NEW YORK (CNN/Money) -
You promised to love your spouse no matter what. Sometimes the "what" turns out to be your partner's bad credit.
A tainted credit history can result from a costly life event, such as a medical crisis or job loss, or simply from chronic financial mismanagement. Whatever the case, ignoring the problem isn't going to help either one of you. A spouse's poor credit standing can strike directly at your own wallet and may damage your good credit if you're not careful.
Your partner's past can sting on two financial fronts: when you make big purchases together, and when you sign up for joint accounts.
Say you want to buy a house. When a married couple applies for a mortgage, the spouses' incomes, debt-to-income ratios and credit scores are key factors in determining how large a loan they'll get and at what interest rate.
If one spouse has very bad credit, it sometimes pays to take that person off the loan application altogether, said mortgage broker Pam Gantt of Key Mortgage in Pinehurst, N.C. That may mean the remaining spouse won't qualify for as big a mortgage as hoped for because the loan amount is based on his or her income alone.
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If the primary breadwinner is the one with the bad credit, that may reduce the couple's chances of securing a mortgage at all. In that case, Gantt sometimes will have the lower-earning spouse apply independently for a "stated income loan," which does not require income verification. The major drawback is that such loans come with higher interest rates and larger fees than a traditional mortgage and may require a bigger down payment.
Another option is to ask someone, such as a parent or relative, to co-sign your mortgage, said Eric Tyson, co-author of Mortgages for Dummies. Should you make a late payment or default on the loan, however, the co-signer's credit record takes as big a hit as yours.
A spouse's bad credit also will affect whether you're approved for joint credit card accounts and the interest rates you're offered if approved. Should your partner mishandle those accounts, your credit report, not just your spouse's, will be negatively affected.
Going from bad to good
The good news is there are ways to improve your partner's credit standing while keeping yours intact. And by doing so you'll improve your financial prospects as a couple.
For starters, until your spouse's credit is repaired, avoid signing up for joint credit accounts. Instead, you can sign your partner up as an "authorized user" on some of your credit or store cards, said credit consultant Jeanne Kelly of Brookfield, Conn. Authorized users may use your card, but in most instances only you are responsible for paying the bills. (Read the terms in the user agreement to be sure that's the case on your account.)
TO IMPROVE HIS OR HER CREDIT, YOUR SPOUSE CAN:
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|||Become an authorized user on your credit card.
|||Apply for a secured credit card.
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Activity on the account is recorded on your credit report and on your spouse's as well. If you consistently pay what you owe on time, that will positively affect your partner's credit score. If you are delinquent in repaying what you owe, only your credit rating suffers, however, since your spouse can terminate the user agreement and ask to have the negative information removed from his or her credit report. One caveat: if your spouse has trouble controlling spending, don't make him or her an authorized user on a credit card with a high limit.
If your partner has trouble obtaining credit, he or she might apply for a secured credit card, said April Lewis, director of education at Consolidated Credit Counseling Services. To get a secured card your spouse must put down a security deposit to cover future charges. In order to rebuild credit, your spouse must regularly use the secured card for purchases and pay the monthly bills on time.
If your spouse has a lot of debt, a good way to boost credit standing is to pay down the balance. But while it may be tempting to do that for him or her if you've got the money, that may not be the best solution. "The spouse doesn't learn anything," Lewis said. Instead, you might talk together about steps your spouse can take to pay off that debt systematically.
Working it out long-term
Ultimately, repairing bad credit that's the result of bad money management isn't just about paying off today's bills. It's about developing new money habits. Of course, simply yelling at your spouse to change is about as effective as training a cat: You waste energy and someone always ends up hiding under the bed.
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Suppose your partner doesn't get the connection between buying something on credit and having to pay it back, or spends more than he or she makes. You'd do well to focus on your spouse's strengths in suggesting ways to tackle the problem, said Joel Framson, a Los Angeles-based certified financial planner.
For example, one of his clients had racked up thousands of dollars in credit card debt and his fiancee was concerned that he couldn't live within his means. Despite his high debt, the client was contributing regularly to his 401(k). Framson commended him for being disciplined about setting aside income and recommended that he temporarily redirect his 401(k) contributions to help pay down his debt.
If bad credit is a chronic problem, and you and your spouse can't meet your financial goals, it may be smart to get help from an objective professional, such as a certified financial planner or a debt counselor.
As tough as it is to deal with bad credit, there can be a silver lining. No one is immune from making money mistakes, and we can feel ashamed when we realize where we went wrong. Exposing that vulnerability and realizing your partner loves you all the same can be potent, said Natalie Jenkins, vice president of PREP, a marriage education program at the University of Denver. "Working through problems like this can be incredibly powerful in bringing a couple together."