Expect to have a hard time borrowing money to buy a car or a home if your credit score is down in the dumps. You can't undo the damage done by late payments and past-due bills overnight but you can potentially raise your score if you co-sign on someone else's loan. Once you have access to credit you can start to build your score, but there are pros as well as cons to being a co-applicant on a loan.
Your credit score drops a few points any time you turn in a credit application because credit bureaus associate new applications with risk. This portion of your score should rebound within a few months once you prove that you can afford to make payments on the new loan or credit card. However, your score is also partly based on the average length of account history. The longer you've had your loans and accounts, the higher your credit score, as long as you are paying as agreed. New loans cause the average length of account history to drop and this hurts your score in the short term. It may take a several months for your score to recover.
Credit bureaus award higher scores to people who use different types of credit products. The bureaus break credit products into two broad categories: installment loans and revolving debt. Installment loans involve borrowing a lump sum of money and making monthly payments until you've repaid the debt. Revolving debts are accounts like credit cards and home equity lines that you can use and pay off multiple times. If you've previously only used one type of credit you can improve your score by co-signing on a car loan or credit card to add diversity of credit to your report.
Payment history is one of the most important factors in credit score calculations. Over time, a good payment history will boost your score. However, late payments will quickly cause your score to tank. A joint loan or credit card is a joint responsibility, so even if you are not the primary borrower your credit score takes a beating if a payment is late. If the loan goes into default, your score really takes a hammering. Car repossessions, foreclosures and charged off credit cards will stay on your credit report for up to seven years.
If you want access to credit, find a co-applicant with a good credit score. When you turn in a joint application the lender bases its decision on your combined credit histories. Make sure that you and the co-applicant have enough income to take on the new debt. Most lenders only allow you to co-sign on loans for cars and homes that you actually own. Your friends and relatives may be wary of adding you to their mortgages or auto loans. Credit cards may be your best bet but lenders might have tougher qualification standards for credit cards than other types of debt.
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