“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.
If you want to be removed as a co-signer, there are several possible options.
What’s a co-signer?
A co-signer is a person who guarantees the loan of someone else who has bad credit or no credit history, or who doesn’t have an income. Lenders consider it risky to provide credit to such people, which is where the co-signer comes in. When you co-sign for someone, you’re promising to repay the debt if he or she does 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. If the borrower doesn’t make the payments, then you have to do it, or your credit score will suffer.
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 transfer the remaining credit card or loan debt to a balance transfer credit card. Generally, these cards have a 0% APR period, usually between six and 18 months, which gives the borrower time to pay off the balance without incurring interest.
There’s usually a balance transfer fee of 3% to 5% or the amount transferred, although some cards have a $0 fee. Show your borrower this list of our favorite balance transfer credit cards.
2. Release the loan
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 let borrowers know if 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 cosigner 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 is 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.
4. Remove your name from a credit card account
If there isn’t a current balance on the account, some credit card issuers are willing to remove your name, provided the original borrower has decent credit. Call up 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 secured debt — like a car loan — and the borrower isn’t able to make payments, encourage him or her to sell the asset and pay off the loan. Hopefully, 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.
Some of these options eliminate the debt but leave the original account open. Make sure the borrower closes the account. Otherwise, he or she could simply run up the balance again, making you liable once again.
Co-signing is a risky endeavor. Of course, while 75% of co-signers end up making payments, there are another 25% who are happily helping out responsible friends or family members who make payments on time every month. Understand the risks of cosigning 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.