Having a cosigner on a loan can help you build credit in some situations. For example, a cosigner with good credit can help you get approved for a loan if you have no credit history or a poor one. If you then handle that credit responsibly, you’d likely see a positive impact on your score.
A cosigner is someone you know who already has established a positive credit history and a good credit score. This person is usually a trusted friend or family member. The prospective lender will consider the credit of both the primary applicant and any cosigners when deciding whether or not to approve the loan. Learn more about this process and how cosigning could help you build credit.
Key Points
• Cosigning can help build credit for those with poor or no credit by leveraging the cosigner’s good credit.
• Both parties’ credit profiles are considered, improving loan approval chances and terms.
• Cosigning affects both parties’ credit reports and debt-to-income ratios.
• Missed payments by the primary borrower can harm both parties’ credit scores.
• Alternatives to cosigning include becoming an authorized user or using secured credit cards.
How Does Cosigning Work?
Cosigning is one way to build credit if you don’t already have an existing credit history. When you have a cosigner, the lender will use both your credit profile and that of the cosigner to determine whether or not to approve your loan request.
Without any sort of credit profile, some lenders may not be willing to issue you credit or the interest rates they offer may be quite high. In those cases, you may consider applying with a cosigner who already has good credit in order to increase your odds of getting approved or securing better terms.
Recommended: How to Avoid Interest on a Credit Card
Cosigning vs Authorized User
Besides cosigning, becoming an authorized user is another way to help build credit. Here is a quick look at how the two approaches differ:
| Cosigning | Being an Authorize User |
|---|---|
| The amount of debt factors into the cosigner’s debt-to-income ratio. | Debt information on an account where you are the authorized user does not affect your debt-to-income ratio. |
| Both the cosigner and the primary account holder are responsible for making the payments. | An authorized user is not responsible for making payments. |
| Both the primary account holder and the cosigner must be adults. | Children can be approved as authorized users on a parent’s account. |
Recommended: When Are Credit Card Payments Due?
Does Cosigning Help Build Your Credit?
When used appropriately, cosigning can help build your credit. Just make sure to avoid these mistakes when choosing a student loan cosigner or a cosigner for any other type of loan. If the responsibility is not taken seriously, it could have negative implications for both parties’ credit.
Recommended: Tips for Using a Credit Card Responsibly
When Cosigning Can Build Your Credit
If you’re just starting out and establishing credit, using a cosigner can be an attractive option. If you have a trusted friend or family member who is willing to cosign on your loan, you may be able to qualify for a loan that you wouldn’t otherwise be eligible for. Then, as you make on-time payments on your loan, you would likely build your credit score due to a positive payment history.
When Cosigning Can Hurt Your Credit
If you find yourself needing a student loan cosigner or any other type of cosigner, it’s important to also understand the potential downsides of cosigning. While being a cosigner does not affect your credit in and of itself, it is possible to damage your credit by cosigning.
When you cosign a loan or credit card, both the primary applicant and the cosigner are liable for the debt. You may find yourself in a situation where your credit is harmed because the other party fails to make regular payments when required. So, depending on your situation, you may be better off with a student loan application without a cosigner.
Recommended: Does Applying for a Credit Card Hurt Your Credit Score?
Things to Know Before Cosigning
The most important thing to know before cosigning is that cosigning on someone else’s loan does come with some risk. While cosigning can make sense to help a friend or family member who is starting out in life, it’s riskier to cosign for someone who already has bad credit.
If someone has bad credit, then they likely already have a history of not reliably meeting their debt obligations. Make sure you fully understand the situation before cosigning a loan.
Other Ways to Establish Credit
Besides getting a cosigner, there are a few other ways to establish credit.
Open a Secured or Credit-Building Credit Card
There are also some types of credit cards that are marketed to those with a limited credit history. Often, these are marketed as either credit-building credit cards or secured credit cards, which involve putting down cash as a collateral (and that sets your credit limit). As you open credit cards and regularly make on-time payments, you are likely to build your credit score.
Become an Authorized User
If you don’t want to apply for a credit card or can’t get approved without a credit card cosigner, you can consider becoming an authorized user on someone else’s account. In this arrangement, only the primary account holder is liable for any purchases that are made on the account. Even if the authorized user is the one that actually makes the purchase, they aren’t financially responsible. Positive payment habits on the account can help build credit.
Get a Guarantor
A guarantor is similar to a cosigner, but there are some important differences between guarantors and cosigners. A cosigner is legally obligated and financially responsible right away to repay any debts. A guarantor, on the other hand, is more of a backup plan. The guarantor is only responsible for repaying the debt if the primary borrower fails to make payments and the loan goes into default.
The Takeaway
When you’re first starting out and building up your credit, you may not be able to qualify for loans. One way to help build your credit is by applying with a cosigner. A cosigner is usually a trusted friend or family member who already has good credit. Applying with a cosigner allows the potential lender to consider both people’s credit. It may help you get a loan that you otherwise wouldn’t qualify for.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Does cosigning show up on your credit report?
Yes, cosigning will show up on both the credit report of the primary applicant as well as the cosigner. Any outstanding debt will be used in calculating your debt-to-income ratio, and late payments might negatively affect your credit. This is one reason that it is always important to check your credit score on a regular basis.
Does a cosigner have to have good credit?
A credit card cosigner doesn’t necessarily have to have good credit, but it’s usually more helpful if they do. The whole point of having a cosigner is to use their good credit to help an applicant with poor or no credit qualify for a loan. If the cosigner has poor credit, it may not make a difference in whether or not the applicant is approved.
Whose credit score is used when cosigning?
When you apply for a loan or credit card with a cosigner, the potential lender will use both people’s credit score and history to determine whether to grant approval. Typically, the primary applicant will have poor or no credit, while the cosigner will have excellent or good credit.
Photo credit: iStock/Sitthiphong
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SOCC-Q424-007