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Combining finances after getting married is customary, but is something that should be approached carefully. If your partner has had challenges with borrowing and repaying money, make sure you understand the issues and their underlying causes, then develop a strategy to deal with them effectively before you jump into signing loan agreements together. Although your spouse's credit can only affect yours directly when you have joint credit obligations, their credit can still have a major impact on your plans for the future.
Can Marriage Affect Your Credit Score?
Credit reports do not indicate your marital status, nor will they include your spouse's identity or any account they hold independently.
If you open joint credit cards or loans as a couple, however, those accounts will appear on the credit reports maintained for both of you at the three major credit bureaus—Experian, TransUnion and Equifax. This means the information associated with the account can affect credit scores for both account holders. If the account is managed responsibly, it can help both of you lift your scores. If the shared accounts go delinquent or are otherwise mismanaged, though, your and your spouse's creditworthiness will be negatively affected.
The most common credit score models, created by FICO® and VantageScore®, heavily weigh payment history (your history of making on-time payments) and credit utilization (how debt balances compare to credit limits) when calculating scores. Therefore, it's important to be aware of the status of all jointly held accounts. If you or your spouse has a tendency to max out credit cards and miss payments, the time to address those issues is before you open any accounts together.
Your ability to borrow money and make living arrangements can be hampered if your spouse enters the marriage with a credit report full of negative information. For example, if you want to finance a home, car, furniture or electronics together, the lender will check each of your credit reports. Renting a home can also be difficult if both of you will be on the lease.
- If you open a joint credit obligation, both parties will be equally responsible for payment, which means you can be on the hook for an unpaid balance even if you didn't use the funds or get a divorce.
- The cost of credit products might come with prohibitively expensive interest and fees.
- If your spouse's credit report shows such red flags as recent and prolific collection activity, a bankruptcy, or a foreclosure, the two of you may be ineligible for any kind of joint credit product or home lease.
- In many states, a spouse's poor credit can drive up insurance rates and affect your household finances.
As for your spouse's debt incurred before marriage, you won't be held liable, but you can be responsible for those that your partner racks up after tying the knot if you live in a state where community property laws apply (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). If you do, both of you will be equally responsible for debts incurred during the course of the marriage. In other states "common law" rules apply, which means you only have to pay your own and jointly owned debts. Alaska is an exception, as it allows residents to opt in to community property rules.
For these reasons, it's wise to learn about your partner's credit issues early in the relationship and try to identify the root of the problem. A credit report peppered with late payments and excess credit card debt could indicate a lack of organization or habitual overspending. Or it might have been due to an unavoidable emergency that's unlikely to reoccur. Whatever the case, you should be fully aware of the past and present so you can plan for the future.
Can You Buy a House if Your Spouse Has Bad Credit?
Like many couples, you may hope to purchase a home soon after your nuptials. If your credit is good and your income is sufficient to qualify for a mortgage, you can buy the property on your own and bypass the problems associated with a spouse who has bad credit.
On the other hand, if you need your spouse's income to qualify for the loan, or don't want to be the only one carrying the debt burden, his or her credit will be a factor. Unfortunately, your great credit won't neutralize the other applicant's subpar credit scores. That's because lenders don't average your two credit scores together to get a midpoint, but will focus on the lower credit score.
Mortgage lenders also check debt-to-income ratio (DTI), which is the total of your monthly debt obligations compared with your monthly earnings. If too much of your spouse's income is dedicated to paying off debt, the interest rate that's attached to the loan may be sky high—or the loan might be denied altogether.
Thankfully there are options to offset these dilemmas:
- Shop around for a lender. Credit unions tend to be flexible with members who have troubled credit histories. Online and community banks are also worth exploring.
- Look into first-time homebuyer programs. FHA loans andFannie Mae's HomeReady Mortgage may accept borrowers with low credit scores.
- Offer a large down payment. Putting extra money down will reduce the lender's risk, so that can compensate for less than desirable credit scores.
- Start high, then go low. If the only mortgage you can get has a high interest rate, you can accept it now and then refinance when your spouse's credit improves.
- Ask someone else to cosign. If a relative with great credit is willing to be on the title, this can be your way in. Depending on the circumstances, it's possible to have that person's name removed from the mortgage after you've established a lengthy and positive relationship with the lender.
What to Do if Your Spouse Has a Poor Credit Score
The good news is that credit scores aren't set in stone. They change along with the information that appears on your credit reports. If your spouse's numbers are low today, there are plenty of ways to increase them by taking action. As a couple, make a vow to:
- Pay bills by the due date. While late payments will remain on a credit report for seven years, you can lower their negative scoring impact by adding plenty of timely payments.
- Reduce credit card balances. Review the amount your spouse owes in credit card debt and compare it with the credit limits. If the balances are greater than 30% of the credit limit, this elevated credit utilization can start to hurt scores. Concentrate on repaying these debts; you might consider either the debt avalanche or debt snowball methods.
- Open new accounts prudently. Applying for credit products adds hard inquiries to your report, which can lower scores slightly. Hard inquiries on your credit scores aren't likely to make a difference on their own, but many new accounts and credit applications can cause your scores to drop and future applications to be denied.
- Maintain older accounts. Closing unused accounts can make credit balances a greater percentage of available limits. Consider keeping your accounts active as this can help you maintain a lengthy credit history and help keep down your credit utilization.
- Check credit reports and scores regularly. By knowing what is listed, you can spot and dispute fraudulent activity, which can harm credit reports and scores. Additionally, you can monitor your scoring progress, which can keep you both on the right track.
Another method to add credit scoring points is by enrolling in Experian Boost™† . This free program enables you and your spouse to add positive payment history from utility, cellphone and streaming bills to your credit reports. It's a simple and effective way to bump up FICO® scores, especially when they're on the low end of the spectrum. By working as a team, you and your spouse can drive up credit scores and create a future full of open opportunities for the both of you.