Being a co-signer on a loan isn't some one-off deal where you help a buddy get approved and then forget about it -- it's a serious commitment. When you sign on the dotted line, you pledge you'll make sure the loan gets repaid if the primary borrower doesn't pay on time. When you make that commitment, it affects your credit score.
When you cosign for a loan, that loan shows up on your credit report, including all of the payments (or lack thereof). If the primary borrower isn't paying on time each month, those late payments also appear on your credit report, dragging down your credit score. Of course, the news isn't all bad: If the primary borrower pays on time each month, your credit report is the beneficiary of the good payment history even if you had nothing to do with the timely payments.
Your credit score also considers the amount of money you owe and, because the cosigned loan shows up on your credit report, it's as if you owe that money. After all, if the primary borrower doesn't pay, that money is coming out of your pocket, which could lower your credit score and make lenders less likely to issue you a loan. For example, if you cosign for a friend's loan for $15,000, when you apply for your own loan, your credit score will reflect the $15,000 debt.
If the primary borrower doesn't repay the debt and you don't pay it off for them, the default will show up on your credit report as well. For example, say your former friend has you cosign for a car loan and then drives off into the sunset and can't be tracked down. If you don't pay off the loan, it will show up as a default on your credit report and damage your credit score.
Before you cosign, make sure you can afford to pay off the loan if necessary. Once you've cosigned, TransUnion warns it's very difficult to get off the loan. Even if you get a court decree stating someone else is liable, such as if you get divorced and the court determines your ex is responsible for paying it off, if that person doesn't pay, the creditor can still come after you. To protect your score, check your credit report regularly to make sure the payments are being made on time.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."