.
Co-signing to establish credit is a common occurrence in families. If the primary applicant has sufficient employment and income to service the debt, but little or no credit history, having a parent co-sign a credit product will assist in creating a thicker credit file. Due to the nature of co-signer status, it is recommended the parent or other co-signer look for a loan rather than a credit card to assist in this purpose. Loans are short term, easier to manage, and once the debt is paid, the co-signer is cleared of the responsibility. Furthermore, by the time the loan is paid off, the primary borrower will have established a record of payment history, and may not need a co-signer for riskier items such as credit cards.
Co-signing because of low income usually leads to problems for the co-signer. If the primary borrower does not have the means to pay back the loan, having a co-signer will only increase their income on the application, but not in reality. This puts the co-signer at greater risk of damaging credit, and being forced to pay back the loan. While the best decision in this circumstance is to just say no, if a person does agree to co-sign a low income credit application, he or she should request a statement be sent to the secondary borrower as well as the primary. In addition, provisions should be made with the lender for immediate notification of late payments or account problems, so the co-signer can protect and limit damage to their own credit reputation.