Heard any good pick-up lines lately? How about:
"What's your credit score?"
"How much revolving debt do you have?"
"Ever filed bankruptcy?"
Probably not. These aren’t usually a single gal’s go-to for attracting a potential mate. But they are critical questions to ask before you get too deeply involved. If one or both halves of a couple aren’t open and honest about their finances, it can lead to disappointment, resentment and, in the worst cases, a breakup or a black mark on your credit report.
Past financial mistakes, large amounts of debt and low credit scores can mean trouble qualifying for good rates on mortgages and other joint loans, not to mention the reality that bad money habits tend to perpetuate, which could lead to fights over spending, lack of saving and general financial stress and instability. It’s no surprise that money problems are often cited as a leading factor in divorce.
But you can save yourself a lot of potential headaches and heartache by tackling tough issues early on. Make sure these 5 topics are on your list.
Your Financial Histories
A client of mine didn't know about her husband's $20,000+ credit card debt and low credit score until three years after they got married and were buying their first house together. Needless to say, she wasn't happy when she learned that they would only qualify for a smaller loan at a higher interest rate.
Marriage involves combining two financial worlds and mindsets and, in many ways, is like a business partnership. You wouldn't invest in a business--or take on a business partner--without knowing the financials. So why would you invest in a marriage without fully understanding what you're getting into?
It can be an awkward conversation, sure, but it's a lot less awkward--or painful--than the conversation you might have later. Talk openly with each other not just about your financial past and present situation, but about your future goals. That way you can tackle any issues now and prevent any surprises down the road. Once you commit to each other, commit to developing a joint spending and financial plan ASAP. That can help keep you on track, and on the same page, in both the short and long run. (Need help with a DIY financial plan? Here’s a good place to start.)
Your Credit Scores
A common misconception is that individual credit reports merge and become one joint report after marriage. The truth is that everyone maintains an individual record regardless of any other factors. However, if you open a joint account, become an authorized user of your partner’s credit account, or co-sign on a loan, a record appears on both credit reports.
If your partner has a stronger credit score, combining finances this way can help you in situations involving a major purchase. On the flip side, any negative reporting associated with a joint account, such as missed or late payments or increased debt-to-credit ratio, could really hurt both of you. One partner’s low credit score can also have a significant impact on your interest rates for co-signed loans and joint accounts. (In fact, if your partner has bad credit, you should think carefully before opening any joint accounts or co-signing a loan.)
So, if you haven’t already, make a date to check your credit reports together (and repeat annually--you’re entitled to a free report each year under law at annualcreditreport.com). If one or both of you have a low credit score, make improving it the priority.
Any Debt You Have
I have heard some version of this story many times before: I have $15,000 of credit card debt, but I don't want to tell my wife or husband about it because I'm worried about how angry or disappointed (s)he might be.
Guilt and shame over our bad money habits are powerful emotions that can lead us to do things that only make the situation worse. Surveys show that about a third of us lie to our partners about spending one way or another. But honesty, as hard as it can be sometimes, is better than lying and getting caught. Both partners in a relationship need and deserve to know what’s going on with each other's finances, especially if there are joint accounts, loans or financial goals involved. Also be aware that if you live in a "community property state", such as Texas, Arizona or California, you can be liable for debt a partner accumulates during your relationship even if your name is not on an account.
Your Bank Accounts
Opening a joint account is common early in a marriage. This makes sense if you have joint bills that need to be paid for things like housing, cars or childcare. However, getting married doesn’t necessarily mean you have to marry accounts. Some couples choose to never have a joint account (which is smart if one partner has poor credit and spending habits) and some choose to only have a joint account. Others choose to have a joint account and individual accounts to separate combined fixed expenses from individual discretionary expenses. This can help reduce potential money conflicts. (On the other hand, if you feel the need to hide money in separate accounts, there is definitely a larger problem in the relationship that should be addressed.)
Even if you decide to open a joint account, I recommend you consider maintaining your own, individual bank and credit accounts too in order to ensure easy access to cash when you need it. Also, in the unfortunate event of divorce, having an established account in your name will help you rebuild your individual credit history.
Buying a Home
I have a friend who bought a house with her husband at the height of the real estate market several years ago. They were so caught up in the hype of being homeowners that they didn't care about not putting any money down, paying a higher interest rate and private mortgage insurance (PMI), and putting new furniture and home improvements on credit cards. Two years later when the Great Recession hit and he lost his job, homeownership went from being a dream to a curse.
If you and your partner are planning on buying a home together, give yourselves time to save up a down payment and reduce your debt-to-income ratio. Putting 20 percent down will allow you to avoid paying extra for mortgage insurance (PMI) and, combined with a credit score of at least 720, you could save a boatload of money in the long run. Your proposed monthly mortgage payment (including principal, interest, taxes and insurance) should be no more than 28 percent of your gross monthly income.
If that doesn't sound realistic for now, you may want to seriously consider postponing a home purchase until you can reach a certain savings, income and credit score goal. Keep in mind that lenders will go by the lower of the two credit scores when jointly applying for a mortgage. If you have good credit and your partner doesn't, you can consider applying solo; however, your income alone would be considered and that could mean affording a less expensive home. Also beware that you could end up bearing the burden of the house debt alone if the relationship goes south.
It Takes Two
We all know relationships are hard work. But successful money management is too, especially when you combine finances and potentially bad money habits.
It’s important to remember that your relationship is far more valuable than anything money can buy, so try to be supportive of each other and work together when times get tough. It’s also much easier to tackle any problems together than alone.
Bottom line: Being honest about your financial histories and challenges, as well as your financial needs and goals, from the beginning is essential if you want to live happily ever after.
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