How much do you know about credit?

Become a savvy financial consumer! Learn a little bit more before you sign on the dotted line.

Take co-signers, for example. You've probably heard the term.

Someday a loan officer may ask you to find one—or a friend may ask you to be one.

A co-signer is like insurance for the lender.

Let's say you're the one who needs a co-signer for a loan. A co-signer is someone other than you who signs the loan note. The co-signer agrees to repay the loan if you fail to repay as promised.

Co-signers are jointly liable for loans, which means that the lender can look to them for payment. Credit card companies sometimes require co-signers, too.

When do you need a co-signer?

Credit unions and other lenders ask for co-signers for several reasons.

• Age. Individuals under 18 years of age who are granted credit can't legally be held responsible for unpaid debt. Since lender can't prosecute minors, they're extremely cautious about approving credit.

• No credit history. If you're a first-time borrower, you probably don't have much credit history. Your lender will check for a credit history to help determine if you're reliable and diligent about making payments on time.

• Poor credit history. You may not feel unreliable, but experience tells lenders that loan applicants who have failed to make payments as promised in the past aren't reliable.

It's all about risk

Lenders are constantly aware of risk, or potential loss if the borrower doesn't repay. All loans carry a certain amount of risk, so lenders look at four primary considerations that affect their decisions to approve or decline a loan.

These primary considerations are called the 4 Cs of credit:

• Capacity— your ability to repay the loan.
• Character— your ability to follow through on commitments.
• Collateral— something of value that you'll lose if you fail to repay the loan.
• Capital— your assets, which is what you own or are worth.

If a lender is uncomfortable with one or more of an applicant's four Cs, the next step is to ask for a co-signer.

Who could co-sign for you?

Start the search at home. Most parents co-sign for their teenager's first credit application.

However, anyone—friend, relative, co-worker—can co-sign for you. That is, of course, if that person is 18 or older, has a good credit history, and wants to do it!

Your co-signer doesn't relieve you of your responsibility to pay back the loan as promised. If you don't, it'll affect your credit rating and that of your co-signer's.

That could be harmful to your relationship. If your co-signer has to pay off your loan, she isn't going to be very happy with you.

Should you be a co-signer?

One day, a friend may ask you to co-sign a loan.

Now you know why you need to consider the request very carefully.

Your money and your credit history will be on the line!

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