By Parmida Modiri, AMP
Your credit report shows a very comprehensive financial history. Your credit score, which is a three digit number, is assigned to each individual based on a variety of factors: number of trading lines open, monthly payments, history of repayment, number of inquiries, etc.
A credit score can range from about 300 (worst) to 850 (best), with anything under a 620 making it challenging to obtain a good mortgage rate. Those with good credit scores are typically offered better rates and less down payment options on mortgage loans because lenders feel that they are less ‘risky’ in terms of repaying.
There are many do’s and don’ts to sharing financial responsibility with your partner, which are listed below:
1. Financial History
Do – Understand Your Partner’s Finances
It is important to know your life partner’s financial history and any debts that they have on their own. Knowing your partner’s financial history can help you gauge their spending habits and how good they are with their money. Sometimes opposites attract, therefore a penny pincher may find themselves with someone who enjoys spending more every once and a while.
Don’t – Turn a Blind Eye
Not being aware of your partner’s financial history can hinder you in the long run. For example, if buying a home together, it may be difficult to get a great rate from a top lender if one of the applicants has a low credit score or risky credit history. You may also require a larger down payment, do your homework before you begin shopping. Knowing financial situations in advance can help you both plan accordingly for the future.
2. Joint or Separate?
Do – Decide what’s Right for You!
There’s no ‘correct’ decision in this case. Having joint accounts for credit cards, loans, etc can be good or bad, depending on your unique relationship. Having a joint account can improve the credit scores for both individuals considering that payments are made to the account accordingly. If one partner has a low credit score, having a joint account with a partner that has good repayment history can bring up the lower credit score if the repayment history remains good.
Don’t – Hide Purchases!
If you do decide to opt for joint accounts, it is important to understand what you are spending and what needs to be paid. Make sure you tell your partner about the purchases you have made, and check the balance of credit cards before putting a large sum of money on a card.
Having separate accounts are becoming more popular over time, where each individual contributes separately to payments, according to their income.
Just remember that your partner’s individual debts are theirs alone, you are only held accountable for any accounts that have on your own or share together.
3. Budgeting
Do – Make a Manageable Budget!
By looking at the expenses that you and your partner have on a regular basis, as well as what you can afford, sit down together and figure out a fool-proof budget. Spreadsheets and templates can be easily found all over the web to help you get started if you are unsure.
It makes sense when creating a budget to work how much each person should contribute according to how much they make and the outstanding debt balances.
Don’t – Expect Your Partner to Pay
It’ll turn into the classic case of “I thought you were going to pay for it”. It is important to know how much debt each of you accrues individually and together as a couple to make sure to avoid falling behind on essential payments, such as utilities and rent/mortgage.
4. Big Purchases
Do – Try Combined!
Couples that come in looking to obtain a mortgage typically have more success than those who are obtaining a mortgage by themselves. Couples usually have more luck because their combined income allows for a larger loan and therefore more options to consider while shopping for a house. It doesn’t even always apply to just mortgages; it could mean credit card approvals, car loans, lines of credit, etc.
Don’t – Hinder Your Partner’s Credit
On the flipside, having a partner with poor credit history can actually hinder your chances when purchasing a property, or obtaining any loan for that matter. The lower the credit score, the riskier a person is to a lender, and usually interest rates and approval amounts reflect this. If you feel that your partner’s credit could be a detriment to a big purchase, such as a house, you may be better off using one individual’s credit or with proper planning help to improve the lower credit rating.
5. Emergency Plan
Do – Save for a Rainy Day
It is important for any individual, regardless of whether tied to a joint account or not, to try and save up money. By putting money aside, it helps you plan for unexpected expenses such as car repairs, a leaky roof, or even a flooded basement.
Couples that both contribute to setting some money aside each month can actually save up more than if one person does so alone. The money saved can even be good to use if trying to save up for a down payment on a car or house.
Don’t – Spend, spend, spend…
It’s alright to indulge once and a while, but it is important to have an emergency plan for you and your partner in case something goes awry. For example, if obtaining a mortgage, the more money you have set aside (and for longer) the better it looks to lenders because it shows that the couple is financially responsible.
You will find that after a while of having joint accounts, sharing liabilities such as a car loan or mortgage that both of your credit scores will ‘even out’ and begin to look fairly similar. This is when it becomes a benefit for those with previously low credit scores.
Whatever you choose to share with your partner regarding your finances, make sure that you have thoroughly discussed them and are both aware of the spending habits and repayment habits of both parties. Pre-planning financial responsibilities and understanding your partner is crucial for minimizing the money related stress couples can face, so that you both focus on the more important things: each other!
Parmida Modiri, AMP is an Accredited Mortgage Professional with Signature Service Financial. Parmida can be reached at parmida@ssfi.ca or visit her website at www.signaturemortgage.ca. Mortgage Agent, Lic. #: M08005765