Six Secrets About Joint Credit
Want to be legally joined in life? In most cases, you need a marriage license and a ceremony. If you're lucky, you also have witnesses, music, a cake, some flowers, a few gifts and a nice meal afterward.
Want to be legally joined in debt? Just sign on the dotted line. No dresses, no tuxes and not so much as a cupcake for your trouble.
Before you enter into the world of joint credit, it pays to know a little more about what goes on behind the scenes, from how potential lenders view the debt to who is ultimately responsible for paying it -- and how it impacts your credit score.
As with marriage, a lot depends on who you choose as a partner.
"The most obvious thing is to really be careful about who you open a joint account with," says Anthony Sprauve, spokesman for FICO, the company that pioneered credit scoring.
"If the other person disappears or flakes, you're going to be responsible for that debt," he says.
So before you fill out that next credit application, here are six things you should know about joint credit:
No. 1: There's more than one type of shared credit.
People throw around the term "joint credit," but they don't always understand what it means.
"I don't think people understand the extent of their liability," says John Ulzheimer, president of consumer education for SmartCredit.com. "If you're a co-signer or co-borrower, you're liable."
There are three different kinds of shared credit (and sometimes both consumers and lenders will use slightly different terms.) They are:
Joint credit: You are a full partner on the account. You filled out or at least signed a credit application for a card or loan. The credit account or loan has your name on it, and the money or credit is yours to use.
What you might not know: You are responsible for 100% (not 50%) of the bill.
Authorized user: You can use the credit, but you have little or no responsibility for repaying it. You didn't fill out or sign an application. The credit account belongs to someone else, and that person receives the bills and has given you charging privileges.
What you might not know: If the account holder doesn't pay, some lenders will at least try to collect from you for the purchases that you made, says Chi Chi Wu, staff attorney with the National Consumer Law Center.
Co-signer: You are signing to be responsible for the entire bill, but the loan or credit account is in someone else's name and you can't use it. That other party will also be receiving the bills, and you may or may not have access to account information.
What you may not know: If the borrower defaults, pays late or misses a payment now and then, that bad behavior can be included in your credit history and sink your credit score.
Another fun surprise: Parents co-signing for an account for someone less than 21 years old "may be liable on the account after the child turns 21," says Wu. A smarter strategy: Make a child an authorized user on a parent's account, she says.
What you should know before you sign: Lenders include co-signed debt with your total obligations when you apply for credit in your own name. So you may be scuttling your own ability to get credit -- even if the co-signed account remains in good standing.
No. 2: Joint debt flies solo on your credit report.
There's no such thing as a joint credit history.
When you marry, you still have a separate credit history, but any debts you've applied for jointly will be included in your file.
What you may not know: The entire debt is listed in your history as yours. To play fair, your spouse gets the same treatment.
Ditto your credit score. "There's no such thing as joint credit score," says Sprauve. Joint accounts "will impact each of [the individuals'] credit scores."
That's great news if it's an account for a card with a $10,000 limit neither of your ever uses. That will boost both your scores. Not so great times two if one of you is maxing out the card every month or missing payments. That will drag them both down.
Also worth noting: it doesn't matter who makes the charges or who pays the bills, whatever good or bad behavior is associated with the account, it goes on your credit report and impacts your credit score.
No. 3: Losing a partner can impact joint credit.
Studies have shown that the departure of a spouse, whether by divorce or death, is one of life's most-stressful experiences.
The last thing you want to think about at a time like that is your credit.
If the loss of a marriage or spouse also results in a loss of income, you'll have to think about it, though. A lower income could lower your credit limits or eliminate your credit entirely, says Ulzheimer.
To avoid it, keep some of your individual accounts solo throughout your relationship, he says.
If you want to keep a joint bank account, great, Ulzheimer says. "But when it comes to buying cars and especially credit cards, keep it separate."
No. 4: Divorce courts can't reassign joint debts.
Two spouses go into divorce count with a pile of joint credit accounts. The wife agrees to take over paying accounts A, B and C. The husband steps us to claim responsibility for accounts D, E and F. The judge signs off, and everyone splits happily ever after?
Not exactly, says Norm Magnuson, vice president of public affairs for the Consumer Data Industry Association, a trade association for credit reporting companies.
No matter what happens in divorce court, both spouses are still 100% responsible for every joint debt, he says. A credit card agreement is between the borrower and the lender, and divorce courts don't have the authority to alter that arrangement, says Magnuson.
"Whatever agreement you make with your soon-to-be ex doesn't change your liabilities," says Ulzheimer. "Lenders still consider you both to be equally liable."
Many divorce attorneys recommend you pay off and close joint debts before you get your final decree, he says. Some lenders may allow the two of you to remove one spouse's name from an account. Or, they may require that you close the existing account and reapply solo.
Get proof in writing of all payoffs, account changes and account closures.
No. 5: With no salary, you may have to rely on joint credit.
The Federal Reserve has told credit card issuers to rely on individual income, not household income, when granting credit.
Meaning, if you apply for an individual credit card, it is your salary alone that would determine if you could get an account in your name only. (However, if you live in a community property state, where all income is deemed the property of the couple, this doesn't apply.)
The reasoning: If you don't control the flow of money, you should not be granted credit based on access to that money, says Wu. "What happens if there's a default? Then the issuer doesn't have access to the other spouse's income."
But the Fed also gave issuers and consumers some wiggle room, says Wu. It allows issuers to use the word "income" rather than "household income" or "individual income" -- on applications, leaving the finer points up to interpretation from the lender and borrower, she says.
No. 6: With joint credit: no secrets.
If a joint credit account is healthy (low balances, paid off in full each month, high credit line), it helps all the parties involved. But if it's not healthy (late payments, rolling balances, maxed out credit line), everybody's credit suffers.
So it's even more important to keep up with statements. "Make sure you've got your receipts and everything matches," says Magnuson.
Have a designated spot in the home for receipts, he recommends. And have a person or at least a process that you use to deal with keeping up with and paying bills, he says.
"My wife and I split the bills," Magnuson says.
One key to keeping up: no secrets.
If two names are on the account and two parties are responsible for those bills, then "both parties should be aware of what's going on with that account," he says.