By Tracy Becker
Many couples have the misconception that marriage will tie their credit scores together, for better or for worse, creating a combined average score for financing approvals. This couldn’t be further from the truth.
Even though some finances, such as joint accounts, can be combined, it’s still extremely important for each spouse to have a great, independent FICO score. Otherwise, couples can face many obstacles with their credit when applying for loans, such as a mortgage for their new house.
When applying for a mortgage, couple first face the issue of clearing the credit requirements for the loan. These requirements vary by lender, but FICO scores typically need to be above a 580 for Federal Housing Administration financing or 720 and above for conventional loans. In most cases, higher scores and better credit equal lower costs on a loan.
Unfortunately, couples’ scores don’t average out or combine after marriage. If one spouse has a fantastic score of 800, the other spouse’s bad score of 500 will be used to determine qualification and pricing. In this case, the 800 score would be meaningless.
When approving a mortgage, lenders also look at other factors besides credit scores, such as stable and reliable income. Typically, the value of the house, the spouses’ incomes, and the debt load of the applicants need to be evaluated for loan approvals. So unfortunately for most Americans, there is no way to leave the income of a spouse with a bad score out of the equation.
Although a couple’s income may qualify for a mortgage, they can still run into trouble with their credit. Even though the best rates aren’t solely determined by credit, if one spouse’s credit barely meets the loan requirement, the couple will end up paying high interest rates, regardless of the other spouse’s great score. This could lead to hundreds of thousands of dollars in extra fees during the life of the mortgage or a complete rejection for loan approval.
However, there are some positives for couples having separate credit. If credit is kept separate — with minimal joint or co-signed loans — a couple can sacrifice only one person’s credit during hard times instead of ruining both. For instance, during a period of lost income, paying bills late or defaulting on debt for the primary credit holder will only destroy that individual’s credit. This is a great reason to keep as many separate accounts as possible.
It’s almost impossible to live without credit these days, so it’s very important to maintain at least one healthy score during rocky times. Couples should plan for this in advance, because hard times can happen unexpectedly. Because finances are the greatest killer of marriages, setting the stage for a less bumpy ride can save much more than extra dollars spent.
Also, if rocky times or other issues do set the stage for a split, having separate credit will also mean less score destruction, as many divorce attorneys suggest not paying joint debt until an agreement is finalized. When each spouse is solely responsible for paying their own credit on time, it is less likely that either will stop paying when the divorce attorney makes that request. Once a divorce is concluded, having poor credit just adds more trauma and obstacles to moving on with life.
Couples should speak with a finance or credit expert to make sure they’re avoiding any trouble with their credit scores or financing.
Tracy Becker is a financial advisor at North Shore Advisory in New York state.