Building a financial future together can be challenging for even the most like-minded couples. But when newly married partners have different credit histories, blending finances can be difficult and, in some cases, even unwise.
If you have good credit and your spouse does not, it's important to understand how his or her credit history can affect you, how you can protect yourself, and how you can build a better credit record together.
Marriage Does Not Result in a Merged Credit Report
Many couples assume that a new, merged credit report is created when they marry. But in fact, every credit report and score is tied to a single Social Security number. That means that your and your spouse's credit reports remain separate and do not reflect the fact that you are married.
Both credit reports will, however, do the following:
- list accounts that you and your spouse open jointly
- list accounts with one of you named as cosigner, and
- reflect the addition of a spouse to an existing account as either a joint account holder or an authorized user.
One Spouse's Bad Credit Can Affect Joint Credit
Lenders use credit reports and scores to decide whether to extend credit to an applicant and how much to charge. Some employers, landlords, and insurance companies also take into account applicants' credit history when making a decision. (To learn more about credit reports, read Nolo's article Credit Report Basics.)
When you and your spouse apply jointly for credit, a rental home, or insurance, the business evaluating your creditworthiness will consider both your credit histories. If one of you has derogatory, or unfavorable, information in your credit report, your request is more likely to be denied. If your credit application is approved, you will most likely have to pay a higher price (interest rate) for the loan than you would have to if both you and your spouse had good credit.
Should You Apply for Credit Individually or Jointly?
One way to avoid trouble is to apply for credit individually (that is, without your spouse). This strategy, however, works only if your individual income and assets are substantial enough to qualify for the credit. Qualifying on one income can be particularly difficult when applying for a large loan, such as a mortgage.
Here are some things to consider when opting for individual or joint credit:
Risks of Individual Credit
There are legal considerations to take into account when applying for a loan individually. For example, if you and your spouse take out an auto loan jointly, both of you are legally responsible for repaying the debt. (To learn about your liability for your spouse's debts, see Nolo's article Debt and Marriage: When Do I Owe My Spouse's Debts?) If only your name appears on the loan documents, your spouse could drive off into the sunset with your new vehicle, and you alone would be liable for repaying the auto loan. If you do not make the payments, only your credit would be damaged.
Authorized User or Joint Account Holder: Which is Better?
If you designate your spouse as an authorized user on your credit account, he or she can use the credit but is not liable for the debt. If you make your spouse a joint account holder, he or she can use the credit and also becomes liable for the debt. When deciding which is best for you and your spouse, consider the following:
- If you decide later to remove your spouse from your account, it is much easier to remove an authorized user than a joint account holder.
- If your spouse becomes an authorized user on your account, the account will appear on his or her credit report, but it may or may not affect his or her credit score. The latest version of the FICO scoring formula -- the most widely used credit scoring system -- does not factor authorized user status into scores. Older versions do, and many creditors are still using those. (To learn more about FICO scores, read Nolo's article Credit Scoring.)
- If your spouse becomes a joint account holder, your positive credit history for that account will be factored into his or her score. On the other hand, if your spouse adds you to his or her account, your credit score will be harmed if there is negative history on that account.
- Adding your spouse to your account as an authorized user or joint account holder will not affect your credit score unless your spouse uses much or all of your available credit. Approximately 30% of your FICO score is based on the amount you owe in relation to your available credit. It's best to keep balances at less than 50% of available credit.
A cosigner is fully responsible for a debt if the primary borrower does not pay. Do not be a cosigner for your spouse unless you are prepared to manage the account and make payments, if necessary.
Keep Your Individual Accounts Open
Even if you decide to open new accounts jointly, keep your old, individual accounts open, too. Accounts with a longer positive history help your score. You will also benefit from having more available, but unused, credit. And it's important to maintain one or more individual credit accounts in case you separate or divorce.
Get Full Disclosure Before Marriage
Experts recommend couples review their credit reports together before getting married or taking on joint financial liabilities. If you're already married, do the review as soon as possible.
You can get one free copy of your credit report from each of the three credit reporting bureaus -- Equifax, Experian and TransUnion -- once a year at www.annualcreditreport.com.
Check your spouse's report for things like:
- late payments and past-due amounts
- high balances
- collection accounts and charge-offs
- tax liens
- unpaid student loans
- foreclosures, and
- any other derogatory information.
Although bad credit certainly can be the result of extenuating circumstances, such as extensive medical bills, it also can be a reflection of how a person manages money. If your spouse's credit report reveals high balances, unpaid debts, or other negative history, keep your finances separate for the time being -- until you've had a chance to discuss the reason for the past credit issues and observe your spouse's bill paying behavior. That means not opening new accounts jointly, not adding your partner to your existing accounts, not being added to his or her accounts, and not sharing a checking account.
Work Together to Improve Your Spouse's Credit Record
A bad credit record is not an insurmountable problem, but it will take time to turn things around. (To learn how to improve your credit record, read Nolo's article How to Clean Up Your Credit Report.) Here are some ways that someone with excellent credit can help his or her spouse:
- add your spouse to one or more of your existing accounts (do this only if you are convinced he or she will not charge up your balance)
- help pay down your spouse's balances, particularly if they are closer to the credit limit than yours are
- transfer your spouse's debt to one of your lower-interest accounts
- take over managing the bills if your spouse has spending or money management issues, and
- set goals with your spouse, and continue to check your credit reports annually.
There are risks in some of these methods. For example, once you transfer your spouse's debt to your account, you become solely liable to repay it, unless you also make him or her a joint account holder. To protect yourself, consider creating a simple written document outlining your agreement. (For information about how to create a loan agreement, read Nolo's article Promissory Notes for Personal Loans to Family and Friends.)
To learn more about maintaining good credit and repairing bad credit, get the book Credit Repair, by Robin Leonard (Nolo).