For some couples, the choice about marriage and credit seems obvious: open all marital accounts jointly. A husband and wife share all of life’s joys and triumphs, as well as its challenges and obstacles. Why shouldn’t they share credit cards, debt, and loans? Though this might make sense on the surface, a different approach toward managing credit will help you position your marriage to prosper and, at the same time, allow you and your spouse to achieve your dreams.
First, let’s talk about how credit-scoring systems treat marriage and credit. Since you and your spouse are sharing a life together, you might think the credit-scoring bureaus will merge your credit histories. This is not the case. The credit-scoring bureaus will keep your individual credit reports open and separate. Joint accounts, or those accounts in which a spouse is listed as an authorized user, will show up on each of your individual credit reports. Accounts that list you as the sole owner will appear on your credit report only. In other words, the credit-scoring systems will treat you the same as they did before you were married.
This means that you have a choice as to whether you hold joint accounts or individual accounts. Following are several considerations you should keep in mind when determining your approach to marriage and credit.
Marriage and Credit Consideration #1: Joint Credit Cards
Though many couples are tempted to open joint credit card accounts, resisting this temptation has benefits. In the case of financial crisis, consider what would happen to each of your credit histories should you stop making payments on a joint account: both will be tarnished.
But if you keep all accounts separate, you can be strategic about forthcoming financial disasters.
Let’s say your spouse loses a job, and you know you can only afford to pay the bills for a couple of months. Before either of you becomes delinquent on your bills, you can transfer all of your credit card debt into your spouse’s name. Hopefully, your spouse can find another job quickly, at which point your spouse will transfer your debt back into your name. But if not, you are positioned to protect your credit.
It works like this. While you and your spouse can afford to pay the bills on time, you do. At some point, you and your spouse might need to make delinquent payments on your spouse’s credit cards. Unfortunately, your spouse’s credit will suffer. Yours, however, will be protected. This means that you can continue applying for credit cards and loans while your spouse learns how to build credit after a financial disaster.
Though this might seem like you are hanging your spouse out to dry, this is not the case. If you have a high credit score, your spouse can lean on you temporarily, and this will strengthen your financial position and protect your marriage. And consider the alternative: if you have all accounts as joint accounts, or if you make delinquent payments on your credit cards as well as your spouse’s credit cards, both your credit score’s suffer.
Marriage and Credit Consideration #2: Who Holds the Credit?
Sometimes a couple may make the mistake of creating all the credit cards in one spouse’s name. In this case, the couple may be in for problems, especially if they apply for a mortgage together. If you hold all credit in your name, your spouse has no credit. Without a history of credit, your spouse will have a low credit card score because the credit-scoring bureaus will have no way of knowing whether your spouse can handle credit. (No credit is the same as bad credit.) Your spouse’s bad score could endanger the loan or force you to sign a loan with a high interest rate, even if you have a superb credit score. For couples that want to put both of their names on the title deed, this can be problematic and expensive.
The solution to this marriage and credit dilemma? Make sure you both learn how to build credit. Marriage and Credit Consideration #3: A Wise Approach to Mortgages
With this in mind, I do often suggest applying for mortgages as a couple. In two-income households, this allows the couple to qualify for a much larger loan. That said, keep in mind that this can wreak havoc if the couple separates or divorces. Though you might not want to think about divorce, be sure you understand the implications of purchasing a home jointly, and what you will need to do should you ever divorce. (Read 7 Steps to a 720 Credit Scoreby Philip Tirone.)
Marriage and Credit Consideration #4: How to Build Credit Fast
In addition, spouses can leverage each other’s credit score to improve their own credit score. For example, a spouse with a subprime credit score can transfer some debt to the card of a spouse with good credit. At a later date, when the first spouse sees his or her credit improve, s/he can ask for a higher limit and a lower interest rate, and then transfer debt back to the appropriate spouse.
Considering these approaches toward marriage and credit will help you not only preserve your credit score but also position your marriage for smart financial decisions.