How to Protect Your Credit When You Marry Into Debt

Submitted by New Jersey Bankruptcy Attorney, Lee M. Perlman.

Originally published here.

So you’ve got your financial act together, but your soon-to-be-spouse doesn’t. You love your partner, but you’ve worked hard to get your finances in order, and you don’t want to be responsible for their past mistakes. Here’s how you can protect yourself from marrying into debt.

You should certainly work with your spouse to overcome his or her past financial mistakes. Marriage is about becoming a team, after all. But protecting your credit is good for both of you. If you run into financial trouble, you’ll have at least one healthy credit history to fall back on.

Know When You’re Liable for Your Spouse’s Debt

Many people assume that, once you get married, you automatically take on your spouse’s past debt and bad credit. Not true, says Sally Herigstad of CreditCards.com. Your credit histories remain separate:

“His debts do not automatically become yours. Nor do credit card companies care whether you take your husband’s name when you get married. A month after you get married, you could apply for a credit card under your new name and nothing should be any different from what it would be today.”

While you’re not on the hook for your spouse’s past debt, things change once you start incurring debt during the marriage. When you open joint accounts, apply for joint credit, cosign, or add your spouse as an authorized user—your credit report will reflect this, reports legal site Nolo.

Also, with joint credit, both parties are fully responsible for the debt. It’s not split down the middle, either, as Yahoo Finance points out. So if your spouse can’t make the payments, that means you’re still fully responsible for the debt.

And there are some cases in which you might be responsible for debt your spouse incurs during the marriage. Nolo explains the rules in the handful of “community property” states:

“This means that even if the credit card debt was incurred by your spouse alone, you may be on the hook for it…each state weighs different factors and may have additional rules regarding when an obligation is considered a community debt. Usually, if the debt was incurred for something that benefited your marriage, it will likely be deemed a community debt. But if it was a purchase that only benefited your spouse, there is a greater likelihood that it will not be considered a community debt.”

This isn’t usually true for common law states, in which you’re generally only responsible for debt that’s in your name. Most states are common law, but the following states are community property states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Of course, prenuptial agreements can help with this. With the help of a lawyer, you can specify which types of debts belong to whom and navigate through the confusion. Check out Nolo’s full post for more detail on common law vs. community states.

Share Your Financial Pasts

Before you decide to spend the rest of your life with someone, you should know where they stand financially. It might not seem like an issue now, but money is a top cause of marital fights. The more you prepare now, the smoother things will be down the road.

Experts recommend reviewing your credit reports and histories together. Discover how your financial thoughts and behaviors differ. Try not to be judgmental, but if there are delinquencies, find out what led to them. Know your spouse‘s attitude about money. This way, when financial topics arise in the future, there won’t be any ugly surprises.

Consider Waiting

If your fiance’s money problems are especially egregious, MSN Money suggests waiting to marry until they get their finances in order. One MSN reader explained that she was set to marry someone in deep debt. Writing for the site, Herigstad advised:

“I hope you wait at least a year, if not two, before you get married. Give him a chance to clean up his credit score and his back taxes and other debts on his own. If he’s determined to file for bankruptcy, he should get that out of the way before you get married. (One spouse can file for bankruptcy alone, but it can get messy.)”

If you don’t want to go that route, consider at least waiting to open joint accounts once you’re married. Let your spouse get his or her affairs in order before you apply for joint credit or open joint accounts. Herigstad suggests waiting until he or she has had a clean record for several years.

Decide How You’ll Make Purchases

Consider how you’ll make purchases with your spouse. In the last section, we suggested you wait on applying for joint credit until your partner’s money habits improve. But even if your partner has improved their money habits, there are additional reasons to hold off on joint credit. For one, their bad score might make your interest rates higher. Or, it might keep you from being approved for credit altogether.

When deciding how you’ll buy stuff together, there are a few considerations you’ll have to make. Every relationship is different. Come up with a plan that works best for you and your relationship. But, in deciding, it’ll help to understand the risks of each of your options. Here are a few of them.

Applying for Credit Individually

If you don’t want to apply for joint credit for any of the reasons outlined above, you can certainly choose to apply for credit on your own. Let’s say you want to finance a car, for example. You can apply with your great credit history, get approved, and then just have your spouse pay you his or her share of the monthly payment.

It’s a simple enough option. But it’s not without risk. Nolo points out:

“If only your name appears on the loan documents, your spouse could drive off into the sunset with your new vehicle, and you alone would be liable for repaying the auto loan. If you do not make the payments, only your credit would be damaged.”

Yes, that’s a pretty depressing example. If your spouse is really irresponsible and/or shady, there might be a greater risk of their taking advantage of you when they have zero liability.

In this case, one might question why you’re marrying this person in the first place. But this is more of a money post than a relationship post, so let’s move on.

Cosigning

When your spouse is planning to make a major purchase, they might need a cosigner. If you decide to help out in this way, be prepared. Understand that you’ll be liable for the debt if your spouse fails to pay. Don’t cosign unless you’re fully prepared to make the payments, if it comes to that.

For more detail, check out our post on how to decide whether you should cosign a loan.

Adding a Joint Account Holder

You can also choose to add your spouse as a joint account holder on a credit account. With this option, the joint holder is liable for the balance, CreditCards.com points out. Adding them won’t directly hurt your score, unless your spouse uses most of your available credit. According to FICO, 30 percent of your credit score is determined by how much credit you’re using:

“…when a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.”

And here’s an important side note: If your spouse adds you as an authorized user to his or her account, your score may be negatively impacted if that account isn’t in good standing.

Adding an Authorized User

You also have the option of adding your spouse as an authorized user. It won’t hurt your report, but with this option, your spouse won’t be liable for payments, and that can cause problems. According to Experian:

“…the way they use your account could impact your creditworthiness. Keep in mind that you are fully responsible for any charges made on your card by an authorized user. If they abuse the privilege of being an authorized user, you could find yourself with large debts that you are unable to pay.”

Basically, you run into the same risk you would if you filed credit individually. You’re trusting them to pay, but they’re not officially liable—you are.

Decide How to Buy a Home Together

Of course, a home purchase is a big decision. If you’re worried about your spouse’s credit, you might consider applying for a mortgage individually. Mark Cappel of Bills.com runs down the pros and cons of each option: applying jointly vs. individually.

Reasons to apply jointly:

• Your spouse has a low credit score, but a high income. His or her income might make you a better candidate for a loan, despite the bad score.
• Your spouse might feel more secure living in a place where his or her name is on the mortgage.
• When both spouses are on a mortgage and one dies, the surviving spouse has ownership of the property, without having to go through a probate process. (The site points out that this depends on how the property is titled).

Reasons to apply individually:

• Let’s say you run into some financial trouble and your mortgage payments are late—or worse, you foreclose. Then let’s also say your spouse has had time to rebuild his or her credit score. If you applied for mortgage individually, only your credit will be dinged. As Cappel puts it: “your spouse becomes a credit score lifeboat that allows you two to continue to find credit.”
• Another awful scenario. You divorce. One of you will probably want to keep the house. With a joint mortgage, you will definitely have to refinance it to remove one of you from the account. If it’s an individual mortgage, you might get to bypass this, if the spouse holding the mortgage is the spouse who wants to stay.

Cappel actually recommends the latter option for households that can afford it.

“For these two reasons I recommend that if spouses, partners, friends, or family members who wish to occupy a house together can afford to do so they put the property in one person’s name only.”

For more detail on which option might be best for you, check out the post in full.

Keep Individual Accounts Open

Even if you decide to open accounts jointly, it’s a good idea to keep your old individual accounts open, Nolo says:

“Accounts with a longer positive history help your score. You will also benefit from having more available, but unused, credit. And it’s important to maintain one or more individual credit accounts in case you separate or divorce.”

Consider Legal Agreements

No one likes the P-word, but we’ve got to talk about it. There are ways prenuptial agreements can help protect you against your spouse’s incurred debt in case of divorce. Legal Zoom explains that, regardless of your state laws, a prenup lets you decide how income and debts in the marriage are handled. If you live in a community state, it might help to clearly set your debt boundaries.

Forbes explains that you can use a pre- or post-nup to specify who owns particular debt:

“A well-considered, thorough, properly-executed prenuptial agreement can save you a world of time and trouble if your marriage ends in divorce; and, if you stay happily married, it provides a foundation for clear communication about finances that I believe should underlay every marriage….A postnup can specify how those debts would be paid in the event of a break-up.”

Of course, you should consult the help of an attorney with your agreement. They can better help you understand what you are and aren’t liable for, depending on your situation and your state.

You should also get on the same page financially and come up with a plan to help your spouse get his or her finances together. But in the meantime, it’ll be best for your marriage to protect your good credit. By communicating, understanding your options and knowing your risks and liabilities, you’ll be on the right track.