Monday, February 11, 2013

Special Valentine's day: Common Myths about Marriage and Credit

Common Myths about Marriage and Credit

FICO Score
While you might not want to discuss FICO Scores with your fiancée or spouse over a candle light dinner on Valentine's Day, understanding how marriage impacts your credit will strengthen your relationship in the long run. Read Common Myths about Marriage and Credit to learn the facts about what happens to your FICO® Score after you say "I do."
Are these fact or fiction?
-Your credit report is merged with your spouse's when you get married.
-Your spouse's credit will affect your credit rating.
-You are required to apply for new credit as a couple once you are married.
-If you divorce, you are no longer responsible for any joint credit obligations.

We’ve all heard the adage that “opposites attract” and most of us know some couples who fit this description.

The good news: there are many happy and functional couples who fall into this category, but it can take extra effort to maintain a successful relationship when there are serious differences in attitudes and behaviors between two people.  This is especially true when it comes to managing finances and credit, and doubly so when you enter the legally binding contract of marriage   In fact, financial incompatibility is frequently identified as a top reason for divorce by relationship experts.

Valentine’s Day is traditionally a time for celebrating love and romance through gifts of flowers or chocolate.  While the offer to obtain and discuss each other’s FICO Score over candle light doesn’t seem very romantic, it does surface an opportunity to highlight some commonly misunderstood information regarding marriage and credit. Whether you’re thinking of proposing this Valentine’s Day, or you’ve already taken the plunge, it’s important to understand exactly how marriage will impact your credit, both in the short term and long term.

Here are some of the most common myths about marriage and credit:

Your credit report is merged with your spouse’s when you get married
This is not true.  A person’s credit report is stored, updated and accessed by lenders on an individual basis. Any credit you have in your name only (whether opened before or after your marriage) and the associated credit performance will only show up on your credit report.  Joint credit, when you apply with your spouse, will be reported and updated on both of your credit reports.

Your spouse’s bad credit will hurt your credit rating
Many people incorrectly assume that negative information on your spouse’s credit report, such as a previous bankruptcy, will affect your credit and FICO score.  This is a fallacy.  Negative credit information should only surface on a person’s credit report when s/he is legally responsible for the debt.

Important to understand, if you are a co-applicant or co-signer on a loan with your spouse (or anyone else for that matter) and there are missed payments on the credit obligation, that information will surface on your credit report when reported by the lender and will likely have a negative impact on your FICO Score.  The same can hold true when placing a spouse as an authorized user on a credit card – if your spouse forgets to make a payment, you’ll both feel an impact on your individual FICO Scores

Be sure to read the fine print on the application form to understand if you are legally responsible for the loan.

Lenders require you to apply for new credit as a couple once you are married
I have never heard of a lender requiring this.  Lenders will accept your individual application for credit even when you are married.

There are situations where the application for a loan (such as for a mortgage) can be viewed as more robust if both spouses are included – especially when considering household income vs a single applicant’s income used to calculate a debt to income ratio.  Note, however, that this requires both parties to be on the application and that means a credit report and score will be accessed on both applicants and you will both be legally contracted for the loan if approved.

If you divorce, you are no longer responsible for joint credit accounts
Unfortunately, this is all too often assumed to be true.  If you’ve entered into a joint credit agreement, you’re both on the hook. A divorce 

does not dissolve a joint credit contract, and all parties remain responsible to make payments as agreed or face the consequences of having negative information being reported to their credit bureau report.  The most prudent advice when it comes to divorce is for all joint credit obligations to be paid in full and officially closed as part of the divorce process.

I interact with a lot of people regarding their credit and many half-jokingly wished they had known their spouse’s FICO score before saying “I do.”  While that may not be practical, open communication regarding finances, credit and wealth management is an important factor in building a strong relationship and should take place before and after heading down the aisle.

Tom Quinn is the Vice President of Business Development for myFICO, and has over 20 years of experience working with consumers, regulators and lenders and regarding credit related questions and initiatives. 



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