The Co-Signing Curse

The Co-Sign Curse & Financial Facts

NBCNews.com published an article last week by freelance writer Sibylla Nash titled, “The Mistake that Plunged My Credit Score 200 Points.” In the article, Nash describes the consequences she has faced since co-signing a mortgage for a friend.

Nash said by having known her friend for more than 20 years and having talked to her on the phone daily, she did not see an issue with co-signing on the loan. She admits to knowing the repercussions of co-signing, but said she never investigated what would happen if her friend missed a payment, assuming her friend would always pay. But co-signing for the loan negatively affected her credit even while payments were being made.

“I had to find out the hard way that co-signing on her condo increased my debt-to-income ratio (how much I owe versus how much I earn), which is not a good thing when you’re trying to buy a house or make any major purchases,” Nash wrote.

A year after having the mortgage, her friend was supposed to refinance her home and get a new loan without Nash, but due to the real estate crash, she was unable to do that. Nash was stuck on the loan. Then in the fall of 2009, Nash checked her credit report to discover $10,000 in past due payments as her friend had missed three mortgage payments, plunging her credit score from over 800 to the low 600s.

Nash notes that there was no reason – such as a layoff or unexpected medical expenses – for her friend to default on her mortgage payments. Currently the outstanding debt totals nearly $30,000 and as the co-signer, Nash is just as liable for that amount. Nash said the four main mistakes she made were agreeing to co-sign anything, co-signing without first researching how it would affect her, not monitoring her credit and not creating a contract to outline their agreement.

“I wouldn’t recommend co-signing on a stick of gum for anyone after going through this,” Nash writes. “It is more trouble than it’s worth. If the friendship has to end because your friend insists that you co-sign, at least you still have your credit.”

Nash said her friendship was destroyed along with her credit. She has slowly been working toward improving her credit score by paying down other debts and is now in the process of trying to sell the condo. Nash learned that co-signing puts your financial livelihood in someone else’s hands. If you are considering co-signing for a loan – even with friends or family – contact a Certified Financial Planner to discuss the possible repercussions and to make a plan, so you don’t have the same experience as Nash.

FINANCIAL FACTS

Off To College – The average American family borrows 22 percent of the total cost of their child’s college education, either through student loans or loans taken out by Mom and Dad (source: Sallie Mae, BTN Research).  

It Pays To Wait – Americans born in 1946 or later will have to work at least until age 66 (to as much as age 67 for individuals born in 1960 or later) to achieve full retirement benefits from Social Security. Once a retiree hits his or her individual full retirement age, postponing receipt of the retirement benefits will increase the payout by 8 percent per year (source: Social Security Administration, BTN Research). 

Working For The Government – One out of every six American workers is employed by the government, either at the federal, state or local level. If you exclude the 7.8 million teachers in our country from the calculation (teachers are technically employees of their respective local governments), one out of every nine American workers is employed by the government (source: Department of Labor, BTN Research).