Editorial Policy

Co-Signing Car Loan Could Crash Mom’s Credit

Erica Sandberg

August 17, 2012

QDear Erica,

Four years ago I co-signed a car loan for my daughter. Since then, her payments have always been late or I have made her payments. What will this do to my credit score? I have an excellent credit rating but fear this will be an issue. — Cindy

ADear Cindy,

You’ve just described reason No. 236 to use extreme caution when entering into joint credit arrangements. They are just fraught with potential dangers.Ask Erica

The lender doesn’t care who is sending the money, as long as someone is. That person could be you, your daughter or a random benefactor. However, if they receive the payments late or not at all, serious problems erupt for those who signed on the dotted line. Consequences include not just the credit report damage you fear, but vehicle repossession, expensive deficiency balances and lawsuits.

Because you are a co-signer on the loan, the lender is reporting information about the account on both your and your daughter’s credit reports. You are equal partners on paper. When the lender receives on-time payments, the reports look good and your credit ratings benefit. But when they don’t, each of your credit files will be dinged.

You say you have a great credit rating now, so maybe the late payments were in the distant past. For assessment and scoring purposes, recent activity counts more than what occurred long ago. Also, you may have plenty of other accounts that you’ve treated well. As one of many, this one may not be diluting the positive actions you have been taking with the others.

To be sure all is as well as you think it is, pull your credit reports from the three major credit bureaus and check to see how that car loan is affecting matters. You can access each of your reports online for free once per year at AnnualCreditReport.com. Purchase your FICO score at MyFico.com as well. FICO scores range from a low of 300 to a high of 850, and scores in the mid-700’s are considered excellent.

If your score is 700 or above, wonderful — your daughter’s irresponsible behavior hasn’t done much harm. But if the numbers are low and that’s the only thing pulling them down, a credit repair strategy is in order, especially if you need a high rating for something like a new loan or credit account.

The vehicle is probably close to being paid off by now (assuming it’s a five-year loan), and when it is, you’ll be free of this unhealthy relationship. Meanwhile, monitor your daugher’s payments carefully. If she can’t fulfill her obligation, I suggest that you take over so you know for sure that the payments are made on time.

Talk to your daughter about what you’re doing and how you expect to be compensated if you do use your own funds. Draw up an agreement that outlines the amount of money you’re lending her, and that she now owes you — not the financial institution. You can add any conditions that you want and that seem fair. For example, you may stipulate that if she doesn’t repay you by a specific date, she has to sell the car and give you the cash from the proceeds. Or take something of hers as collateral, like a laptop, which you will return when the debt is satisfied. Negotiate, and come up with something you both can live with. Then both of you sign the document. That’s your contract, and you can even sue her in small claims court if she breaks it.

In the future, don’t co-sign again — with your daughter or anyone else. It’s just too risky.

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