Loan Cosigning: How does it affect me?

The Myth: If I cosign on someone’s loan, it won’t affect my credit.

The Facts: Cosigning on a loan can affect your credit. The way the cosigned person manages the loan will determine whether the affect of that loan will be positive or negative to your credit. Please keep in mind that when you cosign a loan you are now partnering with the other person on the loan. In the case of a car loan, if the cosigned person has a late payment, you have a late payment. If the cosigned person has a repossessed car, you have a repossessed car, too.

Are you Co-Signing for someone? 

It takes a brave person to cosign a loan as you are taking on a lot of responsibility. You are promising to be responsible for the payments of the loan should the person you are cosigning for not be able to pay. You are also doing the cosigned borrower a huge favor by letting them use your credit to upgrade their credit score.

Let’s think about some of the factors involved in cosigning a loan. Is there a right way to cosigning a loan?

There really is a right way and a wrong way to cosign a loan for someone. The number one thing to remember is to not allow emotion to cloud your judgment. Let me give you an example; I work with the women at a community Women’s Shelter. I met a young lady there who was burdened with a large debt because she cosigned for someone. That someone was her boyfriend whom she was very much in love with. She loved him so much that she cosigned a $35,000 loan for a slightly used Lexus. Within two months they had broken up and he had disappeared with the car. He stopped making payments and the vehicle was taken to another state. The lender was unable to locate the car for repossession. The debt has been placed on her credit as a collection for the $35,000 loan plus collection fees. All because she let emotions cloud her financial decision making.

We love our kids and we want to help them get established in the world of credit. Cosigning on a loan is a great way to teach your kids financial responsibility. It will help them start their credit file with solid information lenders want to see. Getting your kids started in credit correctly is one of the best gifts you could give to them.

I like to think we know our kids pretty well and can judge if they will be responsible enough to make all the payments on time. But it is also important not to burden them with a debt they cannot afford which can turn into a debt where you become ultimately responsible for it. We need to understand their income and expenses to be certain they can afford the payments. You are not a bank, but it is important to understand your child’s finances; perhaps they could create a budget plan for you. It can show how much they have coming in salary and what their basic expenses are going out. It gives you an opportunity to have a good conversation about making payments on time and the importance of building credit for their financial future.

One last thought, if your cosigned borrower makes all their payments on time and the loan pays off correctly at the end, your FICO/Credit Score will benefit along with that person who you cosigned for. Every payment they make on time benefits both of you. That’s a beautiful thing!

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Get special dealer pricing and financing deals.

To get pre-approved for financing, call Meriwest Credit Union at 877-MERIWEST or online at Meriwest Credit Union Auto Loans.

Credit Inquiries: How do they effect your credit?

How does this application affect my score?

Inquiries are not a big part of our credit scores. They only comprise 10% of the overall credit calculation of our FICO score. But they do play an important role in how financial institutions grant credit. There are different kinds of inquiries; some affect our credit score and some inquiries don’t.

• Promotional Inquiries A promotional inquiry is an inquiry made by a lender on an entire neighborhood or larger region. ABC Credit Union may want to advertise their new low rate credit card so they will contact a credit bureau and ask for all the people in a certain Zip Code with a credit score of 600 or better. Then, the bureau does a mass inquiry to create a mailing list. These sorts of inquiries do not affect your credit. They appear on your report for two years, but do not affect your score at all. 

• Employment Inquiries Checking your credit history for employment purposes will not affect your credit scores. According to Experian Credit Bureau, when your credit report is requested for employment purposes it generates an inquiry. However, that inquiry is shown only to you on your personal credit report. It is not shared with lenders or other businesses and is not included in credit score calculations.

• Credit Inquiries for Borrowing (HARD Inquiries) These inquiries will effect your credit score as they are known as a “Hard Hit” inquiry; meaning they were initiated by you when you signed an application applying for a rental property, a credit card or some other type of financial lending product. Whenever we apply for credit; whether it is a personal loan, car loan, home loan, line of credit, credit card, or a business loan, you will have a “hard hit” credit inquiry on your report. The inquiry will appear on your credit report for two years but will affect your credit score for only one year.

Have you ever been to a store where they offer you a 10-15% discount on your purchase for completing a credit application? I bet you have. Recently, I was in Kohl’s Department Store and Target and was asked by clerks in both stores if I was interested in completing their credit app for a discount on my purchase. All around me there were people filling out their applications for the store card to get their discount. I have heard people say they do it all the time to get the discount. As mistakes are known in the internet world, that is a FAIL.

Multiple inquires create multiple hits on your credit report and score. It is not a good idea to complete a credit application for a purchase discount. It takes points from your score and may cause you to have your credit application for something you really need, like a home or a car, be declined as your credit score was low due to multiple inquiries.

Remember, a hard hit inquiry can take 10 or more points off your credit score. It all depends on the strength of your credit report and score.

Interested in learning more about credit? Attend our Credit Myths and Facts Workshop next Wednesday at our Monta Loma Financial Center in Mountain View.


 

Wednesday, April 25 at 6:00 p.m.
Credit Myths, Facts and Credit Repair

How are Credit Cards like a New Romance?

Is using a new credit card similar to starting a new romance? There are a lot of parallels between how we deal with credit and how we deal with romance.

Just like on the program “The Bachelor,” when you are introduced to a new credit card there is sometimes a bit of infatuation; the card is smooth and shiny and the possibilities of fun with the card may seem endless! Yes, that card will take you to dinner, jet you off to the Caribbean, buy you a new set of clothes for your vacation and help you get a rental car while there. At first, the card is everything you have dreamt of! It’s always there for you. It has a calming influence on you because you know it is available to you at a moment’s notice for expenses if you need it. When you hold it in your hand just prior to making a purchase, you can feel the flush of endorphin joy because you can have this wonderful thing in your life; it feels so special just to be together.

Just like any relationship, after we get to know each other our feelings sometimes change. After being together for a month, we discover our card has some baggage; it’s his friend Bill. Bill shows up at your door every month and he becomes a drain on your finances and your emotions. Every month, you have to feed Bill. As you and the card go out and have good times together, Bill is always there on the 1^st of the month to be fed. As each month goes by, Bill gets hungrier and demands more from you. The card that seemed so sweet and gentle in the beginning seems to be laughing at you behind your back making you feel like a fool. This is especially true whenever his “Good Buddy” Bill shows up.

Don’t be late in feeding Bill! If you don’t feed Bill on time, he takes a doggie bag and cleans out your fridge for his breakfast and lunch (late payments). Did you decide not to feed Bill? Bill calls you at all hours of the day to get you to feed him (collection agencies). Not feeding Bill will keep you from meeting more cards in your future (bad credit).

The day comes when you want to break up with the card. Being together is no longer as thrilling. The warm, caring feeling you had in the beginning has soured. As time goes by, you may not want to be seen together. Because of Bill, when you and the card go out now, you are no longer enjoying gourmet meals or movies together. In the end, the breakup is harsh. You are emotionally and financially spent. You take the card and cut it in half saying, “I never want to see you again.” It only gets worse each month when his pal, Bill, keeps showing up to be fed. At least if you keep feeding him, he will eventually go away.

You might want to date the credit card’s long lost brother, Cash. 

Do you have a question or want to learn more about credit cards? Contact me, The Meriwest Credit Union Guy, Greg Meyer at Gmeyer@Meriwest.com. Would you like more information on Meriwest Credit Union? Please go to https://www.meriwest.com. Don't forget to like our Facebook Page: Facebook.com/MeriwestCreditUnion

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How is a FICO Score used in credit?

Hi, I’m Greg Meyer, The Meriwest Credit Union Guy. In these blogs I will be talking about the changes in how we manage our finances in the 21st Century. In future posts we will get into managing our checking with online banking, ideas for preventing identity theft, and managing credit for people with long experience and for those who are new to it. We hope you find this useful!

In our first blog posting, I want to address how FICO is used in the world of credit unions. First, let’s define what a FICO Score is:

FICO-A mathematical model created by the Fair Isaac Company (FICO) that tracks a person’s credit use and gives a value to how an individual manages their credit. Major components of the FICO Score are Payment History, Balances used vs. Balances Available, Credit History, Types of Credit being used, and Credit Inquiries.

Your FICO Score holds the key to loan approval. Maintaining a strong FICO Score will help you access excellent rates on loans for cars and homes. In the long run, a good FICO score can save you thousands of dollars in interest payments. 

Before landing at Meriwest Credit Union, I had spent most of my career in banks and can say beyond a shadow of a doubt that banks are credit score lenders; meaning that they want to see a specific score before looking at the rest of your file. If your score is 740 or over your app goes on the “to be reviewed further” pile. If their bottom line number is 740 and your application comes in at 739, your app goes on the declined pile. I can’t tell you how many very good applicants are turned away from banks every day for missing the credit score by one point!

Credit unions take a more holistic approach to lending. We tend to look at the whole person rather than just one part of them. The FICO Score is not the only item we review at a credit union when you apply for a car loan or other form of credit. Granted, we are also looking for a 740 score like the banks and if your score comes in below a certain point, we may not be able to help you either. However, if you miss the bottom line credit score by a bit, we don’t automatically decline you. We want to see your physical credit report to see if there is any information on there that would help your situation. We want to see how long you have been a member, how long you have worked at your current job, and how long you have lived in your home and town.

Our ultimate goal is to find a way to help our member. A credit union might slightly raise the interest rate to offset the risk they accept in making a loan to someone with a less than perfect credit score. This is referred to as risk based pricing. As the FICO goes down, the amount of risk involved in lending to that person goes up. Many credit unions have a matrix that tells them the rate to charge for particular ranges in FICO Scores.

How do we maintain a strong FICO Score? Watch for our future blog postings! We will have blogs on credit management, credit collections, credit repair, and other financial issues that touch all of our lives.

This week’s featured article: http://www.creditcards.com/credit-card-news/busting-seven-common-credit_myths-1267.php

Do you have a question or want to learn more about FICO Scores? Contact me, The Meriwest Credit Union Guy, Greg Meyer at Gmeyer@Meriwest.com. Would you like more information on Meriwest Credit Union and what we offer? Please go to https://www.meriwest.com.