Smart money: How your bank can be a burden and co-signing risks

We are NerdWallet’s Smart Money Podcast, where we answer real-world money questions.

This episode begins with a discussion on what to do if your bank stiffens you with a low annual percent yield.

Next, we move to the money question that Andrew left us.

“I was asked if I could help my family with their lease. My wife and i were asked recently to be co-signers or guarantors on a lease that would help them obtain an apartment. We were not certain what this might mean for us or what it might bring to our credit and finances. It made us feel a bit uneasy knowing it could impact our ability to purchase a home in future. So I wanted to know if you could answer my questions about whether you are a cosigner or a guarantee on a lease. Also, what risks do you face? And if it is wise to help your family in this way even if you don’t want to. Thanks. Bye. ”

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Many high-interest savings accounts that have been subject to Federal Reserve interest rate increases to combat inflation have seen their annual percentage yield (or APY) increase in tandem with the Federal Reserve’s interest rate hikes. Not all banks are generous. Log in to your savings account to find out your interest rate. This information may be displayed on your dashboard or hidden on another page depending on how your bank interface works. You can shop around to find a better place for your money if you are unhappy with the rate that you see. Many banks, including online banks and credit unions offer APYs above 3% and even offer customers bonuses if they switch.

Co-signing for a loan or lease is an important financial and legal obligation. The co-signer agrees to pay the principal lender the amount due. If the account is in default or becomes delinquent, it could cause a serious credit damage. Co-signers with lower credit scores may have a harder time getting loans or lines of credit. Co-signing could lead to long-term, negative consequences. You should only co-sign if you can afford the payments. You can offer your assistance if co-signing seems risky.

• Be clear about what you are signing up for. You’re responsible for all legal and financial obligations.

• Be aware of the potential risks. Consider the worst-case scenario, especially if your goal is to purchase a home in the near future.

• Look at other options. Help your family members find an apartment that they can afford.

Learn more about co-signing with NerdWallet:

Liz Weston Co-signing is a way to help friends or family members get credit or rent apartments. But, should you risk your credit?

Sean Pyles: This is the NerdWallet Smart Money Podcast. We welcome you to send us your money questions. Then we will answer them with the help our brilliant Nerds. Sean Pyles is my name.

Liz Weston: And I’m Liz Weston. To have the Nerds answer your money questions, text or call us at the Nerd Hotline: 901-730-6373. That’s 901-730-NERD. You can email us at [email protected]

Sean Pyles: This episode features me and Sara Rathner, personal finance Nerds, to answer a listener’s question on the dangers of co-signing. Before that, Liz has a warning to anyone with a bank accounts, which I assume is almost everyone listening. Liz, what’s the deal?

Liz Weston You should definitely listen to this if you have a Capital One Savings account.

Sean Pyles: Before we get any further, let me just say that Capital One is a partner at NerdWallet. As you will soon hear, this does not change how we talk about them. As Liz said, it doesn’t matter what you are saying.

Liz Weston OK. One of the best things about these accounts is that your rate will automatically rise if rates go up once you have opened them. While you may not be able to get the best rates, it is worth your while to see if the short-term rates rise, as they have.

Sean Pyles: Yes. This has been evident over the last few months, as the Fed raised interest rates. My high-yield savings account yield at this time is 2.7%. This is an increase of 1% from earlier in the year. This higher yield was available without my having to do anything. My bank automatically increased the rate on my account, as is often the case.

Liz Weston Yeah. Capital One accounts are not eligible for this rate. Capital One recently changed their account structure so that older accounts earn just 0.3%

Sean Pyles In their high-yield accounts?

Liz Weston: Yes. That’s not a high yield. You should get 2.35% if you open a new bank account. That 2% difference is pretty significant. Capital One had a lot cash in their savings accounts so I calculated that this would have cost us at most a thousand dollars.

Sean Pyles : That’s crazy!

Liz Weston : Yes, I believe so.

Sean Pyles: I must also mention that the new accounts with 2.35% aren’t the best rates of high-yield savings account. My rate is 2.7%, as I already mentioned. How can people make sure their high-yield accounts actually yield a high yield?

Liz Weston: Okay. Log in to your accounts, and see what you are currently earning. It might take you a few clicks to figure that out. Capital One allows you to sign in to your account, click the link that states account details, and it will show you the current rate at which you are earning. If you have a Capital One account, and are currently earning a paltry 0.3% interest rate, you may be able to get the current high rate rate by opening a performance savings account. You can also transfer your money there. You can also find another bank if you are as annoyed as me.

Sean Pyles: Yes. Your experience shows how important it is to check in on your accounts and make sure your bank is working hard for your best interests. If not, you have plenty of places where your money can be invested that will work harder and better for you.

Liz Weston: Yes. There are many other banks that offer competitive rates and some even offer cash bonuses for switching, as I discovered. Switching is easy. There are many options available on this site. So go ahead and explore. If you find a great rate, you can open a new account to get your money working for yourself.

Sean Pyles: What people may not know is that NerdWallet publishes a list every month of the top high-yield savings account of each month. We’re only starting in November so here’s a list of the top high-yield savings account in November. If you’re looking to shop around, it’s worth checking out. A few other factors could indicate that you should change your bank account beyond the lagging yield. Fees are something people should consider. They should shop around if they are paying fees for overdraft fees, or simply to have an account open. Consider customer service. Shop around if you are having trouble getting hold of someone when you need them or if your bank’s customer service is not up to par with the way you prefer to interact with banks like this. If you are looking for a loan to finance a vehicle, a home, or personal loan, it is worth shopping around. It’s a good idea to start looking at different banks before you actually require a loan. This is because you want to be free to compare rates before you apply for a loan. A credit union may offer better rates than banks, so I recommend that people open an account.

Liz Weston: Yeah. People often learn about credit unions while they are looking for car loans or similar products. Credit unions have low rates. This is a great piece of advice. Okay, let’s move on to the exciting news. For our Nerdy Book Club series, we’re holding another book sweepstakes. We’re speaking with Joe Saul-Sehy in December. He is the co-author of “Stacked: Your Very Serious Guide to Modern Money Management span>

Sean Pyles: Send an email to [emailprotected] with the subject “book sweepstakes”, during the sweepstakes period. To be eligible for a chance at winning our book giveaway, All entries must be received no later than 11:59 PM Pacific Standard Time, Nov. 11. Include your first and last names, email address, ZIP code, and number. Visit our official sweepstakes rules webpage for more information. Send us an email at [email protected] if you have any suggestions for future authors. We look forward to sharing our thoughts with you. Okay, let’s move on to the episode’s money questions segment. I’m joined this week by Sara Rathner and Kim Palmer, personal finance nerds.

Liz Weston All rights.

Sean Pyles: The money question in this episode comes from Andrew, who left us a voicemail. It’s here.

Listener: Hi, NerdWallet. Andrew is my name. I was asked a question about helping family members with their lease. Recently, my wife and I were asked to co-sign a lease for a younger relative. We were not certain what this might mean for us or what it might bring to our credit and finances. It made us feel a bit uneasy knowing it could impact our ability to purchase a home in future. I wanted to know if you could help me clarify what it means to be a cosigner or a guarantee on a lease. Also, what are the risks and how to protect your family members. Thanks. Bye.

Sara Rathner: This episode of the podcast features Andrew’s question. We are joined by Kim Palmer, personal finance Nerd, and host of Smart Money Book Club. Welcome, Kim.

Kim Palmer: Hi. I am honored to have you with me.

Sean Pyles: Kim it’s great to meet you. Please explain what co-signing means to those who don’t know.

Kim Palmer: The concept of co-signing is that you sign up your name, credit and identity as collateral to the person you are helping. It means you are responsible for the payment. If a family member or friend is unable to pay, it will affect your finances as well as theirs.

Sean Pyles: Yes. It’s a big gift that you can give to someone.

Sara Rathner: Yes. What are some examples of situations where co-signing for loans can be helpful?

Kim Palmer: It is generally helping the person you are cosigning for. This is a common situation, with parents co-signing for their children. This is a very common situation. However, I am cautious about co-signing. Andrew should be aware of the potential risks. If he cosigns for someone, he will be responsible and could cause serious financial problems. Andrew could have a serious credit score problem if the loan isn’t paid on time. It’s something to consider, all those negative ramifications. Even though I fully understand and respect the desire to help,

Sean Pyles: Correct. Sean Pyles: Right. Even if you co-sign for someone you really like and think they are responsible, if they have roommates who might not be so responsible and they don’t make rent on time, then it is your fault. This is a huge risk.

Sara Rathner Is it possible for them to live alone? Do they plan to live with roommates? It would be a good idea to find out more about their financial situation. You take on more risk the more people you have under your roof when it comes to financial decisions.

Kim Palmer: Absolutely. Kim Palmer: Yes. It was a question that I wanted to ask you, did you see it as a positive option or do you believe it could be a good decision?

Sean Pyles: I have been a cosigner in the past. My dad signed on an apartment for my college when I was in college. This was something I really appreciated as I wouldn’t have been able get the apartment without him. Despite this, my dad is very close to me. It was clear that he was helping me to pay my rent. Andrew seems to be in a much more difficult situation. It can be a generous gift, especially since rents can be so high that it can be difficult to find an apartment for many people. You must be careful that your cosigner can afford to cover rent. If they are unable to pay the rent due to some reason, you should make sure you can still cover it.

Sara Rathner: Yeah. It was a benefit for me too. My parents co-signed my lease when I graduated college. It was my apartment and I did not have roommates. I also had a job. It was before the Great Recession so it was possible to still find a job after college. My income determined my apartment budget. I was able pay all the bills. My parents would have offered to help me if I were in an unfortunate situation, such as losing my job or having my income reduced. This was simply an extension of their support. It was a small risk that they took, but I was able pay my bills myself. It didn’t affect their credit.

Kim Palmer: Kim Palmer, I believe that both your experiences point to the importance of a relationship and that it is important to consider what kind of relationship you have. It sounds like you both have a great relationship with your parents. However, it is important to think about how this could potentially harm your relationship. Could it cause financial damage to your relationship if the person you co-sign with defaults on payments? Is that something you are willing to take on?

Sean Pyles: Yes, I think it’s very helpful to be clear with your partner about the terms of the agreement. You’re moving from an emotional, potentially familial, relationship to a financial, contractual one. Blurring these can make things more complicated. You might be able to forgive certain things, but it could end up costing you your finances. It can be very helpful to have that conversation, lay out your finances, and ensure that you are getting a fair deal.

Sara Rathner (Yes, Andrew mentioned that they have a goal to purchase a house in the future in their voicemail. This can cause a lot of tension in your relationship if the other person you cosign for doesn’t pay their bills on time and it falls on Andrew. Andrew is now unable to achieve a major financial goal. This could lead to a lot of resentment over the years, as buying a house is a way to wealth. It can also lead to hurt feelings if you are unable to do so because you helped someone else break the deal.

Sean Pyles: It can take a while to get to a point where you are ready to purchase a house. This includes getting your credit score ready and saving all you can. You also need to mentally prepare yourself for the process. It is possible to reverse the damage if your credit score suffers, such as a late payment or a drop in your credit score. This could happen if you are unable to pay rent on time. These negative marks on your credit report can stay for 7-10 years, depending on how long they are. This can make you appear very risky to mortgage lenders. You might be charged a higher interest rate or even denied for your loan.

Sara Rathner: Yeah. It was my first home, so I had been renting before I applied for my mortgage. I also had to show proof that I paid rent on time for at least one year. It was my lease. However, if you cosign for someone else, you are equally responsible for their lease. It is possible that you might be unable to get a mortgage if there aren’t enough rent payments.

Kim Palmer: That’s a great point. It also suggests that Andrew might be able to help his family members in other ways than signing for them. You might think about other ways he could still be supportive and helpful. One way he could do this is to give them a lump sum that he feels comfortable with and that would not put his future in danger if anything goes wrong. This is one way to help, but it won’t put your credit rating at risk. You might also be able to help in other ways. You might go apartment hunting with them. If possible, help them to find an apartment that is affordable. Help them to build their credit by talking with them about making on-time payments on any credit cards they have.

Sara Rathner: There are many other options. Many people wait until they are married to get the best housewares. You need this stuff even if you are young and just starting out. Andrew, if you have any household items that you find very useful in your life, give them to your loved ones and help them start their lives. You might also agree to pay a certain bill. You might offer to pay their internet bills for a certain amount of time. This can be a way to help them get started.

Sean Pyles I’m curious if you would co-sign for Andrew?

Kim Palmer: Kim Palmer, I am a very risk-averse individual. I’m so sorry. I would like to explain to my younger relatives that I cannot help them in this way. However, I’d be happy to help in any other way. I’m willing to go apartment hunting along with you. Although I might offer to pay another bill, or give you something else in return, I cannot risk my credit score or finances. This scenario sounds risky and I don’t want to co-sign.

Sara Rathner, I agree. I believe it is important to not set yourself on fire in order to keep someone else warm.

Sean Pyles: Wow. It’s amazing.

Sara Rathner: Thank you. It was not my invention. I can’t take credit. Andrew, this could have potentially long-lasting ramifications. It is possible for a parent to co-sign for their child. They already have a house and aren’t looking for a mortgage. They are less likely to take on this risk. If you are a young adult with a lot going on in your finances, it is important to protect your credit and ensure your financial security. You are not financially independent yet, which means you still need to earn income to support your family. However, you don’t necessarily have a lot of wealth. If you have other ways to help, such as giving them a generous cash gift, donating your time and effort, or taking them shopping at Target to purchase a few housewares, those are great options. That’s what I recommend.

Sean Pyles: I will admit that I might do it, depending on the circumstances. Kim, I am also very risk-averse, but I really want to help others who are unable to help themselves. Sometimes, co-signing is the only option. However, before I co-sign for them, I want to ensure that their living conditions are more sustainable. I would prefer that they didn’t have roommates that wouldn’t pay rent, which could cause the whole thing to go sour. Also, I want to ensure that I have enough money in my account to pay rent for my loved ones if they are unable to. It’s a lot to deal with. This would increase the cost. However, I would like to help the person.

Kim Palmer It’s so lovely.

Sara Rathner: This is a great point. You will need to have a small co-signing fund that covers rent for one to three months. You can also use the money for other purposes if you don’t need it. If you do, however, you will be glad that it is there.

Kim Palmer: Yes.

Sean Pyles: This is obviously not an option for many people. It is impossible to save that much money. For many people, cosigning can be risky. However, if you are able to do it responsibly and financially sustainably, why not?

Kim Palmer: Okay. Sean, I am inspired by you. I’d like to change the answer I gave you before. Because I can think of only one exception, and that’s for my children, who have taken so much away from me financially.

Sean Pyles : Let’s see,

Kim Palmer: I can see that Kim Palmer could do this for her children. If we had a trusting relationship with money and if they knew exactly what their responsibilities were. That scenario could be a possibility for me.

Sean Pyles: One thing to remember, especially when co-signing for an apartment is that you are also responsible for any damage. You might want to walk through the apartment with them before they move out. Make sure everything is in order and you have every chance of getting your security deposit back.

Sara Rathner: Yeah. Keep in mind that if you are helping a relative move to New York City, it can be very difficult to find an apartment because your income must be at least twice the monthly rent. Three months of rent in New York could easily cost $15,000. Your income won’t support this if you don’t reside in an area with high living costs. Another thing to remember is that your income may not be sufficient to support you living in a high-cost area. You may not be able to walk the apartment as well if you live far from the person you’re living with. Another thing to remember is that you don’t have the ability to walk through an apartment as easily as if it were within a 30-minute drive of your house. New Yorkers I know pay more rent than they make in income per year. It’s something you should think about. You should have detailed discussions about the budget with your young relative if they are just starting out in big cities. Their apartment may cost more than your mortgage or rent.

Sean Pyles: It depends on where you live. Kim, what are your final thoughts on someone considering co-signing a lease for a loved one?

Kim Palmer: I think it is important to consider the impact of this decision on the relationship and not only the financial implications. I am concerned that cosigning can hurt the relationship, even if you are helping the person. Think about it. The most important thing is the relationships we have.

Sean Pyles: Yes. Thank you for speaking with us.

Kim Palmer: Of course. Thank you for being here.

Sean Pyles: Let’s move on to our take-out tips. Sara, would you please let us go?

Sara Rathner: Be aware of what you are signing up for. You are responsible for all legal and financial obligations arising from the contract if you sign it with a cosigner.

Sean Pyles: Understand the risks. If you are planning to purchase a home in the near future, think through the worst-case scenarios.

Sara Rathner: Finally, think about other options. Instead of giving your family a lump sum, you could offer to help them find an apartment that they can afford.

Sean Pyles: That’s all for this episode. Have a money question? Call or text the Nerds at 901-730-6370 to ask your questions. That’s 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcast for more info on this episode. Remember to rate, review, and follow us wherever you get this podcast. Liz Weston and I produced this episode. Our audio was edited by Kaely Monahan. Jae Bratton created our show notes. We are grateful to the NerdWallet Copy Desk for their assistance.

Sara Rathner: Here’s a brief disclaimer that NerdWallet’s legal staff carefully crafted. We are not investment or financial advisors, but can answer your questions with our talented and knowledgeable finance writers. This Nerdy information is for entertainment and general education purposes only and may not be applicable to your particular circumstances.

Sean Pyles: Now, let’s turn to the Nerds until next time.