Credit Q&A: Will a Loan Default Hurt My Co-Signer’s Score?

Q. I have a near-perfect credit score. How badly would a default on a personal loan from a bank affect my credit score, and would having a co-signer lessen the damage?

A. If you default on your loan, your score is going to take a pretty big hit.

“The first missed payment is going to take you down into another category,” Bruce McClary, a credit expert with ClearPoint Credit Counseling Solutions, tells MainStreet. “Your score is going to take a healthy dive.”

As we’ve previously reported, a loan default can cause a stellar score to drop about 100 points. Those with moderate to poor credit will experience less of an impact, but the drop will still be significant.

Having a co-signer on the loan will help, but only if he or she elects to make the payment you can’t.

“It doesn’t matter who is making the payments as long as the bill gets paid,” McClary says.

Paying the bill is, in fact, something the co-signer may elect to do, since his or her credit is going to be just as negatively affected as yours if the loan goes into default.

“In a co-signer situation, all things are equal,” McClary says. As such, he suggests notifying your co-signer of your financial troubles before the bank does.

“The situation can be bad news for everyone involved,” he says. But the head’s up can give you both a chance to work out the terms of repayment proactively.

MainStreet talks more about more about the pitfalls of tying yourself to someone’s else loans or credit card accounts in a credit Q&A on how spouses affect each another’s credit.

Want to know what can and cannot affect your credit score? E-mail your questions to editors@mainstreet.com!

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