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Is My Co-signer Affected by Consolidation?

Debt Consolidation

When or if the time comes in your life where you are in serious need of getting a loan but find your credit is not sufficient enough to convince a bank or credit union to loan you the money, you may turn to a co-signer - someone with a good credit score - who will agree to take responsibility for the debt on your behalf if you ever find yourself unable to pay the loan. This is a risky proposition for the co-signer usually. They are, in effect, putting their credit on the line on your behalf and trusting in you to make timely payments to the debt in a manner that will not cause their own credit to be negatively affected.

What is Consolidation?

Consolidation is the process of taking out a new loan in order to pay off several others. This new loan can come from a several sources such as:

  • A new credit card with a higher limit than the total of the debts you wish to pay off. Once you have the new card you can charge off your old debts or transfer balances from existing credit cards to the new one.
  • A home equity loan which borrows money on the equity in your home up to a certain percentage.
  • A home equity line of credit which is similar to a home equity loan but acts as a revolving account on your home's equity that you can use then pay off, and use again as often as you need to.
  • A new personal loan that will enable you to pay off your other debts with the cash you receive.

Once you have the money from this new source, you use it to pay off old debts so that now your debts will be "consolidated" to the new loan and a single, more easily-managed payment. If one of these paid off debts is the one you had co-signed for you, the result will probably affect their credit score one way or the other:

Score a Positive Effect

A positive effect on your co-signer's credit score will come about if you pay off the loan as a part of the consolidation and have the account closed and notated as "paid in full" on the credit report will see the benefit on their credit as that obligation (or potential obligation) is removed from their credit report. This net effect increases their credit potential by removing obligation.

Score a Negative Effect

A negative effect on your co-signer's credit score will come about if you make the same mistake that many people with debt consolidation loans make, and that is to pay off your various debts with the consolidation loan and then charge back up the debt that you had co-signed if it was a revolving account. This will put you in a negative situation with your debt, cause extreme hardship and probably lead to default or the need for credit-counseling service (which often has a negative effect on credit).

Do you qualify for debt consolidation?
What is your estimated debt amount?