Dear Penny: I Co-signed for a Friend and Ruined My Credit. How Do I Fix It?

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Dear Penny,

I co-signed for a friend when she needed help buying a used car. In 2016, she was close to repaying the debt, but she defaulted and the car was repossessed. 

As a result, my credit score dropped by almost 100 points. It has come up since then because I am scrupulous about paying my bills on time, but I am not up to where I was before she defaulted on her last payments.

What can I do to increase my credit score now, or must I wait for a total of seven years to recoup my excellent credit?


Dear B.,

You tried to be a good friend. Unfortunately, you learned the hard way that you have little to gain and a lot to lose by co-signing a loan.

When you put your name on that loan, your friend got the car and you got no rights to the car. But you did become 100% liable for the payments in the event that she didn’t make them.

I wish I had better news for you after the fact, but the damage is done to your credit. Time is the only thing that will heal it.

Negative payment history — whether because you were late on or missed payments or defaulted on a loan — stays on your credit report for seven years. It doesn’t make a difference in the world of credit scores whether those derogatory remarks stemmed from a loan you took out for yourself or one that you co-signed.

So yes, you’ll have to wait out the next three years to restore that once-pristine credit report.

But that doesn’t mean you can’t keep improving your credit score between now and then.

Derogatory information does the most damage in the first two years after it appears on your report. Its impact lessens after that. Even after bankruptcy, many people’s credit scores start to recover within about two years.

The impact of this loan has already started fading away. You can expect your score to keep improving so long as you stay diligent about making on-time payments. If you carry a credit card balance from month to month, your score will go up faster if you work on paying down the balance.

Your score may not reach the high 700s or 800s while the default is still on your report, but you can still build a pretty healthy score if you haven’t already.

While a top-notch credit score gets you serious bragging rights, it really doesn’t matter until you’re trying to get financing or sign an agreement, such as a lease. And your credit profile doesn’t have to be perfect to do any of these things. By now, that black mark is old enough that I’m guessing you wouldn’t have trouble getting a credit card or loan at a reasonable interest rate.

You’ve obviously learned the hard way about the dangers of co-signing, so I don’t want to lecture you. But for anyone reading who’s considered becoming a co-signer: You cannot afford to co-sign unless you can afford to take over payments for the life of the loan.

Anyone who co-signs needs to personally verify every single month that the payment has been made on time and in full. One solution could be to make the payments directly to the lender and the person you signed for can pay you.

Sure, this could backfire. It’s a lot less scary to tell a friend or family member that you can’t make your car payment than it is to give that bad news to a bill collector who’s threatening to repo your car. But if you care about preserving your own creditworthiness, you can’t just assume that those payments are getting made.

Another option is to ask the lender to notify you if a payment is late. You might still see your credit score drop because of the late payment, but at least if you can make the account current, you’ll avoid the damage of a default.

But you also need to have a serious conversation with the person you co-sign for. They need to know about the consequences you’ll suffer if they don’t make payments. Open communication is essential. If they can’t afford a payment, they need to let you know ASAP because you don’t want to find out when a bill collector calls.

And if anyone who’s reading this is benefitting from a co-signer’s generosity, take note of all of this. That person cared enough about you to put their finances at risk. Show them you’re worth the gamble by treating that debt as your No. 1 priority.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].