An inquisitive and avid reader, Robert, asked a great question in the comments section of last week’s article. His question, “If I have a 750 and I marry someone with a 550 does her low score affect mine once we merge?” I answered, “No. And Yes.” This is a complicated question because there is nuance to the answer. Typically, a question such as this is answered, “Yes and No,” but No really should come first in this scenario.
No, your credit history or score is not affected by your spouse’s credit score. In Robert’s scenario, if he has a 750 and his wife has a 550, he still has an excellent rating and will enjoy all the benefits that come along with that number: lower credit card interest rates, lower mortgage rates, multiple credit card offers with 0% interest for longer periods of time, etc. His wife will need to continue to work on increasing her score.
When would your spouse’s score affect you? Your spouse’s credit history and score affects BOTH of you when you need or want to join in a joint venture or buy something together. Often, this is the case when you want to refinance a student loan, getting that small business loan to open a family owned business, filling out a joint application at a department or jewelry store, purchasing a car and absolutely when buying a home.
A brief note before I give you an example of how this works: the only time your personal credit score is combined with another person’s score is when you are a co-applicant, co-signer or are an authorized signer on someone’s credit card, line of credit, auto etc. As you can see, I said “someone” because this can be the case, not only with a spouse but a significant other, your adult child, a friend or anyone with whom you join credit.
Here’s how and when your significant others credit history affects you:
When you decide to make a large purchase that requires both of you to sign onto the account. Unfortunately, for consumers more often than not, the lender places the emphasis on the lowest score of the two applicants, particularly if you have similar incomes. I know it seems counterintuitive to rational people because the higher scorer, per the financial institutions and the credit bureaus, are more responsible with money. This applicant should outweigh the lower score but sadly that is not the case. That would be best for the consumer, but what’s best for the financial institution is to use the rates they give the lower credit score. That’s one scenario of how you are affected by your mates credit score.
Another way you are affected is what I call the “combo.” The lending institution still will not take the higher of the two applicants’ credit scores but combines (combo) them and takes the average of the two to decide what credit category you, as a couple, fit into. In Robert’s example of a 750 score and a 550 score, the average is 650. Now Robert as an individual applicant goes from the excellent category to just fair, as a couple, with his mate who has a poor credit rating of 550. A real life example of the difference this can make is on the website of a particular auto dealership. A few month’s ago while doing some research I found that a 750 score was considered Tier 1 credit and the interest rate on a new car was 3.99%. Conversely, with the combo method and a combined score of 650, the interest rate is 9.95%. What a huge difference!
The last scenario is not often thought of when looking at joint credit and how it may affect you; however, it may be the most detrimental of all the scenarios. That is when the spouse’s credit score is so poor that he or she cannot be a signature on a loan or it’s more cost effective for the couple to have the higher scoring individual on the account alone. Why is or could this be an issue? Having one individual be responsible, on paper, for the house, the car, the student loans, the credit cards, the furniture etc. etc. raises that individual’s debt to income ratio. There are more than 1 or 2 factors that come into play when receiving credit. Debt to income ratio is a factor in any loan. That number determines if you have enough money on a monthly basis to actually pay all your bills. The higher your ratio, the less likely you will be able to incur more debt.
To figure out your debt to income ratio, simply divide the total of your monthly payments that would appear on your credit report by your gross monthly income. This does not include bills such as cable and cell phones.
At the end of the day, credit could be considered a necessary evil. If you do not KNOW THY SELF you could cause some serious financial problems for yourself and your mate. Use it wisely and consider all your options. Thank you Robert for a great question. I encourage others to make comments and ask questions. I will respond. If you are wondering about a subject so are others. You never know, you could be inspiration for the next article. Stay tuned…come back for more great reads about all things credit score related.