If you’re planning to ask a friend or family member to co-sign on your loan or a credit card cosigner, they must have a good credit score with a positive credit history. Lenders and card issuers typically require your co-signer to have a credit score of 700 or above.
What is a co-signer?
A “co-signer” is someone who takes on the legal and financial responsibilities of a loan if the original borrower stops making payments or defaults.
However, a co-signer doesn’t have access to the loan’s funds or its benefits. They simply agree to assume responsibility for the loan if needed.
Lenders often required borrowers with poor credit or bad credit history to use a co-signer.
The co-signer should have a credit score of 700 or above and have adequate income to cover the loan’s cost and credit limit. They don’t have to be a relative; they can be a friend, co-worker or even a spouse.
Many private student loans require a co-signer due to the borrower’s lack of credit history and income. Some landlords also require a co-signer whenever anyone has a low credit score or poor credit history.
What is an authorized user?
An “authorized user” is different from a co-signer, granting access to the cards and credit line with none of the financial responsibilities.
An authorized user is someone who gets a credit card with their name on it, which they can use for purchases and transactions, but the card remains linked to the primary cardholder's account.
Authorized users aren't responsible for the debt, including their own purchases and transactions. They can reimburse the primary cardholder – or not. But in the eyes of the lender, only the primary cardholder is responsible for the debt and making on-time payments.
Like a co-signer, they don’t have to be a family member; any friend, co-worker or spouse can be an authorized user.
What is a co-borrower?
A co-borrower is someone who applies for a loan with another person. Unlike a co-signer, the co-borrower receives the same access to the funds as the primary borrower.
Also unlike a co-signer arrangement, both the primary and the co-borrower are responsible for making payments. Some lenders refer to this group as loan co-applicants.
The best example would be a married couple who wish to take a mortgage loan together. Both of them are responsible for making monthly payments together.
Who qualifies as a co-signer?
There are certain requirements for your friend or family member to be qualified as a co-signer. Although there is no official or legal requirement for a credit score, a good or exceptional score of around 670 or better (usually 700) is generally good enough. However, each lender has their own requirements.
Aside from having a good credit score, a potential co-signer also needs to show they have enough income in the event that you miss making payments or default altogether. To do this, the lender will calculate the debt-to-income ratio for the co-signer, to determine if they have enough income to make monthly payments, if needed.
To avoid this potential roadblock, calculate the co-signer’s DTI on your own. Add up their monthly bills (including the loan amount in case of a default), then subtract it from their monthly pre-tax income. If the DTI is less than 50%, they’re good to go.
Does co-signing affect their credit score?
When a person co-signs a loan for you, their credit history is linked to the loan. If both you and the co-signer miss or stop making loan payments, this can affect their credit score as well as yours.
The loan will also be included in both of your DTI’s, which can negatively impact both of your financial futures.
If a debt is turned over to collection agencies, the co-signer will be pursued and included on mailings and calls along with the original borrower. In the worst-case scenario, the lender might file a lawsuit against the co-signer for defaulting on the loan, insisting your co-signer repay the entire loan themselves and potentially garnishing their wages or bank accounts.
Benefits of having a co-signer
In some cases, a co-signer can help improve your credit score – and boost your confidence. This is especially true if you’ve never used credit before or have no or poor credit history.
Here’s the three main benefits of using a co-signer.
1. Payment history
A co-signer with good credit is less likely to default or miss a payment. They know the importance of making payments on time and, hopefully, can help ensure you don’t miss your due dates.
On-time payments, even on co-signed cards or loans, can help boost both of your credit scores, which can help you qualify for loans and credit lines on your own in the future.
2. Qualifying for lower interest rates
A co-signer with excellent credit can help you qualify for better interest rates. Your lender will take their credit history into consideration and assign terms based in part on their credit score.
You’re also more likely to receive a higher limit and you applications will probably take less time to get approved.
3. Build credit
A co-signer can help you build credit if you’re new or have poor credit history. With a co-signer, you can start to build a positive payment history and improve your credit score.