Tips for managing joint finances when one partner has bad credit
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While it’s always important to discuss finances early, many individuals enter committed relationships without knowing the full scope of their significant other’s finances. If your partner has less than stellar credit, there are actionable steps you can take as a couple to find financial harmony. Here’s our best tips for what to do when your partner has bad credit.
Understanding bad credit upfront
Your credit score weighs your credit health on a scale from 300 to 850 using credit scoring models such as FICO or VantageScore. This three-digit number is designed to help lenders assess risk when it comes to extending a line of credit, whether that be a credit card, mortgage, personal loan or so on.
You may be able to guess this, but the lower your credit score, the less likely you are to get approved for a new line of credit and vice versa.
But having a bad credit score is not always the result of irresponsible financial decisions. Your partner may have a low credit score simply because they have never taken on any credit. This may be the case if your partner does not have an existing loan history or credit card. Whatever the case, there are more than a few ways to improve your credit.
Can my partner’s bad credit impact my credit score?
The short answer is no. The full explanation, however, is a little more complex.
Married or not, your individual credit score won’t change simply because you’ve tied the knot. Couples don’t share credit scores, and you never will. Throughout the course of your life together, your credit histories and reports will remain separate.
While your spouse or partner’s credit score can’t directly impact yours, it can hurt your future together. If you plan on making large purchases together, your partner’s low credit score could hurt your chances of getting a loan. This is because lenders don’t just take the average of you and your partner’s credit score, they actually focus on the lowest credit score of the pair when evaluating creditworthiness.
You may be wondering if a solution to this problem would be to just apply for the loan under your name (due to your higher credit score). But this in itself is a risk. While we all hope that love will last forever, if you did get divorced, you would be financially liable for the loan in its entirety.
Here are a few tips for how you can navigate joint finances when your partner’s credit isn’t great.
Identify the reasons for the bad credit score
This may seem obvious, but the first step to improving poor credit is realizing why it’s low in the first place. Checking your credit score may not be at the very top of your to-do list, but being aware of your financial health can help you further build strong financial habits. This lack of knowledge makes it easy to see how some people could have a low credit score without being aware. And if you are practicing this, your partner may feel more inclined to follow suit.
Many actions can hurt your credit score including (but not limited to), outstanding debts, credit utilization ratio, and a history of late payments, or having little to no credit history at all. Finding out why you have a low credit score is the first step to improving your personal finances. You can access your credit report for free once a year at AnnualCreditReport.com. Pull both credit reports and analyze where you stand. Once you know the extent of the data, you can both decide what exactly needs to be addressed.
Add your spouse as an authorized user on your oldest credit card
If you trust your spouse to responsibly use your credit card, then adding them as an authorized user to your longest-standing account could help them build a stronger credit history.
Authorized users get the same benefits from on-time payments that primary card owners do. As long as you are paying your balance in full and on time — and the issuer in question reports authorized users to credit bureaus — you should see improvement in your partner’s score over time.
Encourage your spouse to get a secured credit card
If you’re not comfortable adding your partner to your credit card as an authorized user, then consider encouraging them to get a secured credit card. A secured credit card is one that you must pay a deposit upfront for the line of credit you will receive.
Secured credit cards may not have the extra benefits and rewards that come with a traditional credit card, but they help build credit for individuals who would usually not qualify for a credit card.
Here are our top picks for the best secured credit cards.
Watch your spouse’s credit utilization ratio
Your credit utilization ratio makes up roughly 30 percent of your FICO score. This metric looks at how much of your available credit you are actually using. A high credit utilization ratio typically means you’re close to maxing out your credit cards and this can lower your credit score.
In the eyes of credit card issuers, the less credit you are using, the more financially healthy you are. A good rule of thumb when it comes to your credit utilization ratio is to keep your spending at 30 percent of your total limit — or even lower if possible.
The bottom line
When it comes to building (or rebuilding) credit, there is no simple tip or trick that will get you a better score instantly. Like many things in life, building credit from the ground up takes time and effort on the part of the card owner. By following some of the tips above, however, you and your partner can be confident that you are on your way to a future of good credit.