Your credit score won't be affected by simply marrying someone with good or bad credit, but there are scenarios where their credit behavior can affect your credit score and your ability to get a mortgage.
Tying the knot often means tying your finances to your spouse's. And while there isn't a direct link between your spouse's credit score and your credit score -- you won't have bad credit just because your spouse does -- there are some cases where bad credit management by one spouse can negatively affect the credit score of the other spouse.
Below, I'll explain the ins and outs of credit scores, ways in which your spouse's credit can affect yours, and how your spouse's credit can affect your personal finances in ways beyond just your credit score.
Intro to credit scores
The way to think about credit scores is that they are a "grade" based on the information in your credit report. Credit scoring companies look at what's on your credit report, and based on that information -- your payment history, your existing balances, credit mix, and so on -- they calculate a numerical value. A FICO® Score can range from 300 to 850, with higher numbers being better.
Here's a quick guide to the five parts of your credit score:
- Payment history (35% of your score) -- Do you always pay your bills on time? It's really that simple. Your most recent payment history will have more impact than old payment history. For example, a 30-day late payment that happened five years ago won't matter much at all, but a 30-day late payment three months ago can be devastating to your credit.
- Credit utilization (30%) -- This is based on how much credit you've used as a percentage of how much credit you could use. If you have a $1,000 balance on a $5,000 credit card, and it's your only financial account, then your credit utilization is 20%, which is just fine. Using more than 30% of your credit limits is a warning sign to lenders, and can harm your credit score.
- Length of credit history (15%) -- Someone who has 15 years of perfect credit history is probably a better risk than someone who has just six months of perfect credit history.
- New credit (10%) -- Applying for a large number of loans or credit accounts in a short period of time can hurt your credit score because it's something people often do when they are having financial problems that haven't yet shown up in their credit reports.
- Types of credit (10%) -- Having a mix of revolving accounts (credit cards) and installment debt (mortgages, car loans, personal loans, etc.) is better than having just one type of account, but this factor isn't that important, and you shouldn't borrow money just to get a different type of account on your credit report.
Credit scores are ultimately designed to measure the risk that you will fail to make payments on time or at all, and it's something credit scores do really well. All else equal, someone with a 750 credit score is much less likely to default on a loan than someone with a 600 credit score.
Does your spouse affect your credit score?
Your spouse's ability to manage his or her credit can affect your credit score, but only if you have shared accounts in one way or another. For example, many couples have credit cards, car loans, or mortgages on which they are joint borrowers, meaning they are both responsible for making payments.
If you have a joint credit account with your spouse, and he or she fails to make on-time payments, the late payments will appear on both of your credit reports. Naturally, these late payments would also harm both of your credit scores.
Even if you aren't late on a bill, a joint account can still hurt your credit score if it isn't optimally managed. For example, you and your spouse might be jointly responsible for a credit card account with a $5,000 limit. If from month to month you carry a balance of $3,000 on it, you'll have used 60% of available credit on the account, which negatively affects your credit score. Ideally, balances shouldn't be higher than 30% of the credit limit at any point in time.
Finally, your spouse's credit can also affect your credit if you are an authorized user on their credit cards. When you are an authorized user on someone else's credit account, all of the history associated with that account is imported into your credit report. If they failed to make on-time payments in the past, or keep high balances on that account, it could negatively affect your credit report and score.
Luckily, you can easily remove a spouse as an authorized user on a credit card account. We've also seen data points that suggest the authorized user can request a deletion of the record from their credit reports with relatively high success. Unfortunately, this "trick" does not apply to accounts where you are joint borrowers, however. A joint borrower is legally responsible for paying on any balances whereas an authorized user has no such responsibility.
How a spouse's bad credit can affect you besides credit scores
Even if your spouse's credit behavior doesn't directly affect your credit score because you don't have shared accounts, it can affect you in other ways, particularly when it comes to borrowing large amounts of money to buy homes or cars.
Your spouse's credit matters a lot when it comes time to buy a home. That's because many married couples buy a home based on what they can afford with their combined incomes. However, if one person has bad credit, applying together to get the benefit of both incomes may not outweigh the downside of having the lender look at both spouses' credit scores.
Here's how this works: Lenders use what's known as the "lower middle score" rule for large loans like mortgages. A lender looks at all three credit scores of each applicant, and uses the lower of the middle scores to determine how to price the loan, and whether to go through with the loan in the first place.
It sounds more complicated than it is. Here's an example to set it all straight.
Let's suppose Sally and Frank are married and want to buy a home together, and their credit scores are as follows:
We first need to find the middle score for each applicant. Sally has excellent credit scores, with a middle score of 801. Frank's middle score is 689. Lenders will use the lower of these two middle scores to determine the rate and terms for the mortgage. In this case, Frank's middle score of 689 would be the one they use.
This can be a big problem for some couples. On one hand, applying together allows Sally and Frank to leverage their combined incomes on an application. Two incomes is almost always better than one, so being able to put down their combined income on an application should theoretically allow them to borrow more money.
On the other hand, because Sally and Frank are applying together, Frank's bad credit will weigh heavily on their application. In this scenario, the best possible move -- if Sally's income is high enough to qualify on her own -- is to have Sally apply individually and leave Frank off the loan.
You can see where this might be a problem. Many couples have to carefully weigh whether it makes sense to apply jointly, and thus use both of their incomes on an application, or have only one person apply for the mortgage because of one spouse's bad credit.
Assuming Sally and Frank each earn $75,000 per year, it all boils down to whether a $75,000 income and an 801 FICO® Score is better than $150,000 in combined income and a 689 credit score. Some banks or mortgage programs may prefer the higher income and lower score, whereas other banks and mortgage programs may favor the lower income applicant with a higher credit score.
How to help a spouse improve or build credit
Helping a spouse improve their credit score is a sensitive topic that can blur the lines between relationship advice and financial advice. I can't help you with how to talk to your spouse about this sensitive subject, but I can show you how to improve a credit score when you're ready.
Following these six steps one-by-one will put your spouse on a well-worn path to a higher credit score:
- Look for any mistakes -- Credit scoring companies collect billions of pieces of information each year on hundreds of millions of people. Occasionally, they make a mistake, often because someone shares a name or address with someone else. Grab your spouse and visit the government-sponsored website, AnnualCreditReport.com, to pull their credit reports and look for any errors. If you find an account or record that doesn't look right, you can dispute its accuracy by filling out an online form. If the record can't be proven correct, it will be deleted, resulting in a nearly instant credit score improvement.
- Pay down balances -- Even people who pay on time all the time can have bad credit scores if they use too much of their available credit. For best results, never have a balance above 30% of your credit limit. On a credit card with a $5,000 limit, that means never having more than $1,500 of balances due on the card.
- Create a "good" account -- Your spouse needs to have at least one "good" account on their credit report to keep open for the long haul. If they already have an open no-annual-fee credit card, then use that. If not, have them sign up for one. If their credit is really bad, they may have to open a secured credit card account.
- Automate credit building -- Once your spouse has a credit account open, you just need to make sure it stays open and in good standing. The best way to do this is to set up the "good" credit card to automatically pay for one monthly bill and do nothing else. For example, you might use the credit card to pay for a recurring Netflix subscription, and then log in each month to pay off the small balance on the credit card. Doing this will keep the account open, and it will help ensure that the card never has a balance high enough to harm their credit score.
- Don't close old accounts -- Whatever you do, don't close an old account. Closing an old account won't make the bad history go away, but it will hurt your spouse's length of credit history. Put the credit cards in a difficult to access place if you must, but don't close them. Use them a couple times a year to make sure they stay open.
- Wait -- Building and rebuilding credit is not an overnight process. Late payments and other derogatory marks become less important with time, and they completely fall off a credit report in seven years, but the biggest gains happen relatively quickly as you'll see a bigger improvement from a bad mark aging from one month old to one year old than a bad mark aging from five years old to six years old.
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