“Co-sign” isn’t a four-letter word, but it might as well be. Despite their better judgment, many people have co-signed for a friend or family member’s loan or credit card. And according to one Federal Trade Commission study, 75% of them have paid the price, ending up paying for at least part of the co-signed debts.
A co-signer is a person who guarantees a loan taken out by someone else. That "someone else" usually has bad credit or no credit history at all, or doesn't have income. Lenders consider it risky to provide credit to such people, and that's where the co-signer comes in. When you co-sign for someone, you're promising to repay the debt if they do not.
Co-signing doesn't eliminate the risk that the borrower won't repay a loan. It just shifts that risk from the lender to the co-signer — in this case, you. If the borrower doesn't make the payments, then you have to do it.
If you’re a co-signer and want to get your name off a credit account, you or the borrower can try one of the following strategies. Understand, however, that these options are more easily accomplished if the original borrower is agreeable to you bowing out as co-signer and has improved his or her credit since you originally co-signed.
1. Transfer the balance to a 0% card
If the borrower can get approved, he or she can move the remaining credit card or loan debt to a balance-transfer credit card. Generally, these cards have an introductory 0% APR period of 12 to 18 months, which gives the borrower time to pay off the balance without incurring interest. There’s usually a fee of 3% to 5% of the amount transferred, although some cards don't charge a fee or waive it for a limited time.
Balance-transfer cards typically require good to excellent credit. If your borrower has boosted his or her score since you co-signed, take a look at our favorite balance-transfer credit cards.
2. Get a loan release
Some lenders — particularly student loan issuers — have a release option for co-signers, according to the Consumer Financial Protection Bureau. A release can be obtained after a certain number of on-time payments and a credit check of the original borrower to determine whether he or she is now creditworthy.
Most lenders don’t actively let borrowers know whether or when they can obtain a release; borrowers have to seek out that information themselves. The CFPB offers a couple of sample letters the borrower or co-signer can send to lenders requesting a release.
3. Consolidate or refinance the debt
Consolidating means replacing multiple debts with a single new debt, generally on more favorable terms. Refinancing means replacing one loan with another loan with better terms. Because both require a new loan, your name won’t be on the debt any longer if the original borrower opts to consolidate or refinance. Of course, the borrower must be able to qualify for the new loan on their own for this to be a viable option.
4. Remove your name from a credit card account
If there isn’t a current balance on the account, some credit card issuers may be willing to remove your name, provided the original borrower has decent credit. Call the issuer — or have the original borrower call — and ask if this is an option.
5. Sell the financed asset
If you co-signed for a debt that's secured by an asset — like an auto with a car loan or a house with a mortgage — and the borrower isn’t able to make the payments, you can encourage him or her to sell the asset and pay off the loan. Ideally, the asset is worth more than the remaining debt, and the balance can be wiped out fully.
Note that, legally, you can’t force the borrower to sell the asset. As a co-signer, you agreed only to make payments if the original borrower doesn’t. You aren’t a joint owner of the asset associated with the debt and can’t make decisions about it.
6. Pay off the balance
If the borrower isn’t making payments and hasn’t built his or her credit enough to obtain a new loan or credit card, it may be time to accept your loss and pay off the balance of the debt. Think of it as a life lesson — albeit a pricey one — and avoid co-signing for that person in the future. Doing so could at least prevent further damage to your credit score.
Some of the options discussed above will eliminate the debt but still leave the original account open. Make sure the borrower closes the account. Otherwise, he or she could simply run up the balance again, and you'll be liable again.
Co-signing is a risky endeavor. Of course, if 75% of co-signers end up making payments, the other 25% are happily helping responsible friends or family members who make payments on time every month. Understand the risks of co-signing and know you have a few possible outs if necessary, but they may cost you. Also, remember that non-payment will hurt your credit score, so pay the bill if the original borrower doesn't.