This section discusses three financial and three relationship issues that are important to success in finances and in love. From a financial perspective, knowledge of the types of credit, joint vs. separate accounts, and credit scores will help couples build credit together. In turn, financial missteps can be avoided by understanding how to handle the common relationship themes of communication, children and child support, and extended family.
Once couples are ready to invest in their life together, obtaining mainstream credit is important and often necessary. Using credit to borrow funds may be imperative because it can serve as the bridge that allows couples to purchase desired assets. Although their resources are often limited, many low-income families are already saving money and using credit. However, about one fifth of low-income families are unbanked, that is they do not have a connection to a formal financial institution.4 Therefore, their savings may grow more slowly or lose value in the face of inflation and can result in more obstacles to using credit to become an owner or investor.5 Making use of mainstream financial institutions is important because there is some evidence that the having to withdraw money from the bank or not having money easily accessible in one’s wallet can reduce obstacles to saving.6
There are several reasons for couples to use credit to help attain joint financial goals. Some constructive suggestions for using credit are explained below. In addition to understanding the ways that credit can be helpful, it is important to understand the drawbacks. Because of the variety of credit products available, this is not a simple matter.
Couples Quiz: What’s Your Financial Compatibility?
Couples frequently avoid talking about money before marriage. That is unfortunate, because sharing perspectives about money can help couples resolve the financial issues that complicate many marriages. The following financial compatibility quiz can help couples planning to tie the knot discuss financial issues. Answer “true” or “false” to each of the following statements.
We are aware of and comfortable with each other’s money personalities.
Some of us grew up in families where parents watched every dime; in other families money flowed easily. Some people measure self worth in terms of money and possessions. Some people are natural spenders; others are savers. Understanding your future spouse’s background and values can help avoid problems down the road.
- We have discussed our short- and long-term financial goals.
Setting financial goals helps you develop priorities and define the type of lifestyle you will lead. Break down your goals into manageable pieces. If you want to buy a house in five years, for example, determine how much you need to save monthly to meet the down payment and to meet that goal.
My spouse and I are well-versed in personal finance.
Parents and schools rarely provide training in personal finance. Work together to develop your financial knowledge and build confidence by taking a course, meeting with a financial planner, or purchasing a reputable book.
- My spouse and I have discussed a plan to structure our finances.
Will you pool all your resources into joint accounts, maintain separate accounts, or devise some combination of the two? There is no right or wrong answer; the key is to come up with a plan that works for you both.
- We have planned for the impact that marriage will have on our taxes.
The marriage “penalty” means that you and your spouse together are likely to pay more taxes than you each did as singles. Check with a CPA or tax professional to ensure that you are prepared to meet your tax responsibilities and aware of any tax law changes in this area.
- We have decided how to divide the money management tasks.
Decide who will be responsible for balancing the checkbook, filing taxes, and tracking investments. Better yet, set up a plan for rotating these and other financial tasks
- We understand the importance of establishing a realistic budget.
Couples without a budget tend to live and spend from day-to-day. A well thought out budget helps you save regularly, utilize income wisely, and avoid misunderstandings about how money is spent.
- I know my future spouse’s investment personality and risk tolerance.
Investing styles are different, ranging from conservative to risky. Take the time to arrive at a level of risk where you both feel comfortable.
- I know how much debt my spouse is bringing into our relationship.
Couples must enter marriage knowing how much debt they each carry and how it will be paid.
- We have made a commitment to discuss money regularly.
Differences are inevitable. How you handle them is important to your marriage.
SOURCE: http://www.360financialliteracy.org/Life+Stages/Couples+and+Marriage/ Copyright 2009 American Institute of Chartered Public Accountants
Relationship Attachment Model
This model of relationships, developed by author John Van Epp, Ph.D., provides an overview of major stages individuals go through to get to know and bond with each other. At each stage of the relationship, people can gather information about their potential partners’ relationships with money and credit as well as their own. Thinking about why and how partners use credit can help with making healthy choices for finances and relationships.
- Knowledge: In this stage, people gather information about partner’s family background, the choices they make, their goals, and their past relationships.
Think about partners’ past financial choices, how finances were dealt with in past relationships, financial values, what are the financial implications of past behavior (debt, credit, and earnings).
- Trust: In this stage, people evaluate the mental picture they have developed about this person and assess whether the picture is accurate. Is the potential partner an IRS hazard, that is, are they what the model calls Idealized, a Rescuer, or a Substitution for someone else?
Talk openly about financial habits and current financial situation, observe financial practices and decision-making about spending, saving and credit. Does partner have credit cards that s/he can’t pay off?
- Reliance: In this stage, people start to test the trust they have developed with the person they are getting to know and whether they are able to meet needs and are dependable. Does trust go up or down as reliance increases?
Commitment: In this stage, people think about the positive and not so positive reasons to commit to a partner.
Have partners been open about what debt they have accrued, why they have debt, and how they will pay it off? What does it mean for you or your partner to take on each other’s debt, financial spending and savings habits? Are we financially compatible?
- Sexual Touch: In this stage, romantic partners consider the extent of physical and sexual touch based on the extent that they know the trustworthiness and reliability of a partner.
Although obtaining credit can be helpful to reaching a couple’s goals, it can be risky and requires taking on debt. It is important for couples to distinguish between good and bad debt to understand when taking out a loan will actually help increase their assets in the long run. Good debt is an investment, like student loans, retirement savings, or starting a business, and it creates value. Whereas bad debt has no potential to increase in value, except for the creditor. When faced with bad debt, it is vital to reduce and eventually alleviate it.
Types of Credit
There are different types of credit to meet different short-term and long-term needs, such as credit cards and loans. Credit cards allow cardholders to make purchases on credit and then they receive a monthly bill, which they can choose to pay in full each month or pay less, allowing a revolving credit to form. This means that credit card companies will allow individuals to carry balances, on which they charge interest. Accumulation of credit card debt is especially risky for economically vulnerable families.7
Loans include mortgages, home equity loans, and student loans that allow couples to make immediate investments in assets, such as a home or investments in education that can build earnings potential. Two of the most popular mortgage loans are fixed-rate and adjustable-rate mortgages (ARM). A fixed-rate mortgage, which has traditionally been the industry standard, is a loan for a fixed number of years at an unchangeable interest rate. ARMs change based on the fluctuations of the interest rate.8 There are three major categories of education loans: student loans, parent loans, and private student loans.
Joint versus Separate Accounts
The different forms of savings or credit account ownership are individual, authorized user, cosigner, and joint types. Spouses most often have joint accounts, allowing two named borrowers on an account. In this case, the credit history of both borrowers is used to determine eligibility and both are responsible for the debt accrued. Figure 3 addresses some of the issues to consider when deciding whether couples join accounts and credit or keep them separate.
Because credit history is important to obtaining credit, knowledge of each partners’ credit scores is critical. A FICO score (named for the Fair Isaac Corporation that created it) is a mainstream credit score that determines the interest rate on credit cards, car loans, home mortgages, as well as one’s ability to obtain a cell phone or get an application for a rental apartment accepted. Low credit scores translate into paying higher interest rates on credit cards and loans.
FICO scores are determined by five factors:
- record of paying bills on time,
- total balance on credit cards and other loans compared to total credit limit,
- length of credit history,
- new accounts and recent applications for credit; and
- and mix of credit cards and loans.
Joint versus Separate: Checking Accounts, Credit, and Mortgages—Things to Consider
Checking accounts: Many couples find that the best solution is to have a joint account in addition to each keeping an individual account. When two people have access to the same account, keeping track becomes more difficult and requires more communication between the parties involved. Therefore, it is very important to keep a master account register up to date, recording all deposits, checks, and withdrawals. Couples do not want to bounce checks because one partner wrote one or made a withdrawal and did not record it. Joint checking can not only give couples more of a sense of “being in this together” but also makes keeping a joint record of these expenses much simpler if partners communicate well.
However, each partner may still prefer to have access to some money to call his/her own, and for which partners are not accountable. In some cases, this may be simply a cash allowance for which you may not need a separate checking account. In other cases, particularly if both partners are working, one partner may continue to handle some of these expenses separately. If either partner wants to establish credit individually, s/he may decide to maintain separate checking accounts at least until credit has been established.
Checking and credit: Separate checking accounts can be used as a lever to help obtain credit. If either partner has poor credit, couples may wish to keep funds separate to circumvent attachment of joint funds to pay one partner’s bad debt. If money is pooled in a joint account, the entire amount is legally available to either partner. A creditor is then justified in attaching those funds to pay a debt that only one partner may have incurred. If a marriage is foundering or if there are severe disagreements about how to manage money, partners may want to maintain separate accounts. With joint accounts, either party can “clean out” the other simply by withdrawing all the funds in the account.
In terms of access to credit, if one partner has had credit problems, s/he can prevent a couple from getting credit after they are married. Finally, seriously consider keeping credit separate, at least until a spouse’s credit record improves. Credit does not have to be combined after marriage. For instance, one partner can apply for credit instead of applying for joint credit after marriage. Separate “associate” cards can be issued for a spouse to use. Even if one spouse has bad credit, the other spouse’s credit rating will remain unaffected but it is possible that the spouse with good credit will have a harder time qualifying for loans (e.g., a mortgage) alone than if a spouse's income could also be counted.
Liability for debt: While the general rule is that spouses are not responsible for each other's debts, there are exceptions. Many states will hold both spouses responsible for a debt incurred by one spouse if the debt constituted a family expense (e.g., child care or groceries). In addition, community property states will hold one spouse responsible for the other's debts because both spouses have equal rights to each other's income. Also, spouses are both responsible for any debt that is in both names (e.g., mortgage, home equity loan, credit card).
SOURCE: 360 Degrees of Financial Literacy, American Institute of Certified Public Accountants.
While some may believe not having a FICO score can help avoid being seen as a bad credit risk, it is actually necessary to have one. Without a score, it is difficult to get a loan because without a credit history a person is an unknown to companies and banks. To start building a credit history, companies will allow individuals to obtain cards based on income. It is important to note that interest rates may be higher for unknowns.
Building Credit Together
Because couples share their personal and financial lives, they must take steps toward building credit together. Before doing so, it is necessary to determine how much debt and the sources of debt that a couple has accumulated. Experts urge people to write down everything they owe, listing debts with the highest interest rates first. Then, a couple can look at their list and start saving money by switching to credit or charge cards with lower interest rates.
When a couple gets married, they share debt from credit cards and loans as well as each other’s credit ratings. Marrying someone with good credit allows an individual to gain access to this good credit. Unfortunately, the opposite is true as well. Marrying someone with bad credit has negative implications, subjecting someone to higher interest rates or being denied credit because of the risk a partner may pose.9
To illustrate how different couples approach building their credit together, Figure 4 presents the stories of two hypothetical couples that face similar challenges as they decide to take the next step in their relationships. Each couple handles their relationships and finances in diverse ways that lead to different outcomes. The first story illustrates how a couple’s relationships with each other and with credit became more attached over time. This couple did not start off with the same approach to finances, but developed strategies to build healthy communication and spending habits. The second story illustrates a couple who remained stuck in a pattern of unhealthy communication and spending that augmented over time. Instead of becoming more attached, their relationship with each other and their credit histories both suffered.
As illustrated in Figure 4, healthy communication between two partners is essential to the success of a marriage. Avoidance of certain topics, like finances or credit history, may indicate hidden issues and concerns about acceptance. Money can be a difficult topic, especially talking about different cultural or socioeconomic backgrounds, the meaning of money and spending styles. Without addressing the topic of money, the relationship and finances may suffer.10 Conflict resolution, whether with a specific partner or a creditor or both, can be a key to improving financial and relationship situations.
When parents are divorced or never married, child support is the obligation for a periodic payment made directly or indirectly by a non-custodial parent to a custodial parent, caregiver, or guardian. Non-custodial fathers who have never been married to the mother of their child are obligated to pay child support as long as paternity for that child is established. If child support payments are not made, non-custodial parents accrue arrears and can face penalties depending on their state of residence. Paying child support, and providing for children that are not shared with a current partner, can add a layer of complexity when parents are establishing new marital and financial relationships.
Two Hypothetical Couples’ Approaches to Financial and Relationship Decision-Making
“Andrew and Erica”
It was instantly clear that Erica and Andrew had different styles of spending and different views on the meaning of money. To Erica, money caused anxiety. Growing up, money was tight and her parents were compulsive savers. To her, money was security and never came easy. Andrew came from a family that was not as concerned with money, and never worried financially about their future. He viewed money as enjoyment and status and was thus inclined to spend more than his wife. As they recognized their differences, they decided that the best way to avoid misunderstandings was to learn about each other’s histories and habits. The couple wanted to buy a car but Andrew’s credit history wasn’t perfect because he had a history of not paying his credit card bills on time. Once Andrew shared his history with Erica, they decided together to merge some of their finances but keep a checking account and one credit card in each of their names. So when they applied for a car loan, they decided to use her name to apply, avoiding high rates. They used their joint account for all living expenses so that they both contributed their fair share. In addition, Erica helped her husband start to improve his credit score by working together to handle finances and teaching him to get into a routine of paying all bills on time. Together, they checked both of their scores twice a year to monitor their progress. Once they had their finances on track, Andrew helped show Erica that spending money does not always have to be scary and making purchases can improve their quality of life.
When Erica and Andrew got married they were aware of the financial implications that follow, that they would now be sharing responsibilities in their relationship and in their finances. Erica made an effort to be involved in the financial decision-making and Andrew was happy to share the responsibility. They knew that by working together instead of allowing one person to be in control, they would be more satisfied in their decisions. By establishing trust, subsequent financial obstacles were easier to overcome successfully. Erica and Andrew agreed on how to spend and were not overly concerned with how their partner was handling their money.
“Kim and Gabe”
Andrew’s sister, Kim, had also just decided to move in with her significant other, Gabe. Like Andrew, Kim shared her brother’s spending style and poor credit history. She was embarrassed because of her debts so she didn’t tell Gabe about them. Similarly, Gabe had a son from a previous marriage that he was too scared to tell Kim about. He assumed she wouldn’t want to deal with the extra baggage he would bring to the relationship. So, he kept his child support payments secret and avoided any discussion of finances with Kim. The couple figured that by hiding their financial shortcomings, they could avoid fighting and embarrassment so they only brought up money when it was absolutely necessary. Like Erica and Andrew, Gabe and Kim were looking to buy a car. Unfortunately, since they did not talk about their financial histories, they did not take their credit scores into consideration and ended up obtaining a loan with a higher interest rate, paying $75 more a month, or $900 more a year, than Erica and Andrew. They were now making large monthly payments to a car loan; while Gabe was also secretly making his monthly child support payments. Erica didn’t understand why they didn’t have more money and why Gabe seemed to lie about his spending. Instead of facing their debt, the couple began to use their credit cards to buy almost everything because it was convenient and to them it seemed like they weren’t paying out of pocket. Their credit histories suffered even more as they struggled to pay their bills on time and their money saved was dwindling. They knew that they were in trouble but were too embarrassed to be honest with each other. They had never established any trust or commitment to work together in dealing with their finances and became more secretive and separate. The damages to their finances and relationship were apparent with more arguments and criticism.
Kim and Gabe did not build knowledge, trust, reliance and commitment in their relationship as Andrew and Erica had. They made the decision to share their lives but not their finances. They thought by hiding their flaws, they could avoid problems, but instead they created deeper issues that are difficult to fix.
Lending money between family members can be tricky with consequences affecting the closest, most important relationships, as well as finances. It is easy to feel no pressure to pay back a family member; however, it is vital to treat a family loan just like a financial institution. Experts urge family members to be as specific as possible about the terms of the loan: how often payments will be made, what day they will be made, and the interest rate.11 Conversely, it is easy to feel an obligation to support family members in times of trouble. Being able to set boundaries and assure that the couple relationship is respected in the context of competing requests from different family members and even families is not a simple matter.