No matter what your credit score is, combining finances with your significant other can change your credit score - even if your partner has the same spending habits. Before you decide to purchase a home, combine credit cards, or just share your incomes with each other, read on to find out how to protect your individual credit scores and have a happy financial-ever-after.
1. Budgeting for two
You don't each need to have the exact same view on how to spend money, but if you do plan to combine finances, you should set a budget that works for both of you. Pull money together for necessities, such as utility bills, groceries and rent.
Be sure each of you has a small stash in the budget for individual personal must-haves, whether for a favorite wine, a night out with friends or fancy cosmetics. Finally, make sure someone is in charge of overseeing that every bill is paid on time.
2. Authorised user or joint account holder
If you both plan to use the same credit card accounts, you have the following two options:
- Authorised user: An authorised user has access to your account. A credit card in the authorised user's name is issued to this user (your partner) for your account. The user can then use the card to purchase items. However, the authorised user is not liable for paying off the debt and can't make changes to the account, such as balance transfers, closing the account and address changes. Also, your lender won't check the credit of the person being added to your account as an authorized user. Any negative or positive credit usage will affect your credit report as well, so proceed with caution.
- Joint account holder: When a joint account holder is added, that person is just as responsible as you are for any debt to the account. The joint account holder is equally liable for making payments and is allowed to call the lender for any information about the account. The person added to the account is likely to have their credit checked before the bank will approve the addition.
Authorised users can be removed and added easily, but a joint account holder can never be removed. For either option, late payments appear on the credit reports of the authorised user, the joint account holder and the original account holder.
The credit report also reflects the credit utilization rate - your balances divided by your credit limits. Your credit utilisation rate is factored into your credit score for each individual credit card balance and for the sum total of all your cards
|Example - Calculating Credit Utilization Rate|
Suppose that you have five credit cards with $10,000 in total available credit and a total of $1,000 in balances on those cards. Your significant other has only one card; it has a $3,000 limit and a $2,500 balance.
In this case, if you become a joint account holder on your partner's card, your credit score could drop because you will be taking on a debt for which the individual card credit utilization is more than 83% of the credit limit. Another reason the addition of the account to your credit report could drop your score is because it will bring your overall credit utilization rate from 10% to 26.9%. The higher your utilization rate, the more your score could fall; therefore, it is a good idea to keep your credit utilization rate below 25% on each individual card as well as below 25% of your overall credit card capacity.
On the reverse side, if you are the one who has credit card balances that are close to their limits, then you can increase your score by adding your name to one of your partner's credit cards that has a lower credit utilization rate.
The trick is to only add your name to cards that will help at least one member of the couple and not harm either person's credit. The cards that would hurt one person or the other's credit should be targeted in your joint budget as a problem that must be resolved. When the balance is below 25 per cent, you can reevaluate the decision of whether to choose an authorized user or joint account holder.
The final decision about whether to add someone as an authorized user or a joint account holder should be based on your relationship's commitment level.
3. Length of credit history
Part of your credit score is based on your length of credit history. The good news is that if the amount of time you've had credit cards has been relatively short compared to the time your significant other has had credit cards, you take on the credit history for that person's account when you are added to that account.
However, be careful if you are the one with a lengthy credit history, because being added on to a credit card that has a relatively short history can decrease your credit score.
4. Mortgage loans
When you and your partner decide to purchase a home together, both of you are liable for the debt. Both of your scores factor into the approval of your mortgage loan and your interest rate. If one of you has a lower credit score than the other, you'll both have to decide whether it's in your best interest to take the interest rate hit, have the person with the higher credit score be the one whose name is on the mortgage, or wait until both of you have the credit score necessary to qualify for a mortgage with the lowest interest rate available.
Remember that after you've made your decision, the only way to remove or add someone's name on the loan is to refinance your entire home loan.
5. Impact of name changes
If you change your last name when you get married, your credit score will not be affected. However, Fair Isaac Corporation spokesperson Craig Watts suggests not delaying updating all your accounts with your new name, so credit reporting agencies don't get confused and create records for two seemingly different people.
For better or for worse, combining finances will more than likely affect your credit score. However, if you use good judgment and carefully evaluate what combining finances will do to your credit score and your budget, most of the account changes you make will be for the betterment of both of your individual credit scores.