Smart Money Podcast: When Your Bank Stiffs You, and Co-Signing Risks

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a discussion about what to do when your bank stiffs you with a low annual percentage yield.

Then we pivot to this week’s money question from Andrew, who left this voicemail:

"I had a question about helping out family members with a lease. My wife and I were recently asked to help some younger family members by being guarantors or co-signers on a lease to help them get an apartment. And we were not sure what that might mean for us, what kinds of risks that might mean for our finances or our credit. Made us a little uneasy knowing that it could potentially impact our ability to buy a home in the future. So I was hoping you guys could give an answer about what kinds of responsibilities that [means] to be a co-signer or a guarantor on a lease, and what kinds of risks that has, and also whether it's wise to help family members in that kind of way, even when you really, really want to. Thanks. Bye."

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Our take on finding a better savings account

As the Federal Reserve raises interest rates to combat inflation, many high-interest savings accounts have increased their annual percentage yield, or APY, in tandem. But not all banks are being so generous. To find out what your interest rate is, log in to your savings account and dig in to your account details. Depending on your bank’s interface, this might be on your dashboard when you log in or tucked away on another page in your account. If you’re dissatisfied with the rate you see, shop around for a better place to store your money. Plenty of banks, especially online banks and credit unions, now boast APYs north of 3%, and some even offer bonuses to customers who switch.

Our take on co-signing

Becoming a co-signer for a loan or lease is a major financial — and legal — obligation. Co-signers agree to pay the debt in the event that the primary lender can’t do so, and if the account becomes delinquent or goes into default, the co-signer’s credit score may take a major hit. A lower score may jeopardize the co-signer’s chances of getting their own loan or line of credit. As co-signing can expose you to negative, long-lasting consequences, try to do so only when you are certain that the other person can afford their payments. If becoming a co-signer seems too risky, offer assistance in other ways.

Our tips

• Know what you’re signing up for. When you co-sign, you’re responsible for any financial or legal obligations of the contract.

• Understand the risks. Think through the worst-case scenarios, especially if you plan to buy a home soon.

• Consider alternatives. You could help your family members in other ways instead, such as by giving them a lump sum of money or helping them find an apartment they can afford on their own.

More about co-signing on NerdWallet:

How to get removed as a loan or credit card co-signer

Should you co-sign a student loan?

When it can be a good idea to co-sign for your young adult

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

Liz Weston: Co-signing can help a friend or family member get credit or rent an apartment, but should you put your good credit on the line?

Sean Pyles: Welcome to the NerdWallet Smart Money podcast where you send us your money questions and we answer them with the help of our genius Nerds. I'm Sean Pyles.

Liz Weston: And I'm Liz Weston. If you want the Nerds to answer your money question, call or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].

Sean Pyles: In this episode, I'm joined by personal finance Nerds Kim Palmer and Sara Rathner to answer a listener's question about the risks of co-signing. But before that, Liz has a warning for anyone with a bank account, which I imagine is just about everyone listening to this podcast. What's going on, Liz?

Liz Weston: Well, and if you have a Capital One savings account, you definitely want to listen up.

Sean Pyles: And before we go any further, a quick disclaimer that Capital One is one of our partners at NerdWallet. But as you are about to hear, that does not affect how we talk about them. Anyway, as you were saying, Liz.

Liz Weston OK. We've talked on this podcast about the benefits of high-yield savings accounts, especially now that interest rates are on the rise. And one of the many advantages of these accounts is that once you open them, your rate should rise automatically when rates go up. You may not get the highest rates out there, but when the short-term interest rates start to climb, as they have been, you should benefit.

Sean Pyles: Yeah. And we've seen this play out over the past several months as the Fed has hiked interest rates. As of this recording, my high-yield savings account yield is 2.7%, which is up from under 1% earlier this year. And I didn't have to do anything to get this better yield. My bank bumped up the rate on my account automatically, which is typically the case.

Liz Weston Yeah. Unless you have a Capital One account. And it turns out that Capital One changed their account structure a while back so that older accounts are earning just 0.3%

Sean Pyles: On their high-yield accounts?

Liz Weston: Yes. Yeah, that's hardly high yield. If you open a new account, you should be getting 2.35%, and that 2% difference is kind of huge. We had a lot of cash sitting in our Capital One savings accounts, so I figured this cost us at least a thousand dollars.

Sean Pyles: Man, that's outrageous.

Liz Weston: I think so.

Sean Pyles: Well, I also have to call out that the new accounts offering 2.35% aren't even the best rates among high-yield savings accounts. I mentioned mine is around 2.7%. So how do you think folks can make sure that their supposedly high-yield accounts are in fact earning them a high yield?

Liz Weston: OK. One thing you do is you log in to your accounts and check what you're currently earning. It may take a few clicks to find that out. With Capital One, you sign on to your account and you click the link that says account details, and that shows you what rate you're currently earning. So if you are a Capital One account holder and you are getting that paltry 0.3% rate, you can get the current high rate by opening what is called a performance savings account and transferring your money there. Or, if you're as irritated about this as I am, you can find another bank.

Sean Pyles: Yeah. Well, your experience highlights the importance of checking in on your accounts every so often and making sure that your bank is really working hard for you. Because if not, there are plenty of other places to park your money that will work better and harder for you.

Liz Weston: Exactly. There are plenty of other banks offering competitive rates, and some are even offering cash bonuses to switch, which is what I found. And switching is pretty easy. We've got a list of good options on the site, so go explore. And if you find a good rate, you can set up a new account and get your money working for you.

Sean Pyles: One thing people might not know is that actually every single month NerdWallet comes out with a list of the best high-yield savings accounts of that month. So now we're just starting off in November, there's a list for the best high-yield savings accounts in November. Folks should check that out if they want to shop around. I also want to highlight a few other factors that might mean you should switch your bank account beyond a lagging yield. Folks should think about fees. If they're paying overdraft fees or fees to simply have an account open, they should definitely shop around. Think about customer service. If you have a hard time getting a hold of a real person when you need to or your bank's customer service just doesn't match with how you like to interact with a bank like this, shop around. Also, if you need a loan maybe for a car or a house or a personal loan, and your bank doesn't offer the best rates, shop around. Now before you actually need a loan could be the best time to look into different banks because you want to be able to shop around before you need a loan right then and there. I also would recommend people look into opening an account at a local credit union, since credit unions sometimes offer better rates than what you would get at a bank.

Liz Weston: Yeah. And people often find out about credit unions when they're going to be looking for a car loan or something like that because credit unions tend to have good rates. So that's a really good piece of advice. OK. Before we move on, we have some exciting news. We're running another book sweepstakes for our Nerdy Book Club series. In December, we're talking with Joe Saul-Sehy, who is co-author of the book “Stacked: Your Super-Serious Guide to Modern Money Management.”

Sean Pyles: To enter for a chance to win our book giveaway, send an email to [email protected] with the subject “book sweepstakes” during the sweepstakes period. Entries must be received by 11:59 p.m. Pacific Standard Time on Nov. 11. Include the following information: your first and last name, email address, ZIP code and phone number. For more information, please visit our official sweepstakes rules page. If you have suggestions for future authors to interview, please send us a note at [email protected]. We look forward to reading with you. OK, well now let's get on to this episode’s money question segment where I'm joined by personal finance Nerds Kim Palmer and Sara Rathner.

Liz Weston: All right.

Sean Pyles: This episode's money question comes from Andrew who sent us a voicemail. Here it is.

Listener: Hi, NerdWallet. My name's Andrew. I had a question about helping out family members with a lease. My wife and I were recently asked to help some younger family members by being guarantors or co-signers on a lease to help them get an apartment. And we were not sure what that might mean for us, what kinds of risks that might mean for our finances or our credit. Made us a little uneasy knowing that it could potentially impact our ability to buy a home in the future. So I was hoping you guys could give an answer about what kinds of responsibilities that [means] to be a co-signer or a guarantor on a lease, and what kinds of risks that has, and also whether it's wise to help family members in that kind of way, even when you really, really want to. Thanks. Bye.

Sara Rathner: To help us answer Andrew's question on this episode of the podcast, we're joined by personal finance Nerd and host of our Smart Money Book Club series Kim Palmer. Welcome, Kim.

Kim Palmer: Hi. Thank you for having me.

Sean Pyles: Kim, it's great to have you. Can you please start by explaining for those who may not know what co-signing is?

Kim Palmer: Co-signing basically means that you're putting up your own name, your own credit, your identity essentially, as collateral for the person that you are helping. And so it means that you are responsible for it, and if that family member or friend can't make the payment, you are responsible and it can hurt your own finances just as much as it can hurt theirs.

Sean Pyles: Right. It's a very big gift to give someone.

Sara Rathner: Yes. So what are some of the different circumstances where you can help somebody by co-signing for a loan?

Kim Palmer: Well, in general, it is always helping the person that you are co-signing for. And we see this come up a lot with parents doing this for their children. That's a really common scenario where we see this happen. But I tend to be a little bit cautious around this whole idea of co-signing, and I would really want Andrew to be aware of the risks that he's potentially taking on by doing this because if he does co-sign for someone, he is responsible and it could really hurt his own finances. If the loan is not paid on time, for example, it could seriously hurt his own credit score. And it's just something to think about, all of those negative ramifications, even though I completely understand and respect that impulse to help someone.

Sean Pyles: Right. One thing that comes to mind for me, especially when it comes to co-signing on an apartment, is you don't know what their roommates might be like. So even if you are co-signing for someone that you know really well and you think they're responsible, if they have a roommate who maybe isn't so responsible and then they end up not being able to make rent, and then you can't cover rent at all in the apartment, you're still dinged even though it was the other person's fault. So that is a big risk.

Sara Rathner: Yeah, that's definitely a good question to ask of the person that you're co-signing for: What is their living situation going to be like? Are they living alone? Are they going to have roommates? Find out a little bit more about their financial situations if you can, but it would definitely give me pause. The more people that you bring under your umbrella in terms of being responsible ultimately for a big financial decision, the more risk you're taking on.

Kim Palmer: Absolutely. And as I said, I do think I tend to be very cautious around this whole idea just because I'm worried that Andrew will offer to do this nice thing and then it will hurt his own finances. But I was curious for you two, do you have a more positive perspective on it or do you think that it could be an overall good choice to make?

Sean Pyles: Well, I am someone who's benefited from co-signing in the past, actually. When I was in college, my dad co-signed on an apartment for me, which I really appreciated because I would not have been able to get that apartment without that. But that said, my dad and I are close. He was helping me pay my rent, so it was pretty clear he knew that the rent was going to be covered. So that's an easier situation than what it seems like Andrew is dealing with. I think it can be a very generous gift, especially when rents are so expensive, it can be very hard to get into an apartment for a lot of people. But you have to be very careful to make sure that the person that you're co-signing with can take on the responsibility of covering rent. And if in some circumstance they're not able to do that for whatever reason, make sure that you can cover the rent for them so you don't get in a situation where the rent isn't getting paid and you are taking a hit to your credit because of late payments.

Sara Rathner: Yeah. I benefited from it too. When I first graduated from college and I rented my first apartment, my parents co-signed my lease. And it was my own apartment, I didn't have roommates, I had a job. This was pre-Great Recession, so you could still get a good job after college back in the day. So I had an apartment that was in my budget based on my income. I was able to pay the bills myself. If I was in a situation where perhaps I lost my job or lost income in some way, my parents would've stepped up to help me otherwise; this was just an extension of that. But luckily I was able to pay my bills myself, so it was a small risk on their part that helped me out, and luckily it didn't hurt their credit at all.

Kim Palmer: I think also what both of your experience points to is how central that relationship is and how important it's to think about what is the relationship you have with that person. Of course, with both of you, sounds like you have such a good relationship with your parents, and I think that one aspect to consider is how it could hurt your relationship potentially. If the person that you are co-signing with ends up missing payments and hurting your own finances, could that do damage to that relationship? And is that something you're willing to risk as well?

Sean Pyles: Yeah, and going into this, it can be really helpful to be very clear with the person that you're talking with about the terms of this agreement. Because you're going from what is an emotional, potentially familial relationship to what is a financial, contractual relationship. And blurring those can be very complicated because you might forgive some things because you love this person that end up hurting your finances. So I think it can be helpful just to have that conversation, sit down, lay out all of your finances and make sure that you're making a good deal here.

Sara Rathner: Yeah, and Andrew mentioned in their voicemail that one of their goals is to buy a home in the future. And that can really put a strain on your relationship if the person you co-sign for does not end up paying their bills in full and it falls on Andrew's lap because suddenly this arrangement that they've created is getting in the way of Andrew meeting a major financial goal for themselves. And that could create so much resentment for years because buying a home is a path to wealth. And if you can't do that because you were helping somebody else who didn't hold up their end of the bargain, that creates so many hurt feelings.

Sean Pyles: Well, it can take so long to put yourself in a position where you're finally ready to buy a house in terms of getting your credit score ready, saving up all the money that you need, mentally preparing yourself to do it. And it can be undone really quickly if you get a big hit to your credit score, like having a late payment, which could potentially happen if someone is unable to make the rent on time. And the thing with these negative marks in your credit report is that they can last for seven to 10 years depending on the mark itself. And that can make you look really risky to mortgage lenders, which could mean that you have a higher interest rate on your loan or you might even be denied entirely.

Sara Rathner: Yeah. When I applied for my mortgage, it was my first home so I'd previously been renting, and I had to provide proof of, I think a year of, on-time rent payments. And it was my own lease, but when you co-sign for somebody else, then you're just as responsible for their lease. And I wonder how that might affect your ability to attain a mortgage because there might not be that good record of on-time rent payments.

Kim Palmer: I think that's such a good point. And I also think it speaks to the idea that maybe there's other ways Andrew could potentially help out his family members without actually co-signing for them. It's worth thinking through maybe some other options for how he can still feel like he's being supportive and being helpful. And a few ways that I can think of include, he could give them a lump sum of money that he is comfortable with, and that wouldn't put his own future in jeopardy if something goes wrong. So that's one way you could help without threatening your own credit history. And also maybe you can just help in some nonmonetary ways too. Maybe you can go apartment hunting with them — help them find something that they could qualify for on their own, if that's possible — help them build their credit score in other ways by helping them or talking through making on-time payments on their own credit cards, for example, or other accounts that they have.

Sara Rathner: There are so many other ways, too. A lot of times people don't get the really good housewares until they get married and have a wedding registry. But you need that stuff when you're younger and just getting started. So if there are some household items, Andrew, that you have found very useful in your own life, gift them to your loved one and help them get their life started — whether that's items for their kitchen or a piece of furniture, you can help them move, you'll get paid in pizza probably, so that could be worth it. And you also might commit to maybe paying a specific bill for them. Maybe you offer to pay their internet bill, for example, for a set amount of time, and that can help take some stuff off of their plate while they're first getting established.

Sean Pyles: Well, I want to ask you two: If you were in Andrew's situation, would you co-sign for this family member or not?

Kim Palmer: I am seriously an extremely risk-averse person, and so I am so sorry, but I would just very nicely explain to my younger family members that I can't help them in that way, but I would be more than happy to help in other ways. I will go apartment hunting with you. I will maybe offer to pay another bill or gift you something else, but I can't put my own credit score or my own finances at risk. And co-signing in this scenario just sounds too risky to me.

Sara Rathner: I completely agree. I am a huge fan of not setting yourself on fire to keep somebody else warm.

Sean Pyles: Wow. Love it.

Sara Rathner: Thank you. I did not invent that. I cannot take credit. But this has potentially lifelong ramifications for you, Andrew. I could understand maybe a parent co-signing for their child. The parent already owns a home, they're not seeking a mortgage, they're not necessarily seeking new credit. It's a little bit less of a risk for them to take this on. But when you yourself are also a younger adult and you have a lot of things going on in your financial life, too, you're at this point where you have to be pretty careful about protecting your credit and protecting your financial security. Because you are not yet financially independent, for the most part, meaning you're still earning income to support yourself; you aren't necessarily at a point where you've amassed a lot of wealth. So if you have another way to help that you feel comfortable doing — giving a generous cash gift or donating your time, your effort, taking them shopping, taking them on that Target run to buy a couple of housewares — those are also really meaningful ways that you can help them out without putting your own financial situation in jeopardy. So that's what I would recommend.

Sean Pyles: I'm going to come down on the other side and say that I would maybe do it depending on the circumstances, because I'm also very risk averse like you, Kim, but I also really want to help people who can't help themselves in some ways. And sometimes co-signing is the only way to do it, unfortunately. But before I do that, I would want to make sure that their living situation was more sustainable. I would prefer them to not have random roommates who would maybe not pay rent and make this whole thing become derailed. And also, I would want to make sure that just in case I would even have enough money in my own account to cover rent for my loved one if they weren't able to make it one month just so that I would make sure that I wasn't getting a late payment or something like that. So it's a lot of stuff to sort out. It would make it more expensive. But I would hope to be able to help this person.

Kim Palmer: That's so nice.

Sara Rathner: That's a good point. If you do decide to co-sign, you need a little bit of a co-signing emergency fund where maybe one to three months' worth of rent in a savings account that you just have. And if you don't need it, you can use that money for other purposes. But if you do need it, you'll be really glad it's there.

Kim Palmer: Yes.

Sean Pyles: And obviously that's not an option for a lot of people. Saving up that much money is just untenable. So I would say for a lot of people, co-signing is really risky and maybe not the right idea, but if you can do it in a responsible, financially sustainable way, then why not?

Kim Palmer: OK. Sean, you have inspired me. I would like to amend my answer that I gave before. Because I could think of one exception now, and that is for my children who have already taken so much from me financially — what's one more thing.

Sean Pyles: What's a little bit more?

Kim Palmer: And so I could certainly see, just like both of you, your own parents did this, I could see doing this for my kids when they are young adults, if we had a really good trusting relationship when it comes to money and we laid out exactly what they were responsible for. So I could see making an exception for that scenario.

Sean Pyles: Well, one thing to think about as well, especially when it comes to co-signing on an apartment, is that you are also liable for damage. So you would want to maybe walk through the apartment before they completely move out, walk through it with them, and make sure that everything is clean, and try to make it so that you are as likely as possible to get your security deposit back and that nothing is damaged.

Sara Rathner: Yeah. Another thing to keep in mind, too, is let's say you're helping a younger relative out who is moving to a really high cost of living area, like New York City — it's really hard to get an apartment when you're first starting out because you need your income to be a certain number of times the monthly rent or something. I don't know, I've never lived in New York, so three months of rent could easily be $15,000. If you don't live in a high cost of living area, your income can't necessarily support that. So that's another thing to keep in mind. If you are in this arrangement with somebody who lives far away, you don't really have the ability to walk through the apartment necessarily like you would if it was a 30-minute drive from your house. So that's another thing to keep in mind. People I know who live in New York pay more in rent than I think I take home in income in a year. So yeah, it would definitely be something to think about. If you have a young relative starting out in the big city, you definitely want to have some very detailed conversations about their budget before you agree to anything. Like their apartment could cost more than your rent or mortgage.

Sean Pyles: Yeah, easily depending on where you live. Well, Kim, do you have any final thoughts for someone who's thinking about co-signing for a loved one's lease?

Kim Palmer: My final thought is to think hard about the relationship impact on this decision and not just about all the financial ramifications that we just talked about too. So I guess I'm just worried that co-signing, even though you're helping the person, it could end up hurting the relationship that you have if something goes wrong. So just think that through, because the most important thing, of course, are those relationships that we have.

Sean Pyles: Right. Well, thank you so much for talking with us.

Kim Palmer: Of course. Thanks for having me.

Sean Pyles: And with that, let's get onto our takeaway tips. Sara, will you please kick us off?

Sara Rathner: Know what you're signing up for. When you co-sign, you are responsible for any financial or legal obligations of the contract.

Sean Pyles: Next step, understand the risks. Think through the worst-case scenarios, especially if you plan to buy a home soon.

Sara Rathner: And finally, consider alternatives. You could help your family members in other ways instead, like giving them a lump sum of money or helping them find an apartment they could afford on their own.

Sean Pyles: And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast. This episode was produced by Liz Weston and myself. Kaely Monahan edited our audio. Jae Bratton wrote our show notes. And thanks to all the great folks on the NerdWallet copy desk for all their help.

Sara Rathner: And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

Sean Pyles: And with that said, until next time, turn to the Nerds.