When a borrower co-signs a loan, it can have both positive and negative effects. This can have both positive and negative effects on your credit score, based on how the borrower manages the loan. For instance, 51-year Ajay Aggarwal decided to co-sign a loan for his son who wants to take a student loan.
This may also result in a hard inquiry on his credit report, which could temporarily lower his credit score, albeit marginally.
It affects credit score in the following ways:
When the borrower makes timely payments: If the borrower makes timely payments on the loan, it can positively affect your credit score. This shows to creditors that you are responsible for managing debt and can improve your creditworthiness.
But if the borrower misses payments or defaults on the loan, it can also negatively affect your credit score. Late payments or defaults reflect poorly on your credit report, as you are equally responsible for repaying the debt.
ALSO READ: How do credit score repair services work?
Impact on debt-to-income ratio: Co-signing a loan raises your overall debt obligations, which can affect your debt-to-income ratio. If you apply for additional credit or loans, lenders may consider this increased debt load when evaluating your creditworthiness.
Inquiries and new accounts: Co-signing a loan may also result in a hard inquiry on your credit report, which can temporarily lower your credit score.
Additionally, the new account will appear on your credit report, affecting factors such as the average age of your accounts and the mix of credit types.
Limited control: It’s essential to recognise that as a co-signer, you have limited control over the loan. You’re equally responsible for repaying the debt, but you may not have access to the account information or be able to monitor payments as closely as the primary borrower.
Overall, co-signing a loan can impact your credit score both positively and negatively, depending on the borrower’s actions. It’s crucial to carefully consider the risks and benefits before agreeing to cosign a loan.
Make sure you trust the borrower to make timely payments, and be prepared for the potential impact on your credit score and financial situation.
Frequently Asked Questions:
How do student loans help establish credit history?
Student loans can help you establish a credit history if they are your first credit accounts. Your payment history, including student loan payments, is one of the most critical factors in determining your credit score.
Do student loans add to the credit mix as well?
Yes, they certainly do. They add diversity to your credit mix especially if they are your only instalment loans.
Does the amount of student loan debt affect credit score indirectly?
High levels of student loan debt could affect your ability to qualify for other types of credit, such as mortgages or auto loans, which may impact your credit score over time.
Why is it important to pay bills on time?
Payment history is a significant factor in determining your credit score. Even a single missed or late payment can negatively impact your score.
Is payment of debt enough to maintain a good CIBIL score?
Paying off debt is indispensable to maintain a good credit score. However, it is responsible financial management that leads to a good CIBIL score.
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Published: 23 Mar 2024, 11:39 AM IST