Tag Archives: cosigning

Want To Stay With Your Ex Another 20 Years After Breaking Up?

One well intentioned, but really stupid, financial decision can have you dating your ex for another 20 years, or destroy your credit tomorrow.

While they were dating, Larry and his girlfriend signed up for a joint credit card. It seemed like a good idea to have a credit card with both their names on it. Besides, his girlfriend didn’t have good credit, and would never have gotten the card on her own.

Fast forward to today, and the end of the relationship, but the beginning of Larry’s financial nightmare. The credit card at the time of their breakup had a balance of $10,000. They agreed to both be responsible for half. Larry immediately paid his $5,000, and had the statements now mailed to his ex girlfriend. He then called the bank and explained the situation, asking that his name come off the card. He was surprised when they told him no way. Over 90% of the time, that request will be denied. It sure wasn’t going to happen here since his ex had bad credit and they weren’t going to let the person with money and a decent credit score off the hook. Their personal arrangement of paying half each was only that – a personal arrangement. By law, both parties are fully liable for the total balance! His name comes off when the balance is paid in full and the card is closed.

As she can only pay the minimum payments, Larry is literally trapped in the relationship with his ex girlfriend for another 20 years or longer at her minimum monthly payments. That’s how long he has to sweat out whether she’ll pay something every month. If not, he won’t know for a few months and his credit, along with hers, will be destroyed. It seemed like a good idea at the time…

Larry has nothing in writing to enforce her $5,000 half, and she can’t pay it off and end this nightmare. The only hope Larry has to end this sooner is to:

-See her and get her to sign that she owes it. Lie to her and say that the bank needs a letter saying it’s not his debt (which it is) because he’s applying for a loan.

-Offer her a settlement. If she pays $4,000 in the next month (or whatever amount can make it happen), he’ll pay off the rest.

-Offer to kick in $100 a month for any month were she pays $400 to speed it up

-Make sure he calls the 800 number on the card every month to confirm she’s made the minimum payment to protect his credit rating.

What’s the lesson from Larry and countless others in that same situation? Never ever do any joint loans, credit cards, or mortgages unless and until you are married. You can help someone by letting them become an authorized user on your card, you can lend them some money with a simple online loan agreement, but don’t do any joint borrowing. Nobody considers the downside at the time – but nobody can get out from under it when something doesn’t work out.

Getting Started Establishing Credit

If you’re 18 to 21 or so and want to establish credit, there are a couple of things you need to think through first. Once you do establish some credit, how sure are you that you can pay it off each month without fail? Just hope and optimism aren’t enough, and nothing kills your credit rating more than going past due even just once.

Yes, building up credit can cost you some fees and interest. If you’re smart about it, paying some of these is probably a worthwhile investment in building a solid credit foundation. There are five common ways to get started. All of them are based on the assumption that you’re employed, have sufficient income, and have no previous credit problems:

Joint Visa or MasterCard. If you can get your parents to apply for a joint card with you, you’ll be able to use their good credit rating to get one with a decent limit. If your parents read this, the advice would be to never actually give you the card – period. It’s meant to establish credit and not to give you permission to spend. The card reports to the credit bureau and starts a great track record for you, but it should stay in your parent’s possession and only get used twice a year for $20 or so, just to keep it active.

Secured Visa or MasterCard. Secured simply means a cash deposit in the amount of your credit limit is placed on deposit as collateral. Other than this deposit, the card looks and charges exactly the same as unsecured cards, and also comes with the usual late and over limit fees like all others. The deposit stays in place until the credit card is closed or changed to a regular account. It’s an excellent start and doesn’t need a cosigner. You want to confirm that the fine print states that they’ll switch you to a regular card after 18-24 months of on-time payments.

Department store cards. You’ll generally be approved without previous credit for a very modest limit of around $250 or so. It’s not much, but it’s an excellent start. Who knows? It may get you 10% off the day you apply, just make sure it’s one of the last times you actually use the card! Huge rates and a tiny limit means you’ll want the credit rating and not use the card.

Co-signed loan. This is the most common first loan for younger people. The co-signer, usually a parent, is equally responsible for the repayment as you are. It’s the reason lenders almost always want a family member. If your parents are looking for advice, it would be to never co-sign anything for anyone. That isn’t a double standard – it just depends on who is asking for feedback. Often a smaller loan, or an increased down payment, can eliminate your need for a co-signer.

Car loan. Assuming it’s a reasonably priced used vehicle, a 30 to 50% down payment through a reputable dealer may get you financing without a co-signer. A family member is better protected by giving you a portion of the down payment instead of signing on the entire loan with you. But car loans are still the most common way most young adults establish credit. You just need to assure it requires the world’s smallest payment and that you know the price of your insurance up front.

Just be really clear that you’re wanting to establish credit and NOT establish debt! There’s a big difference and not realizing that will be very very expensive. Be careful out there.

The Downside of Cosigning

In the last month, I received two e mails on the (sort of) same subject from two different sides that are worth sharing. I’ll start with the negative one, for a very good reason.

“Because of your stupid book, my parents won’t cosign for a car loan for me now. Thanks a lot. What am I supposed to do now?”

Dear anonymous: Hurray for your parents. I am very proud of them. Borrowing money is not a solution in life and teaching you that your immediate needs can just be solved with borrowed money will set you up for a lifetime of financial failure. No, you won’t understand that now, but you will in a decade or so.

Once you calm down and get out of your judgments, grab the It’s Your Money book. It’ll be more education than you’ll get in most of your classes – honest.

But if I don’t, my kid will have to wait at the bus, or get a ride. Good news: They can spend that time studying. Yes, I’ve heard all those arguments. News flash: You’re good at time management, your kid isn’t, and won’t study more, or get better marks, when you cosign a car loan. Inconveniencing your kid does not constitute child abuse. Stop kidding yourself.

The second e mail was from a grandfather: “Our bank just called to let us know that they took $2,300 out of our savings account to pay off for my grandson’s car loan….”

What happened here is that the gentleman cosigned for his grandson’s car loan. The kid was almost 90 days in arrears and the financial institution took the balance from the cosigners account. Yes, they can. When you cosign, you are just as legally liable as if you borrowed the money.

News flash: 100% of people asking you to cosign will assure you they will never ever go in arrears and they can totally afford it. I’ve never heard the opposite and 99% of people don’t think of the consequences when things go wrong – as they will – as they did here.

What’s even worse is that this gentleman’s credit is now trashed. The 90 day in arrears is on his credit file and will stay there for seven years.

If you’re going to ignore my plea to never ever cosign for anyone under any circumstances, at least assure that the loan documents have your address on them. It’ll assure that any notices and statements come to you, so that you’re proactively aware of what’s going on with the loan.

In the It’s Your Money book are a whole list of alternatives to cosigning. Read them and find one of them, instead of ruining your credit, your relationship, and your finances.

Lending Money to Friends and Relatives

There’s a reason the subject of lending money to friends and relatives has a big section in the It’s Your Money book. Rough rule of thumb: Don’t do it.

Recently, I had some e mails back and forth with someone who was talking about their credit card balance. One of the first sentences in the note was: I know you hate lending money to family. That was followed by explaining it was the reason their credit card bill was up there. Now, I’m guessing that this wasn’t about a hundred bucks or so – because that’s totally different than a more significant amount.

I don’t actually hate lending money to relatives or friends – and that applies just as much to borrowing it, as lending money. What I hate, and what should never happen, is that broke people shouldn’t lend money to other broke people!

If you can’t take care of your own finances, how can you help others? If you don’t have the money, how on earth can you justify lending it to someone else? THAT was the problem with this person, and THAT is what shouldn’t happen.

Anyone who is financially successful can, and should, use some of their money to help others. Whether it’s tithing, donations to charity, and even helping someone directly who needs the helping hand. If that applies to you, it’s a Christian thing to do, or at least it’ll also make you feel great to know you’ve made a small difference. But it should be done with actual money, and not by someone getting themselves further into debt by borrowing more money.

For the rest of us, we can’t afford to do it – we don’t have the money! Stop thinking of the room left on your credit line, or your credit card as actual real money. Focus on what you owe, and not on what you can still borrow!

It’s perfectly OK to say no and ask if there’s anything else you can help with. It’s also a great idea to go down to Mosaic and spend the $20 buying them a copy of the It’s Your Money book so they can get the tools on borrowing smarter – or better yet – getting out of debt.

Giving someone one car payment doesn’t solve the underlying issue that they likely can’t afford the car – and will just have the same problem next month. Lending someone the money for the rent often just delays the problem for another 30 days. Even worse, is helping someone to pay their credit card or other bill payments. They’re spending money they don’t have. They need to face it to replace it. Stepping in as a temporary stop gap doesn’t get them any closer to their financial reality check.

Yes, I’m being kind of mean. I don’t mean to be, and if you get out of the emotional reasons, you probably know I’m right. If not, I’m OK to get your hate mail, although there certainly are legitimate times for you to step in and to help.

Two more quick points:
This advice applies just as much to co-signing a loan for someone, as lending them money. In fact, more so, because you’re now fully liable for the entire term of the loan. It’s also a really quick way to destroy your credit rating.

Finally, if you do lend someone the money, you have to think of it as a gift and not a loan. If you don’t, it WILL cause problems down the road. The person will start to avoid you, no matter how nice you are about the subject. You may get resentful of how they used the money, or with family, dinners together will never taste the same with the loan balance still hanging over everyone’s head. All of those do more harm than thinking you’re doing something good in the first place.