When helping a friend is not always the best thingJames Bollengiercredit scores, debts, credit history, credit report
Linda and Stacy were best friends in college. One day, Linda
wanted to buy a car, but didn't have the credit. Stacy went into
the dealership with Linda and signed her name to the paper to help
Linda get the car. Time went on, Linda and Stacy graduated the next
spring and they went their separate ways only talking on occasion.
One day, out of the blue, Stacy received a collection notice for
additional charges on a voluntarily surrendered car. Upon
inspection of her credit report she found it was down more than one
hundred points in one year.
As absurd as this may sound to those outside of the financial
industry, it is a rather common occurrence on credit reports. When
someone signs his name to a contract--whether for himself, a
friend, family member or a company--he is tying himself and his
credit history inextricably to the payment history for that
account. To compound the problem, lenders are usually under no
obligation to notify every single person associated with a contract
that a delinquency has occurred. Typically, they fulfill their only
responsibility by notifying the primary borrower that the
derogatory remark has appeared.
Even if no derogatory information appears, having additional
debts on the credit report can still create problems. Another
common scenario happens when someone has his own car loan and has
cosigned for a friend's loan. He goes to get a mortgage or student
loan, but is denied because it is determined that he doesn't make
enough money to satisfy the debts appearing on the report. The fact
that he is not primarily responsible for one of those debts does
not matter to most lenders.
This is not to say that friends can never get a helping hand.
There are other ways to prudently assist your comrades. A good rule
of thumb is to never sign your name to a payment that you could not
afford to take over yourself. Also, if you can afford to do so, it
is better in the long run to lend a friend some money for a down
payment than sacrifice your credit history and future well being.
For the sake of your friendship and sanity, it is better to assume
that any money you lend may never be returned. Things happen,
people change. We all want to be nice, but it is important to
consider your future when asked to assist a friend.
James Bollengier is director of client services for RMCN Credit Services Inc.
He can be reached at (888) 469-7372, ext. 253 or e-mail [email protected]