Tuesday, February 06, 2007

Happy FICOS = Happy Couples!

How to make the most of sharing your credit:

Are you recently married or about to become half of a couple? Your personal FICO score and that of your significant other’s could affect how you move forward as a team in the financial world. Buying a home and trading in your wheels for something more exciting (or less?) often requires a joint application once you are sharing a life and the associated joys.

  1. Your FICO® scores will figure highly in the kind of loan and terms you will be offered so here are a few pointers:
  2. You both have individual FICO scores based on previous history
  3. You do NOT have a joint FICO score
  4. As you open Joint Accounts, like credit cards and mortgages, the new history you create together will affect both your individual scores
  5. When applying for loans, lenders usually look at both of your FICO scores when evaluating your loan application
  6. Joint applicants will be tied to the lower of the two applicant’s FICO Score
Which means: If one of you has stellar credit, your low score partner may mean higher rates on joint purchases. What’s low? A FICO score of 500 is really unacceptable. 600 is passable while 700 is considered gold standard. 200 points is a very wide range in the FICO world. You need even higher scores to qualify for ‘stated’ or ‘no ratio’ loans.

It is not uncommon for a spouse who seldom uses credit cards to have the higher score. However, this does not mean you can use the higher score partner to qualify for a loan. The main borrower in most instances must also be the “primary wage earner” and could qualify on their income alone for the debt ratio limits without the other person’s income.

If you must use both your incomes to meet debt ratios (affordability) and one partner has a very low score you may be turned down even if one partner has a very high score. Some non prime lenders offer a ‘high score’ program but you can bet the rates reflect the higher risk factor. In the worst case you may not qualify for any loan. Even hard money lenders have their low score limits.

So what are you to do about your errant beloved with a lower FICO score? Sign up for a personal finance course at your local community college…or better yet read: Smart Couples Finish Rich by David Bach. A few new good habits will be easier with appropriate cheering from the ‘tidier’ partner. Habits can be changed with sufficient motivation.

Now if you really need to apply for a loan using the higher partner’s score--that may be an option--as long as you both appreciate the effect on that partner’s score will be negatively affected by a single late payment. The best habit is to keep your credit clean and healthy is by maintaining low balances on revolving credit and pay everything on time. Consider setting an ‘early reminder’ on your calendar to make payments ahead or have them as automatic drafts for a week ahead of the due date.

Whatever your strategy…once the good behavior starts the FICO scoring system will reward you with a higher score. Take a few pointers from your high FICO score partner and do as they do...and your marriage will be all the happier.

Wishing you every credit sanity!

© 2007 susan templeton