Marriage can be a beautiful experience but building a financial nest egg together is challenging when one spouse has bad credit. In general blending finances is not simple and it is not uncommon for couples to have different money management styles.
But if one spouse has bad credit it’s important to understand how it can affect you. Good and bad credit do not mix.
You may want to blend finances but if one spouse has bad credit it is necessary that you keep separate credit files. Because credit scores do not combine in a marriage, your individual healthy credit can help you get approved for an apartment, get financing for a house or car and even college tuition. A spouse’s bad credit can harm you under certain conditions.
How to protect your good credit
Joint Accounts. Stay away from joint accounts. It’s important that joint account holders understand that their credit behavior does affect the other joint account holder. Also in community-property states, all debt acquired during a marriage is considered a joint debt, regardless if the account is joint or in the name of an individual spouse.
Authorized User Accounts. If you are designated as an authorized user on your spouse’s credit account any missed payments will also be reported on your credit reports. Delinquencies appearing on the cardholder’s account, will likely affect your credit scores. However, because you are not responsible for the debt, the credit bureaus will remove the authorized user account from your credit reports if you dispute the account and request that it be deleted.
Co-signed Accounts. 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.
How to build better credit together
There may come a time when you have to blend credit files like purchasing a house. When a married couple applies for a mortgage, the spouses’ incomes, debt-to-income ratios and credit scores are key factors in determining how large a loan they’ll get and at what interest rate.
Leaving a spouse with bad credit off the mortgage application is an option but you then run the risk of not having enough income alone to qualify. You can prepare for a big purchase by working to improve your spouse’s credit history. Here are a few ways to help your spouse:
Add spouse as authorized user. I know we talked about how an authorized user account can adversely affect a spouse but that’s if there are missed payments. If you have an excellent payment record, add your spouse to one or more of your existing accounts.
Reduce account balance. If your spouse with bad credit has accounts that are at or near their limits, help pay down your spouse’s balances. Pay down the balances to 10% or less of the available credit limits and your spouse’s credit scores will increase.
Dispute Credit File Errors. Challenge inaccuracies and correct your spouse’s credit files. Dispute any information you believe is incorrect. The credit bureaus have 30 days to verify your dispute with the source of the data. If the dispute comes back as verified there are further steps you can take. If the dispute is not verified it must be corrected or deleted.
Become the money manager. Be delicate about it but you may need to take over managing the bills if your spouse has spending or money management issues.