When you are approached by a friend or family member asking, "Will you co-sign for me?" it can be an uncomfortable request. You don't want to ignore them in their time of need, but co-signing does come with risks you should be aware of before agreeing to help.

1. Decide if you can live with the risks

One risk is that the person you co-signed for could be late on his or her payments, or maybe not pay at all. Even if you weren't the primary applicant, late or non-payments can still be recorded on your credit report. You may even start to experience collection activity, like phone calls from the creditor. You could even be sued.

A creditor is under no obligation to try to collect from the primary applicant before taking action against a co-signer. Ask yourself: if your friend or family member stops making payments, do you have the money to pay the bill?

2. Consider how it might affect your own ability to get for credit

Even if your friend or family member makes all payments on time, you may still be affected if you are planning to apply for credit yourself. For some types of credit, like a mortgage, lenders will consider how much debt you already have, and commonly include debt you co-signed for in their calculations, even if you are not the one paying for it. You may not be able to qualify for as much as you would have if you hadn't co-signed.

3. Evaluate why a co-signer is needed

Of course, you probably wouldn't co-sign if you knew the person would fail to make payments, but how can you be sure? A low credit score could be seen as a sign that a person might not repay a debt, but it is also helpful to consider why the person has a low score. Was he or she not able to pay bills due to losing a job but has a well-paying job now?

A person who had problems in the past, but has corrected them, is probably less of a risk than someone still having difficulties or who has poor financial habits. If a person has no credit score, consider how conscientious he or she has been in other things, like saving money and paying household bills.

4. Discuss all the options

Does the person need a reasonably priced, used car to get to a new job? Or does he or she want a fully loaded model as a status symbol? It may not make sense to put yourself at risk if what you are co-signing for is not a necessity.

Maybe the person can wait before buying, or go with a more modest purchase, then work on building his or her credit score so that a co-signer will not be needed. A first-time buyer or credit-builder loan might be a better solution.

5. Monitor payment activity

If you do decide to co-sign, minimize your risk by monitoring payment activity. This is better than learning about late or non-payments when the creditor calls you about the delinquent account.

Choose a lender that allows you to see account information on-line so you can regularly check payment status. That way if payments are late or missed, you can make the payment yourself before it affects your credit.

Another way would be to make all payments to the creditor yourself and have the person send the money to you instead. Even the payment is late coming to you, your credit score won't be affected as long as you are sending in the payments on time.

No matter what choice you make, be sure to make an informed decision. Don't unnecessarily jeopardize your financial future.

University Federal Credit Union is a member-owned financial institution open to anyone who lives, works, volunteers or worships in Salt Lake County. Federally insured by NCUA.

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