I previously wrote about deciding whether to combine accounts when you begin your life as a couple. The decision can be a bit thorny under the best circumstances; however, many couples have to deal with a potentially divisive complication: what if your spouse has bad credit?
Don't let your spouse's poor credit history bring you both down. Taking steps to contain your partner's credit blunders is essential to keep your financial options open as a couple, so at least one of you has the ability to secure attractive credit offers, including credit cards, car loans and even mortgages. The last thing you want is for this news to surface while you and your partner are house-hunting, at which point it may be too late to make meaningful improvements.
The following steps can help you get your spouse's credit back on track while ensuring that your own credit stays clean.
1. Identify the source of the problem
It's best to have a candid discussion right from the start about your saving and spending habits and history, and you've probably already had a chance to observe your prospective partner in action. If you or your partner has credit problems now or has had them in the past, it's also important to get that information on the table early on. But if your spouse has had credit problems and you still don't know what went wrong, it's time to find out. Did your spouse have one large financial mishap, such as starting a business that went bust, or did he or she habitually fail to pay bills on time? If there's an avoidable issue, such as forgetting about bills, you can address it when you're figuring out how the two of you will handle money tasks.
If the problem stems from an inability to pay because the balance is too large, you'll need to come up with a plan to pay down the debt and decide if your spouse will go it alone or if you will help.
2. Go through the credit report
To start, you and your spouse should obtain your respective credit reports (it's a good time to check up on yours, too, even if you have a good track record). There are two major rating agencies that provide credit reports in Canada: Equifax and TransUnion. Both agencies charge a fee for online access to your credit report, with or without your credit score, along with tips for improving your score. You can get a free copy of your report if you request it by mail.Go over each report together and look for glaring issues such as unrecognized accounts. Fraudulent accounts opened in your name tarnish your credit record, and it's up to you to deal with them. If you discover any accounts you or your spouse didn't open, you will need to contest them.
When looking at the credit report, consider the factors that determine credit scores. The largest ones are payment history, including missed and late payments, and how much of your available credit you are using. The Financial Consumer Agency of Canada offers a free document called Understanding Your Credit Report and Credit Score, which can be a great source of help.
3. Help pay down balances
If your spouse is still having trouble paying his or her balances, it usually makes sense to help if you have the money to do so, assuming your spouse is also taking steps to rein in his or her credit problem.
Weigh the best uses for any extra cash you have between paying off the debt and investing. If you don't have an emergency fund, it's a good idea to set one up first so you don't fall into more debt in case one of you loses your job or you have an unexpected expense such as a home repair. Once you have an emergency fund, consider putting money toward your spouse's unpaid balances that are racking up charges, starting with the account with the highest interest rate.
Paying off high-interest credit card debt offers a guaranteed return--sometimes saving 10% or more in interest--that's hard to beat. It's also important to develop a plan to pay down lower-interest debt, such as student loans, but chiselling away at lower-interest balances should happen alongside saving for retirement. High-interest credit card balances and other past-due amounts, on the other hand, are essential to pay off as quickly as possible.
4. Keep your accounts separate, for now
Once you start sharing your finances, each of you will still have your own credit report and score, but shared accounts will appear on both of your reports, regardless of which one of you is responsible for payments. Accounts that stay in one name will not affect the other partner's credit.
Until your spouse's credit improves, it's usually wise to keep your accounts separate. If you apply for a new account together, your spouse's bad credit can preclude you from getting the best rates or even being approved. His or her credit record will be scrutinized, and you may receive offers only for cards with low credit minimums, few rewards and high annual interest rates and fees. And if you add yourself to an account that your spouse has trouble paying, it will also tarnish your record.
If your spouse's credit history is preventing you from getting attractive rates on a car loan or a mortgage, you may be better off taking him or her off the application completely. This strategy only works well if you have enough income on your own to qualify because you won't be able to list your spouse's income if he or she isn't on the application. You might be limited to a smaller line of credit if you take this route, so the best option if you can put off buying a house or car is to work on getting your spouse's credit in shape first.
5. Add your spouse as an authorized user
Assuming you're comfortable with your spouse's spending habits and will be able to keep up with the bills, adding your spouse to one of your credit cards as an authorized user is a good way to improve his or her credit score. In exchange, you agree to the issuer that you are responsible for all of your spouse's charges. Adding your spouse as an authorized user will not hurt your credit score as long as you make payments on time and keep the amount of total credit you are using--on this card and other cards--below 30% of your total available credit.
Becoming an authorized user will help your spouse's credit in two ways: First, it will establish a record of on-time payments (assuming you pay the card on time); second, it will decrease the proportion of his or her credit in use (assuming your spouse charges less to his or her existing cards). These two factors make up the bulk of the credit score and are the easiest to improve. However, Fair Isaac & Co. (FICO), the company that computes credit scores, no longer weights authorized user accounts as heavily as an individual's own accounts, so it's essential to get your spouse's individual accounts in order, as well.
Raising your spouse's credit score is a multiyear process. You'll see improvement after a few years from establishing on-time payments and reducing the credit-utilization ratio. Credit blunders, such as late payments and collections, drop off credit records after six or seven years, depending on the province, but their impact on the score declines even before that, assuming there is newer, positive credit activity.
