Don't Cosign, or How to Prevent Trust from Destroying Your Credit

Three years ago a client of mine was a few weeks away from signing loan papers on her new home when she told me she'd just discovered her ex-boyfriend was not working and had not paid his car payment for three months -- a car which she cosigned for relying on her pristine credit scores in the high 700s. She didn't realize that immediately before final mortgage papers are prepared, lenders perform a credit check, and if this information appeared on her credit report, she would lose her low, locked-in fixed interest rate and her newly built home.

This problem isn't unique to my client. It happens all the time to relatives, spouses, partners, and friends of the credit challenged. It's so common that it makes a credit wonk want to shout from the rooftops: "Don't trust anyone to pay a bill with your name on it."

It turns out my client's boyfriend had had a long history of not working and not paying bills. She should have been checking with the lender every month to be certain the car payment was made. If it was not, she should have paid it to maintain her credit rating.

Let's take another situation, one that a reader, let's call her Ashley, recently asked my advice on: In her divorce settlement Ashley's former husband was required to pay for furniture the couple bought. The debt, however, was in Ashley's name. Her husband made many late payments over a couple of years, plunging Ashley's credit scores from the mid-700s down to low 600s, a big blow given she wanted to refinance her home.

In Ashley's case, her attorney should have notified the furniture creditor that she was no longer responsible for the debt, asked them to transfer it into her former husband's name and to bill him for it. If the former husband could not qualify for credit or there was another reason to leave it in Ashley's name, the divorce settlement should have required him to send the payment directly to her every month so she could pay the bill on time. Because the debt remained in her name, she was fully responsible for it.

While Ashley found herself in a difficult predicament, there is another situation that can cause even more serious problems: Cosigning for a credit card or any account where the balance can rise without your consent. In this case, unlike an installment loan (such as for a car or furniture) you could end up responsible for debts you are unable to pay.

A friend of mine had cosigned a credit card for his son, and his son had racked up $3,000 in debt and had neglected to make his payments on time. My friend's only choice was to pay off the $3,000 and let enough time pass so his credit scores could rebound. He should have had the credit card bills sent to his house and had his son mail payments home every month. That would have kept him in control of his credit ratings, taught his son financial responsibility, and built up his son's credit scores so he would never need a cosigner to qualify for credit in the future.

Remember, if your name is attached to a debt, maintain control of it. If you prefer to allow someone else to make payments, check with the creditor every month to be sure the payment is received before the date it's reported to the credit bureaus as a late payment. To protect your credit rating, always make payments, even if you are not responsible for them. Do not allow late payments by someone you trust to downgrade your credit.

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