Being a Cosigner

On many credit applications, there are places for other individuals to input information and roles they play with regard to the account. The most common roles include co-signer, credit reference, and joint account holder. Here's a quick explanation of the differences, in order of liability:

A credit reference is an individual who agrees that they will provide reliable information about the borrower to the lender. A credit reference can also refer to a primary contact person in the event the borrower cannot be reached. Credit references do not leverage their credit rating or reputation; they merely provide information to creditors. Common credit references include family, friends, and even businesses that the borrower has worked with in the past.

Credit references:

• Provide information about the borrower
• Are not responsible for the loan if the borrower fails to make payments
• Do not have their credit rating affected by the loan
• Cannot use the loan funds

A co-signer, also known as a guarantor, is an individual who agrees that they will pay any debts if the primary account holder is unable to. A co-signer leverages their credit rating and reputation* on behalf of the borrower to allow the borrower to obtain credit they might otherwise be unable to get. Very often, co-signers are parents or other family members, assisting children to obtain their first line of credit, as most lenders will not lend to people with no credit history. Co-signers cannot use the line of credit; they are merely guaranteeing that any debt will be paid.

Co-signers:

• Provide information about the borrower
• Are responsible for the loan if the borrower fails to make payments
• Do have their credit rating affected by the loan
• Cannot use the loan funds

*(Update June 29, 2007)
A recent press release from the Fair Issac Corporation (who oversees the FICO credit score) has announced that they no longer look at the co-signer's credit score when determining the credit score of an applicant. The purpose of this change is to shut down "piggybacking", a form of credit fraud. This tactic involves adding one person as an authorized user to the credit card account of someone who has excellent credit. Before this change went into effect, piggybacking provided the applicant with an immediate improvement in their credit score.

The change has been made primarily because of issues with mortgage applicants, but since FICO is used for all loans, the change must be universally enacted.

A joint account holder is an individual who agrees that they will pay any debts in concert with the primary account holder or borrower. The joint account holder leverages their credit rating and reputation, but can also use the line of credit. Joint account holders are very often spouses or family members; some parents choose joint account holder over co-signer because they can receive statements on the account and pay it before payments become late or defaulted.

Joint account holders :

• Provide information about the borrower
• Are responsible for the loan if the borrower fails to make payments
• Do have their credit rating affected by the loan
• Can use the loan funds

When you or someone you know is asked to participate in opening an account, pay attention to what is being asked of you and what your obligations are. If the primary account holder fails to meet their obligations, you may be responsible for them, and it will thus impact your credit rating and score.

This article was written on September 6, 2003 and updated on June 29, 2007. Credit laws and procedures are subject to change; check with your lending institution for the latest updates.