Want to be legally joined in life? In most cases, you need a
marriage license and a ceremony. If you're lucky, you also have
witnesses, music, a cake, some flowers, a few gifts and a nice meal
afterward.
Want to be legally joined in debt? Just sign on the dotted line.
No dresses, no tuxes and not so much as a cupcake for your
trouble.
Before you enter into the world of joint credit, it pays to know
a little more about what goes on behind the scenes, from how
potential lenders view the debt to who is ultimately responsible
for paying it -- and how it impacts your credit score.
As with marriage, a lot depends on who you choose as a
partner.
"The most obvious thing is to really be careful about who you
open a joint account with," says Anthony Sprauve, spokesman for
FICO, the company that pioneered credit scoring.
"If the other person disappears or flakes, you're going to be
responsible for that debt," he says.
So before you fill out that next credit application, here are
six things you should know about joint credit:
No. 1: There's more than one type of shared
credit.
People throw around the term "joint credit," but they don't
always understand what it means.
"I don't think people understand the extent of their liability,"
says John Ulzheimer, president of consumer education for
SmartCredit.com. "If you're a co-signer or co-borrower, you're
liable."
There are three different kinds of shared credit (and sometimes
both consumers and lenders will use slightly different terms.) They
are:
Joint credit:
You are a full partner on the account. You filled out or at least
signed a credit application for a card or loan. The credit account
or loan has your name on it, and the money or credit is yours to
use.
What you might not know
: You are responsible for 100 percent (not 50 percent) of the
bill.
Authorized user:
You can use the credit, but you have little or no responsibility
for repaying it. You didn't fill out or sign an application. The
credit account belongs to someone else, and that person receives
the bills and has given you charging privileges.
What you might not know:
If the account holder doesn't pay, some lenders will at least
try to collect from you for the purchases that you made, says Chi
Chi Wu, staff attorney with the National Consumer Law Center.
Co-signer:
You are signing to be responsible for the entire bill, but the loan
or credit account is in someone else's name and you can't use it.
That other party will also be receiving the bills, and you may or
may not have access to account information.
What you may not know:
If the borrower defaults, pays late or misses a payment now and
then, that bad behavior can be included in your credit history and
sink your credit score.
Another fun surprise: Parents co-signing for an account for
someone less than 21 years old "may be liable on the account after
the child turns 21," says Wu. A smarter strategy: Make a child an
authorized user on a parent's account, she says.
What you should know before you sign:
Lenders include co-signed debt with your total obligations when you
apply for credit in your own name. So you may be scuttling your own
ability to get credit -- even if the co-signed account remains in
good standing.
No. 2: Joint debt flies solo on your credit
report.
There's no such thing as a joint credit history.
When you marry, you still have a separate credit history, but
any debts you've applied for jointly will be included in your
file.
What you may not know:
The entire debt is listed in your history as yours. To play fair,
your spouse gets the same treatment.
Ditto your credit score. "There's no such thing as joint credit
score," says Sprauve. Joint accounts "will impact each of [the
individuals'] credit scores."
That's great news if it's an account for a card with a $10,000
limit neither of your ever uses. That will boost both your scores.
Not so great times two if one of you is maxing out the card every
month or missing payments. That will drag them both down.
Also worth noting: it doesn't matter who makes the charges or
who pays the bills, whatever good or bad behavior is associated
with the account, it goes on your credit report and impacts your
credit score.
No. 3: Losing a partner can impact joint credit.
Studies have shown that the departure of a spouse, whether by
divorce or death, is one of life's most-stressful experiences.
The last thing you want to think about at a time like that is
your credit.
If the loss of a marriage or spouse also results in a loss of
income, you'll have to think about it, though. A lower income could
lower your credit limits or eliminate your credit entirely, says
Ulzheimer.
To avoid it, keep some of your individual accounts solo
throughout your relationship, he says.
If you want to keep a joint bank account, great, Ulzheimer says.
"But when it comes to buying cars and especially credit cards, keep
it separate."
No. 4: Divorce courts can't reassign joint
debts.
Two spouses go into divorce count with a pile of joint credit
accounts. The wife agrees to take over paying accounts A, B and C.
The husband steps us to claim responsibility for accounts D, E and
F. The judge signs off, and everyone splits happily ever after?
Not exactly, says Norm Magnuson, vice president of public
affairs for the Consumer Data Industry Association, a trade
association for credit reporting companies.
"Whatever agreement you make with your soon-to-be ex doesn't
change your liabilities," says Ulzheimer. "Lenders still consider
you both to be equally liable."
Many divorce attorneys recommend you pay off and close joint
debts before you get your final decree, he says. Some lenders may
allow the two of you to remove one spouse's name from an account.
Or, they may require that you close the existing account and
reapply solo.
Get proof in writing of all payoffs, account changes and account
closures.
No. 5: With no salary, you may have to rely on joint
credit.
The Federal Reserve has told credit card issuers to rely on
individual income, not household income, when granting credit.
Meaning, if you apply for an individual credit card, it is your
salary alone that would determine if you could get an account in
your name only. (However, if you live in a community property
state, where all income is deemed the property of the couple, this
doesn't apply.)
The reasoning: If you don't control the flow of money, you
should not be granted credit based on access to that money, says
Wu. "What happens if there's a default? Then the issuer doesn't
have access to the other spouse's income."
But the Fed also gave issuers and consumers some wiggle room,
says Wu. It allows issuers to use the word "income" rather than
"household income" or "individual income" -- on applications,
leaving the finer points up to interpretation from the lender and
borrower, she says.
No. 6: With joint credit: no secrets.
If a joint credit account is healthy (low balances, paid off in
full each month, high credit line), it helps all the parties
involved. But if it's not healthy (late payments, rolling balances,
maxed out credit line), everybody's credit suffers.
So it's even more important to keep up with statements. "Make
sure you've got your receipts and everything matches," says
Magnuson.
Have a designated spot in the home for receipts, he recommends.
And have a person or at least a process that you use to deal with
keeping up with and paying bills, he says.
"My wife and I split the bills," Magnuson says.
One key to keeping up: no secrets.
If two names are on the account and two parties are responsible
for those bills, then "both parties should be aware of what's going
on with that account," he says.