IF YOU co-sign a loan, you're revealing yourself as a saint, an idiot or a parent. Maryanne Frawley of Amery, Wis., is a parent.
"Last year," Mrs. Frawley writes, "my husband co-signed a loan for his 18-year-old daughter. She is now more than 120 days late on the payment and it looks as if we will have to pay it instead. Will her late payment affect our credit report?"
It sure will, in spades. That delinquency is now on the Frawley's own record, and it's going to stay there for seven long years.
That's something you need to think about, before you co-sign a loan, credit-card application or a lease. We all love our children. But you don't want to wreck your personal finances to support them.
Co-signing a loan is not a mere formality, as many people seem to think. "It's a joint obligation. Both the borrowers are liable," says Norm Magnuson of the Associated Credit Bureaus in Washington, D.C.
The primary borrower doesn't qualify for credit -- perhaps because of insufficient income, previous credit problems or the lack of a credit history. Taking everything into consideration, the lender believes that the applicant can't be relied on to repay.
Co-signers substitute their own incomes and credit histories for that of the applicant. You are saying to the lender, "If you don't trust my co-signee, trust me."
And the lender does. Your credit will be examined as if you yourself were the primary borrower. The loan is carried in your name as well as the name of your co-signee. The payment history shows in your credit report.
Even slow payments, a month or two late, hurt your credit reputation. A four-month or five-month delinquency is a serious blot.
Any delinquency at all can damage your access to credit cards. These applications are checked by computer and there's no soul in that machine. Lenders that offer low-interest-rate cards don't want customers who show as slow-pay even on just one line of credit.
It does no good to argue that you didn't know that the other borrower was behind. You're expected to keep track of this debt.
High-rate lenders will generally accept you, under two conditions. The rest of your credit has to be clean and you can't allow that co-signed delinquency to go on too long. Bring the debt up to date and argue with your co-signer later. Be sure you make all future payments on time.
You'll be left in credit hell if you let the lender write off the loan, even if you eventually pay in full. You promised you'd make those payments yourself. Co-signers should ask the lender if they can get a copy of each monthly bill. That will show whether each monthly payment is made on time. Don't co-sign if you're not prepared to pay if the other party doesn't.
Tell your child or other co-signee about the risk you're going to run. They may not realize that their payments will show on your credit report. Ask them to tell you immediately if they can't make a payment. And don't punish them for it, or they won't tell.
If you find out too late that the loan is in delinquency, take over the payments immediately. Then contact each of the three major credit bureaus to see if they have a credit record in your name. If they do, add a statement to your record, explaining why the loan was late.
Of the three major bureaus, Experian (formerly TRW, 800-422-4879) and Equifax (800-685-5000) make it easy; their reps will tell you how to put in a statement. Trans Union (316-636-6110) makes you order a credit report for $8 and dispute the loan, before a statement is allowed (you'll have to be persistent; Trans Union is tough to deal with).
Credit-card issuers pretty much ignore the statements in credit reports. But if you apply for a mortgage or a personal loan, the lender will see the explanation and give you a chance to make your case.
Maryanne Frawley wondered if she and her husband could tax-deduct the payments they made for his daughter, as bad debt. Alas not. This isn't a bad debt, this is your debt. As the IRS sees it, you haven't suffered a loss at all. You are merely repaying what you owe.