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Couples and Credit Reports, Busting the Myths

200,000 couples got engaged during this past week’s Valentine’s Day festivities.  That’s roughly 10% of the engagements that will occur in 2011.  And while most of these couples will soon tie the proverbial knot and profess to live as one until “death do us part”, the mechanics of the credit system don’t necessarily follow those rules.  In fact, there are a fair number of myths regarding couples and their credit.  Here are a few of the most common…

 Your credit reports merge with those of your new spouse – This is probably the most common of the “couples and credit” myths.  The credit reporting system in this country maintains records on individual consumers, not on “households” or couples.  What this means is even though you are married your credit reports do not magically merge with those of your new spouse.

The only time credit reports are merged is in the mortgage environment when you apply jointly for a home loan.  The lender will use the services of what’s referred to as a “mortgage reporting company” which will pull all 3 of your credit reports and all 3 of your spouse’s credit reports and then combine them into one large joint credit report.  The final product is called a Residential Mortgage Credit Report or RMCR.  It gives the impression that you and your spouse have fully integrated credit reports but it is simply a cosmetic exercise. 

Your credit scores merge with those of your new spouse – This is probably the second most common couples related credit myth partially because of the RMCR process I described above.  Credit scores, like credit reports, do not merge when you get married.  In fact, credit scores aren’t even a permanent part of your credit reports, which is why the free annual credit report law doesn’t mandate a free credit score.

Credit scores are calculated on individual credit reports and then delivered with that report to the lender or whoever else is buying the report.  If credit reports were merged and maintained as joint reports by the credit bureaus then joint credit scores could be easily calculated.  But, since reports are not maintained jointly…no joint credit scores. 

You are required to apply jointly for credit with your new spouse – Absolutely not true.  There is no law or lender requirement that forces spouses to apply jointly for credit simply because they’re, well, a couple.  Applying jointly for credit is a choice and it can work for you or it can work against you. 

When you apply jointly for any sort of credit (cards, auto loan, mortgage) the lender is now allowed to hold both of you liable for the payments.  And, since both of you are now liable for the debt, the lender can and probably will report the account to both of your credit reports.  This means if payments are made on time and the account is managed properly then your credit and your spouse’s credit reports and credit scores will benefit.

If, however, the account is managed poorly then that will also show up on both of your credit reports and you will both suffer.  If the account goes to some sort of terminal level of delinquency, such as a collection, then both of you will be hounded for the payments.  And finally, if the lender or collection attorney chooses to sue you for the amount of the debt then both spouses can find themselves on the wrong side of the lawsuit. 

You are liable for your new spouse’s debt – This isn’t entirely wrong but it’s certainly not entirely right either.  If you co-sign or apply jointly for credit then it’s a done deal…you’re liable.  But, if you don’t co-sign or jointly apply for credit then it’s likely that you are not liable for his or her debt.  So, for example, if you’re simply added to a credit card account as what’s called an “authorized user” then you’re not contractually liable for the debt.

The likely exception to that rule occurs if you live in one of the ten community property states.  The states are CA, LA, AK, AZ, ID, NV, NM, TX, WA and WI.  If the debt was incurred while living in those states, a creditor (and therefore a collector) can make the argument that even though an individual incurred the debt, both parties benefitted and thus both parties are liable for payment.  This is why after a death or a divorce collectors attempt to collect from the surviving spouses.

A divorce decree releases me from liability – I hate to bring this up but the rate of divorce filing is half of the rate of marriages.  What that means is a whole lot of couples get divorced every year and most of them have joint debts, which need to be somehow separated.  The problem is your divorce attorney, while he or she is probably very smart when it comes to divorces, isn’t a financial counselor and won’t spend time advising you on how best to separate liabilities.

The court can assign payment responsibilities to one spouse or the other but that doesn’t change the terms of the original lender contract signed by the two spouses.  And since the lender isn’t present at your divorce proceedings and isn’t a party to your agreement, they are not bound by it.  If you have joint credit cards before your divorce, you still have joint credit cards after it.

This is problematic because if the payments are missed, then they will show up on both spouse’s credit reports and can damage both of your sets of credit scores.  And trust me, arguing that “my ex-husband is supposed to pay that” isn’t going to work.  Any division of credit liabilities must be done in such a way that the lender acknowledges the changes.

 

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

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