If you and your honey are merging finances, no doubt you’ve talked about the impact of how each individual will affect the couple’s total financial health. This is more than just how one might forget to pay a bill or not have the cash to settle up at the end of the month. This has to do with your credit score, which can affect your entire financial future.
Your credit score is a number generated by the Fair Isaac Corporation and is based on your credit history and how well you repay bills. There are 5 factors all together, but those two account for 70% of your score so that’s all we’re going to deal with today. This score is generated by a complex math equation and is a snapshot way for credit lenders to determine if you are a risky person to lend money to or not. If you apply for a mortgage, car loan, credit card, or any other loan your credit score is checked. Also when you apply for a cell phone and now more frequently by a potential employer your FICO score is checked.
Your ability to repay bills makes up 35% of your credit score. So if you and your partner forget to pay something one month your credit score can plummet. Rebuilding it takes quite a bit of work since it can take 2-10 years to get a black mark on your credit removed. A late payment stays on for about 2 years (according to some, FICO doesn’t let you know exactly) whereas a short sale or foreclosure can stay on for 7-10.
You start impacting each other’s credit the minute you move in together. Large apartment management companies and some utility companies report to FICO so if you’re late on rent or don’t pay the full amount on your water bill it can be reported to FICO, thus making your score go down. So make sure whoever is in charge of paying the bills each month doesn’t mind the responsibility and can keep on top of payments. This can be especially easy since every creditor from Comcast to your local electricity company can send you email reminders about when your bill is due. Even if you are in your planner everyday and love your Google Calendar, have these reminders sent to you and don’t delete them from your Inbox until they have been paid. An email receipt is usually sent if you pay online, archive those in your email so in case something goes wrong you have your “litigation papers” ready for action.
This symbiotic relationship with your FICO score is especially important if you own a home or are on a joint credit card together. Miss one payment on your mortgage and your score suffers. And credit cards are only second to mortgage payments. FICO is mostly used by mortgage lenders and credit cards so it makes perfect sense that if you miss one of these payments, your score will dip.
The above FICO discussion applies whether you are married or not, but one thing that married couples have to deal with that is unique is marriage property. This is any property acquired during a marriage and can have different rules depending upon if you live in a Common Law or Community Property State.
In Common Law states it is easy to tell who owns what. If your name is on the deed of the house, you own it, not your partner. If you acquire debt on your credit card your divorced spouse does not have to help you pay it off.
However, in Community Property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) what you acquire during the course of the marriage is deemed to have been bought with both individual’s income and is therefore the property of both people. If you should split, your assets and your liabilities are divided evenly. Meaning that if you divorce your spouse and find they had tons of credit card debt, you are liable. However, you can easily check if a credit card has been opened using your credit by checking your credit report annually at annualcreditreport.com. This is good practice whether you are married or single.
The only way marriage property in a community property state can be passed on to someone besides the spouse is if it is owned in “tenancy in common”, which does take an extra bit of paperwork to have happen.
So we knew we could have an impact on each other’s finances, but it’s pretty radical isn’t it? So make sure you have open and honest communication about finances before you decide to get married so you don’t become one of the 80% of divorced couples that get divorced because of finances. Divorces are far less glamourous than weddings, though some can cost just as much.