How To Avoid Sticky Financial Situations

Writer Sybilla Nash agreed to help out a friend by co-signing a mortgage. But after her friend neglected to make payments, Nash's credit score dropped 200 points. Nash wrote about the ordeal for The Huffington Post. She joins host Michel Martin and consumer education expert John Ulzheimer to talk about how to avoid sticky financial situations.

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MICHEL MARTIN, HOST:

Now to matters of personal finance. Today we want to talk about a situation a lot of people have faced, and that is being asked to help a friend or family member out by co-signing a loan. Sybilla Nash did just that. A very big loan - a mortgage, in fact, and guess what happened? The friend stopped making payments and that left Sybilla's credit score in tatters.

She wrote about her ordeal for the Huffington Post, so we asked her to talk to us about it. Sybilla, welcome. Thanks for joining us.

SYBILLA NASH: Thank you for having me.

MARTIN: We also wanted to find out how consumers can avoid situations like the one we're just about to hear about, so we've called John Ulzheimer. He is president of consumer education at SmartCredit.com. That is a for-profit company designed to help consumers track their credit history and prevent identity theft. Welcome to you, John.

JOHN ULZHEIMER: Thank you so much for having me.

MARTIN: Sybilla, you said this all started about four years ago, when a longtime friend of yours wanted to buy a home. Tell us what you did to help her out. What did she ask you to do and why did you agree?

NASH: A friend of mine - I mean, we went to junior high and high school together, so I'd known her forever. She was in the process of buying a home and saw how hard she worked to make that dream of hers happen, and so she found a home. She made an offer. She's in that process. They have a closing date and a couple of weeks before she's to close, they come back to her and they tell her that she needs a cosigner. It was a kneejerk reaction to the - oh my gosh, she's worked so hard for this, I want to help her out.

So it was more of an emotional decision, which is totally wrong when finances are involved, and that's - you know, that's my fault. It shouldn't have been about, oh, I need to help her, she's a good person. It should have been like, oh, why is the bank denying you at this last minute? What popped up? At the time, four years ago, the industry hadn't crashed. It was still pretty good. You could re-fi fairly easily and that was the plan. I would sign for her and then, you know, however long it took, she would re-fi me off the mortgage. Done. That was the thinking going into it. I didn't think it would be that big of a hassle.

MARTIN: And when did you realize you were wrong about that?

NASH: Just the most random thing. I was comparing costs for cable TV and satellite TV, as we all do, and I'm like, OK, this looks - this is a good deal. You know, you get the little coupons in the mail, so I call up one of the satellite providers and they run a credit check on you. So I'm like, OK. But I had had my credit frozen, so I went online and I unlocked my credit and I see $10,000 delinquent for Bank of America, and I tell you, I almost fell out of my chair. I was like, what? Bank - $10,000?

You know, I was freaking out. I'm like, what is this? This has to be wrong. Is it identity theft? Is it a mistake? And then, you know, I thought about it. I was like, OK. B of A. That must be the home loan.

MARTIN: And she'd never said a word about it.

NASH: No.

MARTIN: What was the effect on you?

NASH: Oh, it was devastating. My credit card companies dropped me like hot potatoes. The credit cards that I did have balances on - they reduced my credit to just cover that balance, so I essentially had no credit.

MARTIN: So John, I'm sure you're listening to this and you're thinking - what?

ULZHEIMER: This underscores a very, very common misunderstanding about co-signing, which is that you can co-sign and be somewhat protected or benign from a credit perspective. And I've had this discussion that has led to arguments in some cases, with consumers, that they want to co-sign either for things like mortgages or auto loans or credit cards or apartment complexes for their family and friends, but they only want to do so for the purposes of the loan or the account or the service being granted or turned on or booked.

The problem is, is that, in our system of personal finance there is no such thing as that sort of designation, co-signer for credit only. It really is no different than you being fully liable for the loan and, unfortunately, being in the crosshairs of things like credit reporting and also being a target for any collection activities.

There's a reason lenders want co-signers. It's not arbitrary. The reason they want co-signers is because they're not comfortable doing the loan with just that one person, but they would feel more comfortable if there were two people on the hook for the payment.

MARTIN: So shouldn't that have been a red flag for Sybilla right there?

ULZHEIMER: Yeah. And the only time lenders look for co-signers is if there's an unacceptable level of credit risk associated with the individual applying for the loan.

MARTIN: If you're just joining us, this is TELL ME MORE from NPR News. I'm speaking with Sybilla Nash. She had her credit ruined when she co-signed on a mortgage with a friend, a friend who later did not make the payments. Also with us, John Ulzheimer from SmartCredit.com. That is a for-profit credit monitoring service, and we're talking about how situations like this can be avoided with other consumers.

John, is there anything Sybilla could have done differently?

ULZHEIMER: The only saving grace that she could have hoped for is the fact that the mortgage market maybe wouldn't have melted down, which obviously it did. That's then. This is now. The real question is, is what can she do now.

These are not infinite punishments that she's going through. Remember, we're talking about credit scoring systems that evaluate more than just missed payments, so if she can compensate for the damage that she's suffering for the late payments by doing other things well, you'd be surprised how quickly you can get that score back high enough to where you can start to interact in the world of personal finance at these competitive rates and terms that we're enjoying right now.

MARTIN: And she's doing that. I mean, one of the things that she talks about in her piece - she says that she's forced herself to - she's had to focus on strict budgeting. She's paid off two credit cards in the past two years. Her credit score is inching back up. She has been budgeting better and is much smarter about how she manages her money, and she's been also careful to talk to her daughter about personal financial issues, which is something she says didn't happen in her case.

So Sybilla, why don't you pick up the story? You also say, I wouldn't recommend co-signing on a stick of gum for anybody after going through this. I'm sure that's good advice. But talk to me about why you think it's so important to talk to your child about finances.

NASH: Oh, it is very important and let me just clarify too that it's not that my parents did not have that conversation with me. They did. I think it was my own hubris, like, oh, that wouldn't happen to me. I know my friends and my friends would not do that to me.

So it's explaining to my daughter that you don't know what can happen in someone's life. Do not put their - your financial well-being in someone else's hands by cosigning for them, and that's essentially what I did.

MARTIN: So John, do you have any final thoughts here? I want us to monitor your credit and I do feel like I need to say, at this point, you do not need a for-profit credit service in order to monitor your credit. You can get credit reports from the government for free. We've talked about that on the program a number of times. But what are some of the other steps that Sybilla could be taking right now to try to salvage the situation?

ULZHEIMER: Here's the dilemma. I mean, the bank clearly has done nothing wrong. Right? So there's this immediate reaction that - well, let me go talk to the bank and see if they can help me. The bank is not going to simply say, OK, we will modify the paperwork to release you of your obligation. And the reason they're not going to is because they realize that what they were worried about initially with the individual home buyer is now happening. She is going into default. It's in their best interest to not allow Sybilla off the loan, which is just too bad.

Part two is you can take some action. If your friend has the ability to pay, but she's just choosing not to pay, you can compel her to pay, but the problem is, is now you're hiring lawyers, and that's not a cheap date either.

MARTIN: Sybilla, before we let you go, why did you decide to write this piece?

NASH: People are so embarrassed to talk about finances, especially when you don't have a good credit report or your credit's in tatters. No one wants to talk about it, so for me it was a little bit cathartic about writing about it, and it's also to let people out there know that this can happen and it's so far-reaching that you just don't really realize it. You just think, oh, it'll just be for this - like John was saying earlier - just to get them the loan and then I'll get off somehow or they can see I'm not using the car or I'm not living in the house, because after the Huff Po piece I had so many people emailing me that had done so many similar things, car loans or home loans.

And so I'm not the only one out there. There are so many people that make this mistake and they need to understand just how far-reaching it is.

MARTIN: Sybilla Nash is a freelance writer and author. She joined us from our studios in Culver City, California at NPR West. John Ulzheimer is president of consumer education at SmartCredit.com. That's a for-profit company designed to help consumers track their credit history and prevent identity theft, and he was joining us from Georgia Public Broadcasting in Atlanta.

Thank you both.

NASH: Thank you.

ULZHEIMER: My pleasure. Thanks for having us.

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