Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Co-signer ends credit crunch

Dear Dr. Don,
I have terrible credit and want to take a personal loan to pay off some debt. I have a co-signer with superb credit. What are my chances of getting this loan? I have a good paying job that I've had for a long time, and also have a truck loan with this same co-signer.
Thanks,
Kaye Cosignatory

Dear Kaye:
Getting the loan shouldn't be a problem with a strong co-signer. You need to recognize that taking out a personal loan to pay off some debts doesn't pay off the debt, it just changes the lender and the loan terms. Restructuring your debts can make sense if you can get a lower interest rate or extend the loan term to make your monthly payments more affordable.

Having a co-signer helps you get better loan terms because the co-signer is making the same commitment that you are to make the loan payments. The Federal Trade Commission's (FTC) electronic pamphlet, Co-signing A Loan, provides more information about the co-signer's responsibilities. To my thinking, the best line in the pamphlet is, "When you're asked to co-sign, you're being asked to take a risk that a professional lender won't take."

Your co-signer has already stepped up to the plate for you once. Asking him/her to do it again shows that you continue to have problems with managing credit. Don't take this step lightly. If you restructure your debts through a personal loan with a co-signer, then commit to the additional steps of putting together a household budget and closing out your old credit card accounts.

Staying current on the truck and personal loan payments will help you, with time, regain a stronger credit history. Negative information on your credit report drops off after seven years, but your credit score will start moving higher over time even while the negative information remains on your credit report.

If you've got a good paying job, then the problem isn't really the debt, it's spending more than you make in income. Taking 10 years to pay off last year's vacation just doesn't make sense. Your goal should be to stop committing future income to paying prior years' spending. It won't happen overnight, but when it does you can work toward your future instead of paying for your past.