It can be extremely difficult to figure out how to build credit — especially when you need good credit to improve poor credit.
It’s not an easy prospect if you have poor credit and you’re trying to buy a car, get a credit card or take out a student loan. With a low or nonexistent credit score, you could be disqualified from getting the loan you want; at best, you could be handed some very unfavorable terms and high interest rates. Finding a person with excellent credit to cosign their name on the loan application is one solution.
Getting a cosigner can open up a lot of opportunities for you if you’re trying to explore ways on how to build a credit history. But be careful — a few missteps can hurt both your and your cosigner’s credit scores in the long run.
Credit Score Challenge Week 9: Get a Cosigner to Improve Your Credit
You might be the most financially responsible person in the world, but without a credit history you won’t get through the first step of the financing process on your own before getting rejected. This is where a cosigner can be handy.
A 2014 survey by credit reporting bureau Experian revealed the percentage of millennials aged 18 to 30 who need a cosigner to obtain a number of credit-based services:
- College loans: 35 percent
- Residential leases: 32 percent
- Car loans: 19 percent
- Credit cards: 17 percent
- Car leases: 11 percent
- Home loans: 6 percent
Depending on your financial situation, a cosigner might be required. For example, some banks, credit unions and lenders might require anyone under age 21 to get a cosigner for a credit card. But, getting a cosigner might also depend on your cash flow, income and credit history.
Whether it’s a credit card, student loan or mortgage, a cosigner can be your key to getting the financing you need and improving your credit score.
How to Start Building Credit With Help From a Cosigner
When choosing a cosigner, pick someone that you trust, has exemplary credit, is creditworthy and understands the co-signing arrangement. Student loan group Sallie Mae suggests asking a parent or guardian, a close relative or spouse. Approach the person you’d like to cosign with confidence. Tell them that by cosigning for you, you’ll come closer to realizing a major financial goal that wouldn’t be possible without them
Having a cosigner with excellent credit in your corner can be the difference that gets a loan application approved instead of rejected. The better your cosigner’s credit, the more eligibility they’ll have for getting you a low interest rate, too.
Getting your loan cosigned means your cosigner is “giving” you the power of their strong credit, endorsing their faith in you that you’ll make good on the debt you’re incurring. When your financing is approved, it’s time for you to start paying down your debt. Make monthly payments on time and in full, and you’ll slowly start building your credit.
Paying off your cosigned loan can strengthen your credit score, opening new doors for obtaining future financing on your own. Having different types of credit in your history can help your credit score as well.
Disadvantages of Getting a Cosigner
Cosigning comes with some inherent negatives — not just for the cosigner but for the borrower as well.
For one, even the strongest of relationships can be dented when a co-signing agreement fails because of the borrower’s financial irresponsibility. If you’re unsure if you can follow through on your debt obligation, don’t ask a friend or family member to cosign. Make partial or late payments on a cosigned loan — or miss them entirely — and conflict is bound to arise with your cosigner over a financial responsibility they trusted you to manage.
Also, getting a cosigner means that their credit score essentially becomes yours. As Autos.com puts it, “the borrower is at the mercy of the cosigner’s credit score.” If your credit score is poor, it’s better than nothing. But if your cosigner’s credit score isn’t that great, you could still be saddled with an unfavorable interest rate and terms.
If any of the cons described above are concerns of yours, reconsider getting a cosigner until your own credit is in good standing.
Alternatives to Getting a Cosigner
If you’re hesitant about asking someone to cosign your loan or you simply can’t get someone to become a cosigner, there are a few routes you can take to improve your credit and obtain financing. For example, you can:
- Apply for a Secured Credit Card: Look into applying for a secured credit card. Designed for the borrower with poor or no credit in mind, a secured credit card might not offer the same spending freedom and rewards as a conventional credit card, but it gives you the opportunity to build your credit before seeking out a cosigner.
- Become an Authorized User: Another alternative is asking a parent or relative if they can allow you to become an authorized user on their card. As an authorized user, you can charge money to the primary holder’s account. The account will show up on your credit report, and if you make your payments on time, it can improve your credit score.