If your big heart has ever overtaken your brain and caused you to co-sign for a loved one against your better judgment, this article is for you. The truth is the co-signing will very often have a negative impact upon your credit scores, sometimes to an extreme degree. There are many reasons why you should not co-sign and you can find out more about the "Dangers of Co-Signing" here. However this article is not about why you should not co-sign, but rather this article offers solutions to help you if you have already made this mistake.
How Co-Signing Can Damage Your Credit
When you co-sign for a loved one you are, in fact, opening a joint account with that person. Co-signing makes you equally responsible for the debt just as if you had purchased that vehicle for yourself instead of helping out a friend. The most obvious way in which co-signing can damage your credit is if your loved one fails to pay this joint credit obligation according to the terms of the agreement.
Remember, your loved one needed a co-signer in the first place because the bank was not willing to issue him a loan based upon his credit worthiness and/or income alone. Therefore, the bank thought that loaning your loved one money was a bad risk. If the loan or credit card for which you co-signed is routinely paid late, is currently past due, or goes into default then you can expect to see some potentially severe damage to your credit scores.
However, even if your loved one makes every single payment on time the debt for which you co-signed could still hurt your credit scores. This fact is especially true of joint credit card accounts. If you co-signed for a credit card for your child, for example, and your child maxes out the account then your credit scores would almost certainly take a slide downward even if every single payment was made on time. Credit card debt itself (even on an account for which you "only" co-signed) still can hurt your credit scores even with perfect payment history.
Ask Your Loved One to Refinance or Pay Off the Debt
The only way to truly protect your credit from the damage of a joint account is to find a way out - a way to remove yourself as a responsible party for the debt. If you loved one now has the funds available to pay off the debt then, of course, asking him to do so is probably your easiest solution. Unfortunately, in the vast majority of cases your loved one likely will not simply have the funds available to pay off the joint debt and, therefore, you will probably need to consider other potential solutions.
Another method for resolving the issue of co-signed debt is to have your loved one look into refinancing the debt into his name alone. For example, if you co-signed for your child's auto loan and your child has since that time built positive credit for himself then he may now be eligible to take out a loan in his name alone (assuming that he makes enough income to qualify).
When You Cannot Find a Way Out
Sometimes your loved one may be unable or even simply unwilling to pay off or refinance a joint debt. This can be especially true if the joint debt has already been littered with late payments. If your loved one has habitually made late payments on the debt for which you co-signed then his credit could very well be too damaged to allow him to qualify for a new loan in his name alone.
In truth, there are no great solutions available to you if you find yourself in the unfortunate predicament of being tied to a debt which your loved one consistently pays late and cannot refinance out of your name. However, sticking your head in the sand and ignoring the problem is not going to help your situation to improve either. Although none of the options below are very pleasant, they should at least be explored.
1. Assume the Payments
If you can afford to do so then assuming the payments for the joint debt yourself is the most foolproof way to protect your credit from any further damage. It might not sit well with you to take on responsibility your cousin's student loan payment (and why should it!?), but at least you would be in control of how the situation impacts your credit in the future. You could even make the payments to the lender yourself and request for your loved one to reimburse you directly (although enforcing this agreement would be very difficult when and if your loved one fails to pay you as agreed).
NOTE: If you co-signed for a credit card account then you do have the right as a joint account holder to call the issuing bank and close the account. While you would still be jointly responsible for charges already made, closing the credit card account would at least prevent any new charges from occurring.
2. Sell the Asset
You may be able to convince your loved one to sell an asset if he cannot pay off the debt or qualify for a loan to refinance the debt out of your name. If you co-signed for a loved one's auto loan, for example, selling the vehicle to a third party would remove both you and your loved one from the debt. Selling an asset will not undo any previous damage which the account may have already caused your credit scores; however, it could help to protect you from additional credit score damage in the future.
Although filing for bankruptcy certainly is not going to protect your credit from further damage, bankruptcy can potentially help to protect you from further action against you by creditors. If, for instance, you co-signed for credit cards with a former spouse and are now facing a pile of credit card debt which you ex refuses to pay then bankruptcy might just protect you from law suits, wage garnishments, and some other potentially nasty side effects that can come along with unpaid joint debt. Additionally, filing for bankruptcy will not wipe out the debt (the person for whom you co-signed will still be liable unless he/she files for bankruptcy as well). Of course bankruptcy should probably be your very last resort, but in certain situations it may be the best choice left available to you.
4. Talk to a Credit Expert
It can often pay to speak with a professional to get personalized advice for your specific situation when you are dealing with credit problems caused by co-signing. A credit restoration expert may be able to help you verify that the account is reporting properly on your credit reports (and perhaps help you to get the item deleted if it is reporting inaccurately) or may also be able to help you find solutions to potentially offset some of the damage caused by the derogatory joint account. If you are interested in scheduling a no-obligation analysis with a HOPE4USA credit expert CLICK HERE or call 704-499-9696 today.
Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.