My 20-year-old son needs a co-signer for the house he wants to rent with his friend. He asked me, but I’m not sure how this will affect my credit if they don’t pay rent on time. Will late payments ding my credit score? What if my son pays his half on time, but his roommate doesn’t? They’re good students and everything, but it’s their first time living on their own, and neither of them makes much money. — Karen
Your question highlights a very common haze about credit. Therefore, I’m glad you asked, because it gives me the perfect opportunity to clear out some of the clouds for everyone.
In the financial context, credit is a loan. A bank might extend someone credit — a set amount of cash available on a credit card — based on past borrowing and repaying performance. For example, they may allow the cardholder the ability to spend up to $5,000. If that person does really well by charging regularly and paying on time, but doesn’t go overboard by maintaining a high balance, all is grand. The credit issuer sends the cardholder’s glowing information to the credit reporting bureaus, and his credit rating (which is measured by credit scores like FICO) goes up.
So does this differ from a rental agreement? Absolutely. The landlord or building owner does not lend money to the person moving into the property. Instead, she allows the tenant to stay there according to the terms set forth in a lease or rental agreement. If the tenant pays on time and adheres to the rules of the contract (which the landlord must also follow), problems are avoided. The credit bureaus are not notified because rent payments are bills, not loans or lines of credit.
That said, most landlords will pull prospective tenants’ credit reports and scores to find out if they are a good risk. If the person has used credit responsibly by keeping debt down and paying on time, there’s a greater chance he will also submit his rent when he should. But credit reports are only part of the qualification process — for example, the landlord will also make sure the home-seeker has a job that’s steady and provides enough income to afford the place.
Which brings us to the co-signer issue. Because of your son’s young age, he may possess neither the attractive credit history nor the employment requirements necessary to support the rent. In this case, adding someone who does have established credit and who can add to the cash flow makes a great deal of sense.
If you were to co-sign, you would become equally responsible for the rent and upkeep of the home per the contract. So if your son or his buddy is supposed to send the money and doesn’t, or if a beer keg explodes in the bathroom, flooding the place and ruining the hardwood floors, the landlord can demand payment from anyone on the lease. The landlord might also send the debt to a collection agency, which will then hurt your credit reports (and make it even more difficult for your son to secure another rental). And if things get really bad, the landlord can sue for unpaid rent and/ or damages. The judgments will also wind up on the reports.
Now you have to make a decision: to co-sign or not. Maybe I’ve watched too many episodes of “Campus PD,” but if I were in your position, I’d give it a pass.