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Credit score and a co-signed loan

Chris Farrell Aug 22, 2011

Question: I’ve just co-signed for a federal student loan for my goddaughter in the amount of 13K. She’s going to school overseas and to get a student visa, the entire year’s tuition and living expenses needed to be in banked in advance. Her parents have their own business, and cash flow issues preclude them from handling this on their own.

My question: will this co-sign have an immediate negative impact on my own credit score? I am about to refinance my primary residence in order to take advantage of low rates (and beat a 10-year ticking clock on a full balloon requirement on original note). My current score is excellent. Jane, Brooklyn, NY

Answer: It should have an impact on your credit score. The reason is that the potential liability will show up on your credit report. Whether the impact is minimal or not on your credit score and from the lenders point of view largely depends on how much debt you’re carrying relative to your income (and credit limits). For some borrowers the additional liability could have a large effect; for others, it could be little more than a glancing blow.

As you know the real risk with a co-signed loan is that you’re legally on the hook for the entire debt if the borrower stops paying the tab. The lender will look to you to make good on the debt.

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