How Suretyship Affects Your Credit Score

Many people wonder how being a guarantor is connected to their credit score. Indeed, if you are asked to act as a guarantor, it is important to understand what this means and what consequences you might face.

What It Means to Be a Guarantor

If relatives ask you to be a guarantor on a consumer loan, you might be concerned about what percentage of the loan will be reflected in your credit score. Let’s find out how suretyship affects your credit rating.

Being a guarantor on a loan means that you take responsibility for repaying the loan if the borrower fails to fulfill their obligations to the bank for any reason. Simply put, if the primary borrower does not repay the loan, you will be required to pay it. Banks use this system when they are unsure whether the borrower can repay without problems — a sort of financial safety net.

How Suretyship Appears in Your Credit History

Information about your guarantor status is recorded in your credit history. It shows the type of loan, the bank providing it, the contract number, and the amount guaranteed. Payment discipline and outstanding debt are not reflected in the guarantor’s credit history until the primary borrower fails to make payments and the guarantor begins paying the loan themselves.

Thus, merely being a guarantor has a minimal impact on your credit history. However, if the responsibility for repaying the debt passes to the guarantor, the impact increases. In this case, the credit score’s dynamics will depend on how accurately and consistently the guarantor fulfills their obligations.

Impact on Debt-to-Income Ratio

Suretyship does not affect the guarantor’s debt-to-income ratio while the primary borrower is making payments on time. But if the borrower stops paying and the debt transfers to the guarantor, payments for that loan are counted as part of the guarantor’s debt load, just as if it were their own loan. This typically occurs after a payment delay of more than 30 days.

How Borrower Delinquencies Affect the Guarantor

So, does acting as a guarantor affect your credit score? There are several possible outcomes:

• If the borrower makes payments according to the schedule, your involvement is not required.
• If the borrower fails to pay, you must repay the loan. If you pay off the debt, your credit history improves.
• If you ignore your obligations after the borrower fails to pay, your credit history will record you as a debtor.

Even if you pay the borrower’s debt, this increases the strain on your budget. Therefore, when asked to act as a guarantor, consider whether you can fulfill these responsibilities if you need to pay for someone else. Later, you may seek reimbursement from the borrower, but if they do not pay the bank, there is no guarantee they will repay you.

Conclusion

Being a guarantor has a minimal effect on your credit rating while the primary borrower is responsible. However, the financial and credit implications can become significant if the borrower fails to meet their obligations. Careful consideration and understanding of your ability to cover the loan are crucial before agreeing to act as a guarantor.