How a Co-Signer or Co-Applicant Builds Your Credit Score

If you’ve been researching applying for a loan, you may have been disappointed to learn that higher interest rates in recent times have led to an increase in loan rejections. Having a cosigner or co-applicant can help increase the likelihood that you’ll be approved for a loan and can even improve the terms you’re offered.

When you choose the right cosigner or co-borrower, your own credit can even be improved as you work to build a positive payment history.

At the same time, taking on a cosigner or co-applicant is a big decision. This isn’t something you’ll want to pursue lightly, both for the sake of your personal relationship with the other individual as well as your financial future.

Let’s take a closer look at what you need to know about cosigners, co-applicants, and co-borrowers to ensure you have all of the most important information before moving forward with your application.

Cosigners, Co-Applicants, and Co-Borrowers: Defining the Terms

There are important distinctions to be made  between the terms “co-borrower,” “cosigner,” and “co-applicant.” You’ll want to make sure you fully understand which type of agreement you are signing on for before putting your name to any loan agreement.

“Co-borrower” and “co-applicant” are often used interchangeably, though one could technically argue that co-applicant is the term used during the application process while co-borrower is the term used once the loan has been approved and funded.

• The primary difference between cosigners and co-borrowers is the degree to which the individual is invested in the loan.

Here is the bottom line:

• A cosigner will only need to make payments toward the loan if the primary borrower cannot fulfill their obligation
• A co-borrower is expected to make payments towards the loan– essentially, they have both more responsibility and more ownership than a co-signer

What Is a Cosigner?

When someone cosigns a loan, it means that they are adding their name, financial info, and credit history to the loan application of the primary borrower.

By doing this, they are agreeing to take on the legal responsibility of paying back the loan amount (and any extra fees) if the borrower isn’t able to keep up with the payments.

Co-signers provide a guarantee for a loan or lease but typically do not have an ownership interest in the financed item. They're responsible for the debt if the primary borrower or tenant fails to pay. Their primary role is to offer assurance to the lender or landlord regarding repayment but may not have any rights to the property or asset being financed.

Usually, a consumer will seek out a cosigner when they know they’re going to struggle to be approved for a loan based on their own financial information and credit profile.

What Is a Co-Applicant?

A co-applicant on a loan is an additional individual that is taken into account when a loan is being underwritten and (hopefully) approved. It’s possible that having a co-applicant will help you improve the odds that you will be approved for a loan. Furthermore, you might be offered more favorable loan terms once the other person’s credit history and financial info are added to the pot.

Co-applicants apply for credit together and are equally responsible for repaying the debt if the loan is extended. They both have ownership rights or benefits from the loan or lease agreement. Both parties' incomes, assets, and credit histories are considered in the approval process. They share equal responsibility for making payments.

It’s important to understand that being a co-applicant (or a co-borrower, for that matter) is not the same as being a co-signer. Cosigners usually aren’t given access to any funds or have anything to do with any collateral related to the loan. Instead, they are just, essentially, back-up if the primary borrower can’t pay back what they owe.

A co-applicant, on the other hand, is equally responsible for the repayment of the loan. For instance, if a husband and a wife apply for a mortgage, they would both be considered “co-applicants.” They both have to make sure they are making their mortgage payments on time, and both benefit from the loan. In this particular example, both spouses would end up being named on the title once the mortgage was fully paid off.

What Is a Co-Borrower?

Co-borrower is, basically, another term for a co-applicant. Some people make the distinction that a co-applicant and a co-borrower are the same thing, except that they describe different moments in time in the loan process.

If co-applicants apply for a loan and are approved and funded, they become co-borrowers. With co-borrowers, both individuals' incomes and credit histories are considered in the approval process, and both are equally liable for the loan payments. Unlike co-signers, co-borrowers have an ownership interest in the property.

If someone is a co-borrower, it means that they have access to the loan funds in the same way that the primary borrower does. It also means that they have an equal amount of responsibility for repaying the loan as the primary borrower.

How a Co-Signer or Co-Applicant Builds Your Credit Score

Having a co-signer or a co-applicant can potentially help you build credit. However, this isn’t necessarily a given– whether or not your credit improves, thanks to having another person sign their name to a loan, depends on whether you exhibit responsible habits as a borrower.

If you're the primary borrower and have a co-signer, the co-signer’s strong credit history and responsible financial behavior can positively influence your credit. Timely payments on the loan or lease can improve your credit score.

On the other hand, if you miss payments or default on a loan and you have a co-signer, it negatively affects not only your credit but also the co-signers credit score. Their credit is impacted just as yours is because they are equally responsible for the debt if you stop making payments.

If you have a co-applicant on a loan, both of your credit scores are impacted positively or negatively based on how the loan or lease is managed. Timely payments by both co-applicants can help build both individuals' credit histories, contributing positively to their credit scores. Conversely, missed payments or defaults adversely affect both co-applicants credit scores.

The Pros and Cons of Cosigners Vs. Co-borrowers

Taking out a loan is a big decision, and approaching someone to sign the paperwork alongside you isn’t something to take lightly. You’ll want to think about the impact it could have on both you and the individual you’re asking to sign on as a cosigner or co-borrower.

The Benefits and Drawbacks of Having a Cosigner

There are several reasons you might want to approach someone you know and trust to cosign a loan for you.

There are a number of advantages to having a cosigner, including:

• Helping to boost the chances you’ll be approved: A co-signer with a strong credit history can bolster your chances of getting approved for loans or leases, especially if you have limited or poor credit on your own.

• Potentially giving you access to better loan terms: With a co-signer, you might secure more favorable terms than you could qualify for independently, such as lower interest rates, higher loan amounts, or longer repayment periods.

• Helping to build your credit: Timely payments on the loan can help you establish or improve your credit history, potentially setting you up for better credit opportunities in the future.

• Letting you gain access to credit: Having a co-signer might grant you access to credit or loan options that you wouldn't qualify for otherwise.

On the other hand, having a co-signer isn’t all sunshine and roses.

There are some potential consequences you’ll want to think about before starting to hunt for the right cosigner, including:

• Potentially putting strain on your relationship with the cosigner: Financial issues, especially if you struggle to make payments, can cause tension or damage relationships with the co-signer, especially if they're forced to step in to cover payments.

• Impact on the cosigner’s credit: If you default or miss payments, the co-signer's credit is affected, potentially damaging their financial standing and creditworthiness.

• Sharing responsibility with the cosigner: Both you and the co-signer share equal responsibility for the debt or lease. Any missed payments or defaults negatively impact both your and the co-signer's credit scores.

You’ll definitely want to make sure you consider the potential impact on your relationship with your cosigner before choosing to go this route. Money has a way of causing strife in even the strongest of relationships, and you’ll want to make sure you have a clear understanding of how and when the loan will be repaid so that you and the cosigner are able to maintain a positive personal relationship during and after the repayment period.

The Benefits and Drawbacks of Being a Cosigner

It can be tempting to become a cosigner to help out someone you care about when they’re looking to gain access to a loan or line of credit. However, it’s extremely important you consider all of the potential implications of this before moving forward.

There are, of course, some obvious benefits to being a cosigner for someone else.

Here are some reasons you might choose to become a cosigner:

• Helping someone you care about secure financing: Co-signing allows you to help a friend, family member, or someone else secure credit or a lease when they might not qualify on their own.

• Helping someone you care about improve loan terms: Your strong credit history might secure better terms or approval for the loan that the primary borrower wouldn't qualify for alone.

Some of the reasons you might not want to cosign a loan include:

• You’re legally obligated to pay if the borrower misses payments: As a co-signer, you are equally responsible for the debt payments. You're legally obligated to pay if the borrower defaults or misses payments. This can negatively impact your credit score and financial well-being.

• It’s possible that your credit score could be impacted: Any late payments or defaults by the primary borrower will also impact your credit score. It could affect your ability to get credit for yourself in the future.

• It could cause issues in your relationship: If you're forced to step in to make payments due to the primary borrower's inability, it can strain relationships or cause serious tension.
• It could impact your ability to borrow down the road: Being a co-signer might affect your ability to borrow for yourself, as it increases your overall debt obligations, potentially impacting your debt-to-income ratio.

The Benefits and Drawbacks of Having or Being a Co-Borrower

If a co-signer doesn’t sound like the right thing for your situation, would a co-borrower or co-applicant be more applicable?

Some of the reasons you might want to apply for a loan with another individual include:

• Helping improve the odds of approval: Including a co-borrower with a strong credit history and income can increase your chances of getting approved for a loan, especially if your own financial situation isn’t ideal.

• Potentially giving you access to better loan terms: With a co-borrower, you might qualify for more favorable terms, including lower interest rates, higher loan amounts, or longer repayment periods than you would be offered if you applied on your own.

• Helping to build credit: If you’re making payments on the loan on time, it can positively impact both borrowers' credit scores, potentially improving or establishing credit history for both parties.

• Sharing the responsibility: When you have a co-borrower rather than a co-signer, both borrowers share the responsibility for the loan, which can make managing payments more manageable and spread the financial burden.

Of course, there are always two sides to every coin. Some of the potential downsides of having a co-borrower include:

• Tying your financial fate to someone else: Both you and the co-borrower are equally responsible for the debt. If one borrower defaults or misses payments, it negatively affects both of your credit scores and financial standings.

• Potentially creating strain in your relationship: Money has a way of making a mess of perfectly good relationships. Financial difficulties or disagreements regarding payments can strain relationships between co-borrowers, especially if one party feels burdened by the debt.

• Potentially impacting the co-borrowers credit negatively: If the loan goes into default or payments are missed, it affects the co-borrowers credit as much as it does yours, potentially harming their creditworthiness.

• Potentially limiting your financial independence: Depending on the agreement you have with the co-borrower, it’s possible that having a co-borrower could limit your independence. Both parties need to agree on decisions related to the loan, and it could affect your individual borrowing capacity in the future.

How Do You Know If You Need a Co-Signer?

Not everyone is going to need a cosigner for a loan. Whether or not having a cosigner could be worth the trouble is going to depend on your particular financial circumstances.

Here are some signs that a cosigner might be useful to you as you work to take out a loan or line of credit:

• Your credit history is limited: If you're new to credit or have a short credit history, lenders might require a co-signer to mitigate the risk.

• Your credit score is low: A poor credit score might result in rejection or unfavorable terms, and a co-signer with a stronger credit profile can help secure better terms.

• You don’t have much income: If your income doesn’t meet the lender's requirements for the amount you wish to borrow, a co-signer with a higher income might be necessary.

• Your employment or apartment rental history is limited: Limited rental or employment history might require a co-signer to strengthen the application.

• The loan you’re applying for requires a cosigner: Some loans, especially for students or individuals with limited credit, commonly require a co-signer, such as student loans or certain types of personal loans.

How to Find a Good Co-Signer

Finding the right cosigner isn’t a decision you’ll want to rush. Not only is a big decision for you because it impacts your ability to gain approval for a loan and affects the terms your offered, but being a cosigner can also have a big impact on the other individual’s financial life.

• When you ask someone to cosign a loan, you’re asking them to take on a big responsibility. Not only that, but you’re asking them to trust that you will be able to make your payments on time every time.

For this reason, you don’t want to go around asking everyone you run into whether they’ll cosign on a loan. Typically, cosigners will be parents, family members, close friends, or spouses. The less close you are to a person, the less likely it will be justifiable for them to take on the risk of cosigning your loan.

When you start contemplating who to ask to cosign your loan, you’ll want to keep the following factors in mind:

• Think carefully about your relationships: Start by considering family members or close friends who have a strong credit history, stable income, and trust in your ability to repay the loan or lease.

• Be ready for open and honest communication: Have an open conversation about your financial situation and the responsibilities of being a co-signer with your short list of potential cosigners. You’ll want to ensure they understand the potential risks and obligations.

• Find someone reliable that you trust: Choose someone you trust and who trusts you. A co-signer should be someone willing to support you financially and who believes you'll meet your obligations.

• Look for someone with financial stability: A cosigner won’t do you much good if their credit and financial info aren’t any more stable than yours is. Look for someone with a good credit score, stable employment, and a healthy financial situation. Lenders are going to prefer co-signers with a strong credit history.
• Come up with a clear agreement: It’s important that you make sure the co-signer understands the legal implications of their role. Discuss the exit strategy, like when the co-signer might be released from the agreement, or otherwise ensure you have a crystal clear agreement about each of your responsibilities in the loan.

What Is the Difference Between an Authorized User and a Cosigner?

Finally, before I sign off, let's look at one more question that is frequently asked in relation to cosigning-- what's the difference between an authorized user and a cosigner?

In short, the key difference lies in the level of financial responsibility. An authorized user can use a credit account but isn't liable for payments, whereas a cosigner is legally responsible for repaying the debt if the primary borrower defaults.

Essentially, an authorized user is someone who has been given permission by the primary account holder to use a credit card or account. They have the privilege to make purchases but aren't legally responsible for the debt incurred. The primary account holder maintains responsibility for payments.

• A cosigner, on the other hand, is a person who agrees to take equal responsibility for repaying someone else's loan or debt.

To help make the distinction a bit clearer, you might want to become an authorized user on someone else's account in order to improve your credit. On the other hand, you might search for a cosigner if you're looking to add the positive credit history of someone you trust to a loan application in order to improve approval odds or gain access to better loan terms.

Improving Your Credit to Improve Your Financial Future

Having a cosigner or a co-applicant is a great way to gain access to financial products you otherwise wouldn’t be approved for on your own. Furthermore, it can help you lock down better rates and terms on the loan. If you are able to make regular payments toward the loan after another individual helps you secure it, it can help you build credit through a positive payment history.

At the same time, taking on a cosigner or co-borrower isn’t something you want to take on flippantly. This is a serious financial responsibility that the other individual is agreeing to, so it’s important to make sure they understand what their legal obligations are by signing on to the loan.

Are you working to improve your financial future by improving your credit? If so, make sure you check out our Credit Building Tips blog for more articles and resources to help you on your credit-building journey!

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