The mistake that plunged my credit score 200 points

In the fall of 2011, I went on an episode of “The Suze Orman Show” to ask her how to repair my credit, and I knew I was in big trouble when she told me there was nothing she could do. I had figured, there must always be ways to raise your credit score.

Little did I know how much it can hurt your credit score to co-sign a mortgage for a friend who ends up not making her payments.

It was just before the housing market crashed in 2008, when a close friend decided to make the leap from renting to homeownership. Like myself, she was a single mom. We had known each other since grade school, participated in the same Brownie troop. We talked on the phone daily and had over 20 years of friendship between us.

When, in the eleventh hour, the bank told her she needed a co-signer in order to close on the property, I said I would do it. I don’t even remember if she asked or if I just volunteered. It was a knee-jerk reaction to help a friend. I didn’t want to see her lose the opportunity.

That was my first mistake.

I didn’t realize how bad it was

I was self-employed as a freelance writer. I knew the repercussions of co-signing … sort of. But I didn’t fully investigate exactly what would happen if she missed a payment because I assumed it wouldn’t be an issue. When I originally signed, I told her I didn’t want to be on the loan for more than a year. The plan was that she would refinance her home after a year of payments and get a new loan without me on it.

I knew how hard she worked to get to this point and felt that she would value her credit just as much as I valued mine.

I had to find out the hard way that co-signing on her condo increased my debt-to-income ratio (how much I owe versus how much I earn), which is not a good thing when you’re trying to buy a house or make any major purchases. At the time, I was trying to sell my house in New Jersey to move to Los Angeles. Mistake number two.

Everything went well for the first year. Unfortunately, the market was beginning to crumble. Before the real estate crash, banks were handing out refi’s like candy, but when my friend bought her home in 2009 they had started tightening their belts. She was unable to refinance me off her loan.

She lied, and I suffered

It wasn’t until the fall of 2009, when I was thinking about getting satellite television, that I checked my credit report and discovered $10, 000 in past due payments. My friend had missed not one, not two, but three mortgage payments!

My credit score plummeted from 800+ to the low 600s after she defaulted on her mortgage. Several credit card companies dropped me, while others lowered my credit limit to the balance due.

I was embarrassed and ashamed about the multitude of letters I received from my creditors telling me they were cutting off my line of credit. Basically, I was left with no credit, no access to more credit and a horrible credit score. I was devastated, all because of my own mistakes.

Mistake number three: If I had been monitoring my credit, I would have known the first time she missed a payment.

Were there extenuating circumstances that somehow explained her behavior? No.

She hadn’t lost her job and didn’t experience any major medical emergencies, so I don’t know how she managed to get so far behind. To this day, I still don’t know what happened–even while she was missing her payments, we were talking on the phone nearly every day, and it never came up. Whenever we talk about her delinquency, she’s apologetic but has never tried to justify it.

Her lack of communication and honesty destroyed our friendship. She wasn’t forthcoming when she realized she was in trouble, and going forward she wasn’t honest about her ability to pay. Today, we barely speak unless it has to do with the house (which I’ve never even seen, as I live in Los Angeles while she and her house are in New Jersey).

I’m on the road to recovery

As it stands, she hasn’t made a mortgage payment in more than a year and owes almost $30, 000. We owe this amount. Co-signing makes me just as liable. The house has been under contract for a short sale and hopefully, we will close soon (although I found out only three weeks before closing that she neglected to pay another $25, 000 in outstanding dues, so who knows what will happen now). Mistake number four was not creating any type of contract that outlined our agreement.

I wouldn’t recommend co-signing on a stick of gum for anyone after going through this. It is more trouble than it’s worth. If the friendship has to end because your friend insists that you co-sign, at least you still have your credit.

All is not lost for me. In order to bring up my credit score, I’ve been focused on paying down my credit card bills and student loans. For the last two years, I’ve used lump sums of my tax return to pay off my credit cards. In effect, I’m decreasing my debt to income ratio and showing that I am able to keep up with my obligations on time.

My credit score has inched up to 698. I’ve paid off two cards in the past two years. I have one more to go, plus my student loans, and then I’m done! That has been the most exhilarating part of this journey. I’m on the road to becoming debt-free (except for my own mortgage).

It’s also forced me to operate more on a cash-only basis because I have limited credit, which has the side benefit of helping me budget better and be smarter with how I spend my money. I don’t have the credit resources I used to have in case of emergencies.

It’s also prompted me to have honest conversations about credit and our responsibility with my daughter. It’s not that my parents never cautioned me about co-signing for someone, it’s just that I never thought the worst case scenario could happen to me.

I’ve learned the lesson that you never want to put your financial livelihood in someone else’s hands. And when you co-sign, that’s exactly what you do.


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9 Responses to “The mistake that plunged my credit score 200 points”

  1. Anonymous

    Regarding mistake #4: If you would have had a contract outlining your agreement, Mistake #5 would have been thinking it was worth a hill of beans. Understand that even if she breached a contract to you promising that she would pay the mortgage (or agreeing to indemnify you if the bank came after you), that contract would be essentially worthless. What would you do with it? Sue her to recover the money she doesn’t have? A contract between you and your friend won’t mean anything to the bank as it sues you and garnishes your bank account. Bottom line, in the legal world, we have a name for a guarantor or co-signer: fool with a pen.

  2. Anonymous

    This story is a reminder that serious consideration should be given to co-signing for a loan. Ultimately, prior to co-signing, an individual needs to ask themselves, “what would be the impact to my life if I have to pay this loan myself?”

  3. Anonymous

    Paul in #3 should seriously consider taking the other party to small claims court. The charges made in your name after the relationship was ended sound fraudulent to me (and cancel that card ASAP).

  4. Anonymous

    I take exception to Paul’s post — beyond its typos which don’t inspire much confidence in Golden Financial Services:

    A credit report is supposed to be a factual history of one’s credit activities. Sibylla is not discussing errors on her credit report. Her credit report is correct: She took responsibility for a mortgage and the mortgage payments were not kept current.

    How does it help us — the credit-using and credit-extending world at large — if someone like Paul’s “partner” can just “get marks like this removed”?

    I did glance at the home page of Paul’s website which talks about debt consolidation and repayment — which is all to the good. But Paul’s post makes it sound like there’s some kind of hocus pocus available for Sibylla other than simply knuckling down and dealing with the mortgage holder on this.

  5. Anonymous

    Wow what a story. You are a good friend. You can rebuild your credit again.

    Before you admit to guild or verify any of this in writing, you should connect with us at Golden Financial Services.

    My partner has helped to get marks like this removed for many of our clients. We can check your credit report and tell you right away what we can do based on a few factors.

    I know it sounds like that would be impossible, but trust me it is not.

    My company just created a really cool superhero pay off debt guide that may also be worth checking out. Here it is. If anything it sheds light on the dark depressing subject of debt.

  6. Anonymous

    I am so sorry you went through that. To think a person could do that to a friend they cared about is devastating. I’m glad you’re doing the most you can in the situation and hopefully, after she loses fully, you can start better at repairing your own credit.

  7. Anonymous

    I have a similar story.
    A fiance of 3 years insisted that he wanted a new car and the only way to get it for him was my name on the loan. So I did it. He also needed 3 root canals in one year and I co-signed for the credit card that’d enable him to get the procedures done. A year ago we decided to end the relationship, and a couple months after that he just dropped off the $30k vehicle on my driveway with 2 missed payments. The car was about $6k under water, and had some minor damages here and there. I spent overall about $2k to get the loan to current and make the repairs. The dealership was very sympathetic and quickly helped me refinance that and my other vehicle for a new one.
    A month later? You guessed it! I get a call from the credit card company saying that he hasn’t made a payment in 2 months. I also found out that he purchased a new full bred puppy for himself.
    So now I have a $1000 credit card to pay off.
    Lesson learned?

  8. Anonymous

    “…My friend had missed not one, not two, but three mortgage payments!…”

    Unfortunately not the way it works. When you co-sign you are as liable for the payments as the person you are co-signing for — so ‘you’ missed three payments, not just your friend.

    As Dorothy said above, it is a huge red flag if banks won’t give a person a loan without a cosigner. The bank is practically saying: “we do not believe you have the means or are trustworthy enough to pay this loan back” when they require a cosigner.

    Unfortunately, Sibylla’s story shows the bank was right.

  9. Anonymous

    Sybilla, I am so sorry your instinct to help your friend hurt you so badly. I hope you can get this situation under control. And I thank you for sharing your experience; I hope others learn from it.

    Bottom line: NEVER, NEVER, NEVER co-sign a loan for someone. If a BANK won’t loan them money, there is a REASON for it; they have the resources to check your friend’s credit, and they know she’s a bad risk. If you MUST assist your friend or family member, simply A) write them a check for the full amount of the loan, or B) make the monthly payment yourself, and have your loved-one pay you back, if they will.

    Regard any loan to a friend or family member as a gift. The chances are unusually high that you’ll never be re-paid.

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