Most people tend to co-sign for their loved ones for what reason may it be. It may include co-signing for a mortgage, a purchase, an inquiry, or monthly payments. We should be aware of how this positively and negatively impacts our credit health.
There are a variety of factors on how it could influence your credit score and asking how it changes is no exception. But despite that, with regards to co-signing a credit, the possibility for a negative credit consequence is disproportionately high.
Here are 3 co-signing factors you should monitor and be aware of:
When your loved one who you co-signed with fails payments in due time agreed upon, it could be one of the biggest potentials to drastically reduce your credit score. Late payments will appear on your credit report and it could damage your credit health.
The reason behind this is most of your FICO score is 35% based on payment history. If your loved one misses out on paying bills or defaults, your credit score could suffer heavily and this will appear on your credit report. One of the best ways to improve credit is to familiarize yourself with credit score ranges. This way, you know exactly where you stand.
Here’s an overview of credit score ranges:
780-850: Excellent and does qualify for best interest rates
740-779: Very good and usually qualifies for best interest rates
720-739: Above average and may face slightly higher interest rates
680-719: Average score and may qualify for most loans at higher interest rates
620-679: Below average and may qualify for most loans at significantly higher interest rates
580-619: Poor credit score including some credit issues and will probably not qualify
520-579: A very poor score that has several credit issues. Unlikely to qualify for any loan
519 and below are facing extreme credit issues and need to seek a credit specialist
Outstanding Balances and Ratio
Outstanding balances that could appear on your credit report could also be a big problem with co-signing credits. Credit bureaus don’t miss out on counting outstanding balances on your credit report and they tend to focus on negative impacts to identify if you’re a risky borrower.
While these outstanding balances don’t prove to be fatal on your credit, the utilization ratio could prove much more of a problem. It would drive your utilization upward which could hurt your credit significantly. Utilization ratio takes up 30% of your credit score that is why you should keep it low. Seek the advice of a credit specialist to guide you through the steps in decreasing your outstanding balances and in settling them the soonest.
Simple qualifying to be a co-signer has already a negative impact on your credit score. Lenders, credit bureaus, and brokers ask for your credit report and details whenever you want to apply for a mortgage, loans, and other borrowing terms. It will appear as a “hard inquiry” on your credit reports and will slightly damage your credit score.
You can still help out your loved one without hurting your credit. By doing it on the reverse or vice versa, you could add someone instead as an authorized user on your existing good credit card account. In this way, you could help those with poor credit to build better scores for their future mortgage plans. It will not impact your credit negatively as long as you do not issue them a new credit card.
Even this method helps your loved ones with poor credit, an authorized user account is not an all-in-one answer approach. They may still seek help from a credit expert for the best ways to improve credit and their financial qualification needs. A financial advisor for bad credit may also help with the services offered.
You should be thinking that being a co-signer is a bad idea. Just the idea of being a co-signer doesn’t make you less responsible for who you co-signed for someone or your loved one. It also reflects on your credit report as if you were the primary borrower. Regardless of how much we want to help and care for someone who asks for our co-signature, we should always think onwards for co-signing is a dangerous risk for your financial health.
We are your mortgage professionals and credit repair experts for 9 years running with offices in and around Canada. Our specialty lies in credit rebuild and credit score assessment spearheaded by our founder Faizal Garasia, an authority in credit relief and mortgage loans.
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