Spouse Has Bad Credit? How It Affects You
It wasn’t until a few months after my husband and I got married that I decided to check both our credit scores. While my husband’s credit score wasn’t horrible, it certainly didn’t qualify as “excellent.” This got me thinking about how newlyweds’ financial histories can affect both spouses’ finances moving forward, and how critical it is to acknowledge this reality—ideally before getting hitched.
Why It’s Important to Have a Good Credit Score
Manisha Thakor cuts right to the chase in her book On My Own Two Feet: “Your credit score is essentially your financial reputation in numeric form.”
Aiming for an excellent credit score—generally defined as 750 or more—is a worthy goal, owing to the range of ways in which it can save you money. Credit scores are critical when applying for loans—for instance, car loans and mortgages. In addition, many employers consider prospective employees’ credit scores during the hiring process.
A high credit score means you can access lower interest rates when borrowing, because creditors will view you as reliable. The perceived risk that you’ll default on your loan is lower compared to those with poor credit scores. Lower interest rates, especially on large amounts borrowed over significant timeframes, can save you thousands and thousands of dollars!
A poor credit score can indirectly hurt your financial efforts as well; consider the fact that when you’re paying over the odds in debt repayments, you’re committing fewer dollars to saving and retirement planning.
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Till Debt Do Us Part
Marriage makes you one combined financial unit.
However, that doesn’t mean your credit scores are merged; your credit history continues to be maintained on an individual basis. One spouse’s poor credit cannot directly damage the individual score of the other spouse.
That being said, if you apply for a loan as a married couple, creditors look at both your credit scores to determine your eligibility and terms. So, if one of you has the credit of an angel whereas the other’s credit history is limited or even littered with missed payments and liens, you may find your application is denied.
But, this is not just about loan applications—poor credit can belie more than just a few bad credit card habits. Other financial follies, like paying taxes late, not focusing on saving, and day-to-day overspending, could be lurking in the closet.
What Do You Do After You’ve Said I Do?
While bad credit isn’t good news, it’s not necessarily a reason not to get married. And, it’s not necessarily the precursor to divorce! It is, however, an alarm signaling that it is time to get clear on your joint financial situation and start communicating. Make sure you do this respectfully and compassionately to minimize blame and financial stress. (If you’re the type of person who’d like to know this information from prospective partners before things get serious, there are now dating sites catering just to you.)
Once you’ve identified that one of you has less-than-optimal credit, it’s time to take action. Here are four top tips for taking immediate action:
1. Check your credit report for mistakes: Errors are, unfortunately, pretty common and can be really detrimental. Check your report at least once per year.
2. Make payments on time: Yes, this is stating the obvious, but it needs to be said! Mary Beth Storjohann of Workable Wealth says, “35% of your credit score is based on how you pay your bills (making this the biggest determining factor for your score)! Are you often late of missing payments? The impact of just one 90-day late payment goes way beyond the three months you took to pay, so set up automatic bill payments.”
3. Lower your debt-to-credit ratio: This is how much debt you have as a proportion of your overall credit limits. 30% of your credit score is based on the amount of money you owe versus the amount of credit available to you. The higher the amount of credit you’re utilizing, the more negative the impact on your score. Keep the debt level as low as possible (30% of your limits, or less).
4. Pay down your debt faster: Make more than the minimum payments wherever possible by utilizing the snowball method or targeting the balance with the highest interest rate to pay down first.
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Alongside these tips, it’s super important to remember that improving your credit score won’t happen overnight. The length of time it takes for your score to improve is directly related to reasons for the drop. It can take anywhere from a few months to several years for your credit report to reflect the positive changes you’re making. As Mary Beth notes, “The most important thing is to be proactive in clearing up any issues.” In addition, two of the criteria factored into your score are the length of your overall credit history and the average age of your accounts.
So, don’t be discouraged—be patient and give it time.
And, Finally, Some Tips on What Not to Do!
There are always two sides to every coin so, while you’re following the tips above, make sure that you’re not unwittingly hurting your score and negating your good work.
Be mindful of the following ways that you could be hurting your credit score:
1. Opening too many new accounts: This comes back to the point that the average age of your accounts is a key factor. Opening lots of new accounts reduces that average.
2. Closing too many old accounts: Older accounts indicate that you have managed payments for a long time and increase the average age of your accounts. When you close credit card accounts, this also decreases the amount of credit available to you, which can reflect negatively if you have other accounts that are still carrying high balances (it essentially increases your debt to credit ratio).
3. Signing up for lots of retail incentive programs: Every time you apply for credit, the company issuing the credit will request information about you from the credit bureaus. Too many of these requests can reduce your score.
4. Over-utilizing your credit. Mary Beth advises, “If you’re depending on your credit cards to fund your daily expenses and lifestyle needs, but aren’t able to pay them off in full at the end of each month, something needs to change. Start tracking your spending and get a handle on your expenses.”
In summary, start taking positive steps, be aware of actions that can hurt your credit, and focus on building solid financial foundations for the future.
This post was written by Erika Torres of GoGirl Finance. GoGirl Finance is a fast-growing community of women seeking and providing financial wisdom across money management, lifestyle, family and career. For more finance tips, follow GoGirl Finance on Twitter @GoGirlFinance