Any time you are extended a new line of credit, your credit is affected. Cosigning on a student loan qualifies as being extended a new line of credit, so being a cosigner on a student loan does in fact impact your credit.
As a cosigner on a student loan, you are equally responsible for repaying a student loan as the loan’s primary borrower. The hope is that you won’t have to repay the student loan you cosign for, but you are legally agreeing to pay back the debt if the primary borrower is unable to.
Individuals with no credit have great difficulty getting private loans without cosigners. If you are the parent or guardian of a student for whom this is the case, you might need to cosign in order for them to get the financial help they require.
Credit Pros and Cons of Cosigning on a Loan
When you’ve been asked to cosign on a loan, there are a number of factors you’ll want to consider outside of just whether you want to help a student. Here are the advantages and disadvantages of such an agreement on your credit.
Being a cosigner on a loan could benefit you by diversifying your credit accounts or it could hurt you by adding unwanted activity to your credit history.
Cosigning on a student loan shows up as both a credit inquiry and a new credit account in your history. In general, the number of credit inquiries on your account should be kept as low as possible because too many can decrease your score. And new credit accounts lower your average account age, which also tends to bring down your credit score for a while.
So especially if you’re going to need to take out a new loan or mortgage within a year or so, you’ll need to make sure that you don’t have too many inquiries or new accounts in your history. Cosigned loans included.
The effects of these factors lessen over time, so cosigning is unlikely to do long-term damage, but it could impact your short-term ability to get another line of credit as you can only have so many open at a time.
Some loans offer the option of allowing borrowers to release their cosigner from the contract. Most times there are certain stipulations, such as a borrower making a specific number of on-time payments. If you’re hesitant to cosign but wouldn’t mind doing so if the agreement were more flexible, look into this option beforehand.
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