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Build Credit Responsibly: Using a Cosigner

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If you apply for a loan or a credit card, you may be told you need a cosigner. If you are faced with this situation, it's important to understand what cosigning is, what responsibilities come with cosigning a loan and why using a cosigner may be beneficial to your financial future.

What is cosigning?

Cosigning occurs when a person signs a loan with you, promising to be responsible for the loan payments in the event that you are unable to pay. Since you are just starting out, lenders want to be reassured that you will make payments as agreed.

Remember, as the borrower, you are responsible for your regular, on-time loan payments. But, in the event that your payment habits lapse, your cosigner is responsible for stepping in and fulfilling the payment obligations.

If you miss payments, remember that both you and your cosigner's credit can be negatively affected. This can make it more difficult for you to get a loan on your own after you've graduated and gotten your first job, or you might end up qualifying for higher rates.

Why use a cosigner?

There are many reasons that banks and credit unions require a cosigner, including (but not limited to) you may have little or no credit history, or because of new credit card regulations, which require a cosigner if you are under age 21 and your annual income is less than $2,000.

Getting a loan with a cosigner is one of the best ways to start building your credit responsibly. If you borrow and make payments regularly and on-time, your credit history will be started on the right foot. Your cosigner's strong credit or higher income may help you qualify for the loan or credit card you want, qualify you for a better interest rate and can give you the borrowing strength you need.

If you do get a credit card with a cosigner, use it for small necessities you have previously budgeted for or for emergencies. Starting on the path to good credit history now can help you down the road with vehicle and home purchases, without the need for a cosigner.

Who makes a good cosigner?

Most students choose a parent or guardian with solid credit history to cosign a loan or credit card with them. Before you ask someone to cosign, be sure that they understand all the responsibilities associated with cosigning.

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