Q&A: Co-signing a loan may affect credit score

Dear Liz: Despite having high credit card debt (about $35,000), which I am working hard to pay off, my FICO score is consistently over 765 and I have never been denied credit — until now. I was recently denied for a card because of “high debt to earnings” (I earn about $85,000 annually.) Could that be because I recently co-signed for a $15,000 education loan for my grandson? I trust him completely to pay off the loan, but is it now showing on my credit history as money owed even though it is not payable until after he graduates?

Answer: You’d need to check your credit reports to be sure, but it’s entirely possible the new loan is already showing up and affecting your scores. Your debt-to-income ratio was high even before adding this loan, though, so it’s not surprising that the credit card company balked.

It’s unfortunate that you weren’t clear about this when you co-signed, but you’re on the hook for that student loan every bit as much as your grandson is. If he misses a single payment, you could see your credit scores lose 100 points or more overnight.

If you want to protect your credit scores and have the opportunity to get good credit card deals in the future, continue to pay down your debt. Also, consider making the payments on the education loan yourself and having your grandson reimburse you. That’s really the only way to make sure a missed payment won’t torpedo your scores.

Q&A: Spouse balks at wife’s franchise-financing scheme

Dear Liz: My wife has an MBA and essentially has been a homemaker due to having a disabled child. She would like to go back to work and has asked me to cosign a $1.5-million loan to buy a franchise. In addition, she would like to use all the savings we have —$140,000 — for a down payment. I am afraid to do this as it took over 20 years to get the emergency fund collected. She earlier suggested using my 401(k) retirement fund for this business. My fear is that she will not be able to manage this business well and I will have to add this onto my own job. The business may fail and all the money would be lost. She is so mad at me and will not talk to me. Please help me with this.

Answer: Your wife understands that her long absence from the workplace makes it unlikely that she will ever see the kind of salary that an MBA normally earns. So she’s decided to bypass regular employment in favor of entrepreneurship.

If there were a decent chance of her succeeding, this enterprise might be considered a gamble. Given the circumstances, however, it’s almost certain to fail. If you commit every spare dollar to the down payment, where will you turn when the business needs additional infusions of cash, as most businesses do in their early years?

There are other businesses she could start and other franchises she could buy that wouldn’t require committing such a huge chunk of your resources. The fact that she’s clinging to this one idea doesn’t speak well of her ability to make good business decisions. Even worse is that when you expressed perfectly rational fears about her scheme, she responded by refusing to speak to you. It’s definitely time to make an investment, but it should be in couple’s therapy rather than in a business.

Q&A: Defaults on a co-signed student loan

Dear readers: A recent column about private student loans prompted financial aid expert Mark Kantrowitz to reach out with some additional advice for people who co-signed student loans for someone who has stopped paying. Although private student loans don’t have the same rehabilitation options as federal student loans, Kantrowitz encourages anyone in this situation to ask the lender, “What are my options?” and “Can you remove the default?”

“I’ve seen lenders not only remove the default from the co-signer’s credit history, but even reduce the interest rate if the co-signer agrees to make the payments by auto-debit,” said Kantrowitz, coauthor of the book “File the FAFSA.”

Someone who agrees to make payments may get a better deal than someone who pays off the loan in a lump sum, Kantrowitz said, because lenders want to be paid interest. But there would be nothing to stop a co-signer who makes payment arrangements to pay off the debt in full after a few months.

“This way he potentially can have the default entirely removed from his credit history, restoring him to his previous credit score,” Kantrowitz said. “It also leaves the account open, so that he can pressure the [borrower] into making payments.”