One perk of marrying into royalty? Kate Middleton isn’t up at night worrying about Prince William’s credit score.
For everyone else, a spouse’s financial track record can be cause for concern. Marriage itself doesn’t automatically trigger changes in scores but the history each spouse brings into the union can significantly impact shared and individual fortunes.
The exact formula varies, but credit scores are based on complex algorithms that include factors such as the length of your credit history, the amount of available credit, outstanding debt and any negative marks such as bankruptcies, collections or late payments.
There are several different scores marketed to consumers, but the FICO score is still the most widely used by lenders and ranges from 300 to 850.
As the wedding season gets under way, here’s a look at how credit scores factor into married life:
MORTGAGES
A common milestone after marriage is buying a home. This is perhaps when a spouse’s credit score is most critical.
If the mortgage is going to be under both names, the bank will check each spouse’s credit score in determining eligibility and the terms of the loan. But how the scores ? and other financial information ? are weighed will vary depending on the lender.
The lender may take an average of the two scores, or in many cases, simply use the lower score to err on the side of being conservative, said Careen Foster, director of scores product management at FICO Inc.
So even if your score is an impressive 780, the bank may base the loan’s interest rate on your spouse’s score of 620.
That would translate into a big financial hit; on a $200,000 mortgage, the payment would be about $1,000 a month for the stronger score, versus about $1,200 a month for the lower score, according to FICO. That’s for a 30-year, fixed rate mortgage, assuming 4.44 percent and 6.03 percent interest rates for the respective scores.
There are a few ways to mitigate the impact of a bad score. The ideal situation is to take some time to rehabilitate the credit score before applying for a mortgage.
Another option is for the spouse with the stronger score to take out the mortgage. But this may significantly reduce the amount the couple can borrow because only one person’s income will be considered for the loan. It also means only that spouse will be liable for the debt.
In community property states, such as California and Texas, couples can use both spouses’ income toward a mortgage application even if only one is named on the mortgage.
Keep in mind that credit scores aren’t the only factors used to determine if you qualify for a mortgage. Assets such as savings and investment accounts can help offset the impact of bad scores.
MERGING MONEY
Marriage doesn’t influence your credit score. It’s the mingling of finances that often comes with it that leaves scores vulnerable.
With joint credit card accounts, for example, the account is factored into each spouse’s credit score just as if it were an individual account. So if one spouse has very limited available credit, this could be a way to help lift his or her score.
That’s because scores benefit when borrowers have a higher ratio of available credit to outstanding debt.
On the flipside, if your spouse racks up charges you can’t cover, both your scores could take hits. Keep in mind that banks may also require credit checks before a spouse can be added as a joint owner of an account.
If you simply add your spouse as an authorized user on a credit card, however, the impact may not be as significant.
That’s because authorized users aren’t liable for the debt and therefore aren’t weighted as heavily in the newest version of the FICO scoring model.
That’s a change from older versions of the score, when there was no differentiation between authorized user accounts, individual accounts or joint accounts. FICO says 3,500 lenders are already using the new score and that the company is in the process of moving major banks over, but declined to say how many lenders still use the older score.
Exactly how much an authorized user account will impact a score depends on other factors in the broader credit profile. Its impact will be minimized for those with a longer and fuller credit history.
Ultimately, it’s a good idea to understand your spouse’s credit standing and habits. It may not change how you feel, but it could change how you decide to proceed financially as a couple.
Source: The Associated Press.
