Falling in love may make your heart sing, but it won’t make a bit of difference in your credit scores — those generally stay separate. That’s unless you feel moved to do something like … co-sign a loan, sign up for credit jointly or use a lot of your available credit to finance a big wedding (or big anything else). How can it hurt you? Let us count the ways.
Let’s say your beloved needs a car to get to work. But the car dealers take a look at his or her credit scores (or lack of credit history) and decide to require a co-signer. Co-signing, or guaranteeing the loan, has lots of advantages for the person taking out the loan and almost none for the co-signer.
What you are doing is putting your good credit on the line for someone you love — and someone you believe will be able to repay a debt even though the lender has decided this person is not a good bet for repayment. You are taking responsibility for paying up to 100% of the loan plus any collection fees (even if you and your sweetie call it quits). So you should be able to comfortably afford the payments should you have to make them. Most financial experts advise against co-signing. But if you let your heart overrule your head, be sure you understand the risks.
2. Joint Accounts
Some credit cards don’t even offer them anymore. However, joint credit (and joint ownership) remains common for houses and vehicles. So even though you and your honey have different credit reports and scores, any skipped or late payment on these joint accounts will affect both of your credit scores.
Having your partner as an authorized user on your credit card can also affect both of your credit histories. However, an authorized user is not on the hook for repayment, as a joint user would be. A spouse with weaker credit could use authorized-user status on a credit card to help build a positive credit history. This can be a smart strategy for spouses if one has a higher score and wants to help the other. However, should the authorized user run up debt, it will show up on the primary user’s credit reports and affect his or her credit accordingly. So it’s not entirely risk-free. If a relationship ends, so should authorized-user privileges.
3. The Grand Gesture
The surprise anniversary trip to Paris, the engagement ring that was more than you budgeted — romance can kill a credit score (and then money trouble can kill romance — go figure). Here’s what happens: Say you have a credit card limit of $20,000. And you buy an engagement ring that costs $12,000. Let’s even say you have a low-interest card, or a card that gives you a few months of interest-free financing. But you’re using 60% of your available credit. Unless you have other credit lines that are hardly being used, you may see your credit scores fall. The reason is because you are using a higher percentage of your available credit. Most credit experts recommend keeping your credit utilization ratio below 30% (below 10% is even better).
So what can you do? Know where you stand. Know where your partner stands. You can check credit histories — and begin to correct any mistakes — by checking your free credit reports annually. You can also use a free tool, such as Credit.com’s Credit Report Card, to get two free credit scores and tips on how to improve or maintain them.
It’s possible to merge lives without merging credit, and you may want to do that, particularly if there is much difference in your credit scores. That way, the person with the higher score can maintain it while the person with the lower one works to increase his or hers. And eventually, if you want to take out a joint loan — say, a mortgage — that requires both incomes, you’ll be ready.
More on Credit Reports and Credit Scores:
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report
- How Do I Dispute an Error on My Credit Report?
- What’s a Bad Credit Score?
- How Credit Impacts Your Day-to-Day Life