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Marriage may be exciting and romantic as it confirms and celebrates that the two of you are now officially “one.” But the impact on your credit profile may not be so warm and fuzzy.
I used to work as a Realtor, for example, and I once helped some newlywed buyers find their dream home. Everything went really smoothly and I was looking forward to earning my commission, but then the lender called to say that there was no way the couple could qualify for a mortgage. As it turned out, the woman’s previous husband had filed for bankruptcy two years prior. At that time they had a shared bank account, car loan, and mortgage and were still in the process of getting divorced. The event – which was his doing, not hers – triggered a huge drop in her credit score that she was not even aware of until I broke the unhappy news.
Should You and Your Spouse Apply for Credit Together
When it comes to credit and your all-important credit score, banks and other lenders typically define married couples using a lowest common denominator approach. While you may see your spouse as your better half, your banker may see them as the half that drags down your credit.
I bought a house, for instance, soon after getting married. I had a steady income and a long track record of excellent credit. My wife had just finished grad school, and she was on her way to a high income career. But she had very little credit history and had not yet landed a job, so her credit looked weak on paper. So when the lender ran our applications together as a couple, our combined credit profile suffered.
He suggested that we borrow only on the strength of my own credit, leaving my wife’s credit out of the equation. We did, and got a much better loan at a lower interest rate. Both of our names were still on the mortgage, however, since that gave the lender extra protection against a default. Instead of only having the legal right to come after me and collect, they could come after both of us since we were married.
That was before the credit crisis of 2008, however, and nowadays banks have much stricter policies. It is unlikely that you will find a lender willing to make a mortgage loan to a couple while using only one person’s credit and ignoring the credit of the other spouse. Today they tend to scrutinize both spouses and then qualify the loan based on the lower of the two scores or the credit history of whichever person’s credit is the crummiest.
If you are lucky enough to find your soul mate, in other words, keep in mind that the partnership may turn out to be star-crossed when it comes to your combined credit history. That’s because despite the fact that love makes the world go ‘round, money still rules.
What Happens if you Divorce
My advice to anyone going through a divorce is to make sure that the divorce document stipulates in no uncertain terms that when the divorce is final, so is your financial relationship. If there is a shared asset and debt – like a house or car with an outstanding loan balance – then insist that the ex-spouse who keeps that asset must refinance within a reasonably short period of time to completely remove the other person’s name from the loan.
What if the person who is keeping the house does not have good enough credit to qualify for a refinance? Then you’re stuck. As far as the lender is concerned you are both still on the hook for the loan balance. Meanwhile if you do manage to refinance then the person who stays in the house has a new mortgage. The interest rate and other terms of the loan will be entirely based on their individual credit history, income, and other criteria.
And if the house you own together has lost so much value that it won’t appraise high enough to enable you to refinance? That’s a common problem these days because home prices have dropped dramatically. In that case you are better off just selling the property and dividing any proceeds you might wind up with between the two of you as part of the divorce settlement. If you sell at a loss, divide the losses between yourselves. At least your credit history will be legally separated. Neither of you can predict what your financial future holds. As long as your credit remains co-mingled – with both your names on the same mortgage – it sets both of you up for a potential credit disaster.
The Bottom Line
Bad credit between people who are legally connected or whose names are still on loans together is totally contagious. Things may look fine now, and you may have an amicable divorce. But a year from now your spouse might suddenly be unemployed or married to someone who declares bankruptcy, and you’ll wake up to find that your own credit is in the toilet. That’s a risk that I don’t think anyone needs to take.
You should also realize that one of the most common reasons that marriages fall apart and end in divorce is because of disagreement and stress brought on by financial pressures. So if you want the marriage to succeed, which hopefully you do, you need to work out any credit issues before marriage for the benefit of your relationship. You and your spouse will inevitably inherit those from each other as soon as you say “I do,” and with bad credit comes serious challenges. Poor credit can, for instance, prevent you from borrowing money, opening a bank account, getting a rewards credit card, or buying or even renting a home. Employers sometimes also do credit checks and use your credit history as a determining factor when interviewing and hiring, so an ugly credit report can even become an obstacle to employment.
No marriage needs that kind of unwanted obstacles. So clean up your credit and manage your finances carefully. Then you won’t have to worry about whether or not marriage means “Until debt do we part.”