Mike Sullivan has counseled many people who cosigned on a loan in earnest, then paid dearly later. Sullivan is director of education for Take Charge America, a Valley-based credit counseling agency.
“I see a lot of co-signs for people with poor credit … but the reason they have bad credit is they don’t repay debt,” he said. “A lot of people have their credit ruined over that.”
TransUnion, one of the three major credit bureaus, has released its list of the top five most common credit misconceptions. The dangers of co-signing for a loan topped the list.
Steven Katz, director of consumer education for TransUnion’s TrueCredit.com, said people need to be “very diligent” about managing their own credit.
“If you take steps now much the way you take steps to manage your health, then when you need credit down the road for a car or a home, you’ll have it,” he said.
The top five misconceptions are:
• Co-signing a loan doesn’t make you responsible for the account. If you open a joint account or co-sign a loan, any activity on those accounts will show up on your credit report. Think of any joint account or co-signed loan as your own account.
“If the other person doesn’t pay that month, it’s going to reflect on you,” Katz said.
Not only that, but creditors are free to come after co-signers if the person they tried to help fails to repay the loan, Sullivan said.
“Let’s say you co-signed for your kid’s car and it’s repossessed,” he said. “They’re not going to bother with the kid, but go after you because you have money.”
Co-signing is almost always a bad idea, with the sole exception being a parent co-signing for a first-time limited loan if the child is trying to establish credit, Sullivan said.
• Paying off a negative record will get it removed from your credit report. Negative records such as collection accounts, late payments and bankruptcies can stay on your credit report for 7-10 years — even if you pay them off.
“For the most part, any late payment or collection account will be on (your credit report) for seven years,” Katz said. “The good news is if you pay off (debt) on time, it stays on your report for 10 years.”
• Paying off a debt will make your credit score jump 50 points right away. There is no single quick fix to perk up your score. Instead, paying on time, reducing your debts and making sure your credit report is accurate make the recipe for a stronger credit score, Katz said.
• Checking your credit reports will lower your credit score.
“Everybody should be checking their credit reports multiple times throughout the year,” Katz said.
What hurts your credit score is when creditors check your credit report, he said.
“It’s certainly OK in the course of a year to go out and inquire about a mortgage, open a credit card once or twice, but if you start to do those things more often, your score will be impacted,” Katz said.
For example, opening multiple lines of credit in order to receive price breaks will negatively affect your credit score, he said.
• Closing old accounts will improve your credit score. When you close old accounts, you shorten your credit history, and that can actually lower your credit score.
“Closed accounts almost never help your credit score,” Sullivan said. “I always tell people unless you’re having trouble resisting using credit, don’t close an account unless it’s costing you money.”
If you know you’re going to be buying a house or car in the near future, it’s not a good idea to close an account, he said.
“However, it’s almost always best to get rid of it if it’s costing you anything,” Sullivan said. “I had an account that cost me 50 cents a month and I got rid of it.”
Top five credit misconceptions:
Co-signing a loan doesn’t make you responsible for the account.
Paying off a negative record will get it removed from your credit report.
Paying off a debt will make your credit score jump 50 points right away.
Checking your credit reports will lower your credit score.
Closing old accounts will improve your credit score.