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Thinking About Co-Signing a Loan? Read This First | Pennyhoarder

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Building credit is tough. Each of us starts the journey from having no credit score, so getting our foot in the door can be tricky.

That’s why young adults or people with poor credit scores often turn to older friends and family members with solid credit scores for assistance when trying to buy a house or car.

So should you help out a friend or family member by co-signing on a loan? The answer is almost always “no.”

“With co-signing, the thing you have to remember is that lenders want to lend money and charge you interest,” says Robin Hartill, senior editor of The Penny Hoarder and certified financial planner. “When they refuse to lend to someone, they’re passing on the chance to make money because they think it’s too big a risk.”

So if lenders say no, chances are good you should say no too.

Risks of Co-Signing a Loan

The risks of saying yes to co-signing are many — and they can have a real, long-term impact on your financial well-being. Here are some things to consider before co-signing a loan.

Your Credit Is at Risk

As the co-signer of a loan, you’re putting the debt in your name. That means the loan will appear on your credit report, and any late payments by the borrower will reflect as a late payment by you. Any delinquent payments will adversely affect your credit score, and if the borrower makes this a regular habit, you may have to step in and spend your own money to protect your credit score.

Your Hard-Earned Cash Is at Risk, Too

When you co-sign for a loan, your signature is not meant to be a vote of confidence to assuage a lender. You are agreeing to pay the entirety of the loan if the borrower stops making payments.

Before co-signing, consider this: Could you afford to make those payments each month until the car, house or other financed item is paid off?

Remember that you’ll have nothing to show for those payments, because the borrower is the one who keeps the car, lives in the house, gets the college education, etc. That is, of course, unless the car is repossessed or the house is foreclosed on.

If you, as the co-signer, do not make the payments when the borrower stops, the bank will step in — and this will affect your credit. The lender can also sue you, which could ultimately result in a lien on your home or garnishing of your wages.

Your Relationship Is Not Immune, Either

Financial consequences aside, co-signing for a loved one could also lead to a strained relationship — or even estrangement.

Before co-signing, ask yourself this: If the borrower ultimately decides not to hold up their end of the bargain, how will that affect your relationship? Will you be a “helicopter co-signer” who regularly checks in on their finances, risking resentment on their end? Will you know how to talk to the co-signer about missed payments? What happens if your borrower refuses to pay; will you lose that relationship?

“I’d caution people to think very carefully about the harm co-signing can do to a relationship,” Hartill said. “Co-signing is something you do to help someone you care about. But if they fail to do what they agree to and your finances suffer as a result, it’s going to be tough to mend that relationship.”

What You Should Do If You Co-Sign a Loan

Sometimes, saying no is impossible. Private student loans, for example, typically require a co-signer, forcing parents to sign their life away in the interest of their child’s education. As the co-signer for any type of loan, you can protect your investment and credit by:

Request Monthly Statements

As the co-signer, you can ask the lender to send a copy of monthly statements to you as well as the primary borrower. You can also request alerts for missed payments and access to the online payment portal. This allows you to stay on top of payments and make them if it is clear the borrow cannot or will not.

Pro Tip

If you make a payment on behalf of the borrower to protect your credit score, you are setting a precedent. In the borrower’s eyes, you are now available to make payments any time they don’t want to.

Plan for a Refinance

The whole point of co-signing for a friend or family member is to help them get on their feet while they build up their own credit. That means, after a few years of responsible payments, they could have the credit score to handle a loan on their own. In that case, you and the borrower could attempt to refinance the loan without your signature.

Pro Tip

Set a goal of refinancing from the start of the co-signing process, and actively work to motivate the borrower to improve their credit so they can be in good standing to refinance when the time comes.

Petition for a Co-Signer Release

If you desperately want to be removed from a loan as a co-signer, you can request a release form. However, the primary borrower must sign off on the release form, and the lender must approve it. Those are two tough hurdles to jump through.

If the borrower is enjoying a house or a car that you’ve been making payments on for them, they may not be likely to sign the release form. And if their credit score is still low and the lender deems them to be too risky, the lender will not sign off on the form, even if the borrower has.

Alternatives to Co-Signing

Saying no to a friend or family member in need can be tough, but there are other ways you can help if you are not comfortable being a co-signer on a loan.

Gift a Down Payment

Often, a borrower has a better chance of getting approved for a loan if they make a large down payment. To avoid the need to co-sign, offer to pay the down payment as a one-time gift, if you can afford it. Alternatively, you can offer to loan them the money for their down payment with a solid repayment plan. Understand, though, that they will be under no legal obligation to pay such an informal loan back, so don’t give away money that you absolutely must get back.

Help Build Their Credit

If the borrower can wait another year or two to make their purchase, offer to help them build their credit score to a place where they could get the loan themselves. For example, you can make them an authorized user on your credit card, which can influence their credit score.

Pro Tip

Don’t trust them with your credit card? Make them an authorized user but hold on to the card and don’t give out the card number. Their credit will still benefit if you’re responsible with the card.

You can also help them build their credit score by making sure they make all payments (rent, utilities, credit card payments) on time and in full each month over a long period of time. If they’re having a tough month, offer to step in and help pay for rent.

Suggest a Bad Credit Loan

Some lenders will offer loans to borrowers with poor credit. These loans typically carry unfavorable terms, like high interest rates. Instead of co-signing for a loan, offer your friend or family member to pay a portion of their interest each month on a “bad credit loan” until the borrower’s credit score is strong enough for the borrower to refinance at a better rate with a different lender — and without your help.

Timothy Moore is a market research editing and graphic design manager and a freelance writer covering topics on personal finance, travel, careers, education, pet care and automotive. He has worked in the field since 2012 with publications like The Penny Hoarder, Debt.com, Ladders, WDW Magazine, Glassdoor and The News Wheel. He lives in Ohio with his fiance.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.

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Bad Credit

3 credit habits that you need to break

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Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.

Habit 1: Pushing the limits

The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.

The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?

To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.

In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.

Habit 2: Paying the minimum

You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.

Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.

So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.

Habit 3: Using it for every single expense

You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.

You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.

So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.

Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.

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Free credit reports have been extended; here’s why it’s important to check yours regularly

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Checking your credit could save you from identity theft. (iStock)

Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.

Credit reporting companies Equifax, Experian and TransUnion are all offering  free credit reports weekly through April 20, 2022.

The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.

HOW OFTEN DOES YOUR CREDIT SCORE CHANGE?

Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.

Free credit reports for all?

The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.

To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).

Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.

5 BENEFITS OF HAVING A GOOD CREDIT SCORE

Protect yourself from identity theft

There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.

“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.

Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.

“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”

More reasons to check your credit

Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.

If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.

WHAT IS CREDIT MONITORING, AND HOW DOES IT WORK?

You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.

“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”

Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.

Set up a monitoring service, too

Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.

IS IT WORTH PAYING FOR CREDIT MONITORING?

If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.

Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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Bad Credit

Do Personal Loans Have Penalty APRs?

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

When you make your credit card payment late, you’re often subject to late fees and a penalty APR, which is a temporary spike in your interest rate.

The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”

Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.

Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.

Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.

Other common personal loan fees include:

  1. Interest: The monthly charge you pay to borrow money
  2. Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
  3. Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
  4. Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)

As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.

Select has a free tool to help match you with personal loan offers without damaging your credit score.

None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.

Our top picks for best personal loans

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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