Should I remain as a cosigner on a loan or remove myself to lower my debt?

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Q: I am a cosigner on a student loan with my son. He is now able to take the debt on himself. I am wondering what the effect would be on my credit score if he were to refinance and remove me from the loan. He has been paying on time since 2014 but has a $47K balance. His on-time payment status affects my credit positively, but would reducing my debt by $47k outweigh those benefits? I don’t want to do anything that would negatively impact my credit score. Thank you.

A: Dear reader,

Being released as a cosigner on a student loan has both pros and cons. When released as the cosigner from a loan you are no longer legally liable for repayment. In addition, you don’t have to worry about the potential damage to your credit if your son were to fall behind in his payments. However, there is another side to this situation. Being removed as a cosigner from a loan with a positive payment history could potentially hurt your credit. How much will depend on your current credit history.

How student loans impact your credit

Like any installment loan, a student loan helps establish a payment history on your credit record, which is one of the main factors influencing your credit score. As you already know, an on-time payment history positively impacts your credit. So, removing this positive history can hurt your score if you haven’t demonstrated a strong payment history with other loans or credit cards. Alternatively, the negative impact may be less severe if you have other accounts in good standing with a a strong, positive payment history.

Loans such as student loans can also have other effects on your credit record. The age and length of your credit history can also influence your score. The longer your credit history, the better. Closing an account or loan decreases the average age of your accounts, which can negatively impact your score.

Your credit mix, or the variety of credit account types you have, is another factor that influences your score. It takes into consideration if you have a variety of installment loans and credit cards on your credit. These two factors play a role, but do not weigh as heavily as payment history or credit utilization ratio.

Your credit utilization ratio is the second most important factor influencing your FICO score after your payment history. It calculates how much you currently owe on credit card debt divided by your credit limit. But this calculation does not take into account installment loan debt, like your son’s student loan. So, the remaining balance on that loan does not affect your score. However, it does affect your debt-to-income (DTI) ratio, which takes into consideration all of your income and debt. Your DTI impacts your ability to get approved for new credit.

Getting released as a cosigner

It’s not always an easy process to get released as a cosigner, especially from a private student loan servicer. Each lender has its own criteria and process, and some may not even allow it. You should contact your lender to know what your options are. If you can be removed from the loan and notice your score has decreased, don’t fret. Instead, focus on improving your credit score. Feel free to browser our blog with valuable tips and strategies to help you rebuild your credit or reach out to a certified financial counselor from one of our trusted agencies online or by calling 800-388-2227 for personalized guidance. Good luck!