Foundations for Strong Families 201. Credit Scores

01/09/2009

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.

Figure 3

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.

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