Do's and don'ts of joint credit
Signing up for joint credit can be tricky, and it seems that more often than not, one party ends up in a lurch: exes find themselves mired in messy financial situations, parents are on the hook for debt they can't handle or friends are left stranded by someone they thought they could trust. So if you find yourself considering signing up for joint credit, keep a few do's and don'ts in mind before you sign.
"People are going to do this because of an obligation to a family member, friend or child, so you might as well go into it with your eyes open and aware of everything that might happen," says Pat White, executive director of Credit Counselling Canada.
Do: Understand what you're committing
If you're a co-applicant for a joint credit product, you and the other applicant both have access to the account and you're both liable for all of the debt, even the debt you didn't incur.
If you're a guarantor, you don't get to use the product but you're still guaranteeing you'll shoulder the debt if the other person does not pay. Typically, guarantors aren't held accountable until the lender has exhausted all other means of collection from the original borrower, though.
Either way, it's your responsibility
to pay attention to all of the finite details, such as credit limit, interest
rate and payment due date. Some joint loans, such as mortgages or car loans,
have set end dates
but a line of credit or credit card could go on for an undetermined
"Joint credit is joint debt," says White. "People don't think about it and focus on the joint credit but it's really about debt."
Don't: Forget about your future
A single mistake on the joint account could mar your financial future. Richard Moxley, author of The Nine Rules of Credit and spokesman for eCredit Fix, which helps consumers learn about improving their credit score, says he saw it happen with his clients in his former career as a mortgage broker.
"Just because they had one account out of six that's screwed because it was shared with a son or cousin or nephew, they're paying thousands of dollars in unnecessary fees, higher interest rates and headaches," he says.
You may think you're secure and won't need to ask the bank for any favours in the future, but you never know when an emergency may pop up, leaving you in need of an increase on your line of credit. With your neck on the line for this joint credit, you could be turned down.
Do: Prepare for the worst case
The experts have seen it all: nasty divorces, friends or family members falling out, kids running up a credit card debt or even a spouse that dies, leaving their widow with steep debt. Make sure you're prepared -- financially and mentally -- for Murphy's law.
However much the credit product is worth, keep that amount stowed away in emergency savings in case you're responsible for paying it all off, says Moxley.
Don't: Go in without knowing the
One partner can ask for (or accept) a credit limit increase to the shared account without the other partner's permission. While you may only be comfortable with a $5,000 limit on a credit card, your partner could be increasing your shared card's limit to $10,000 without your knowledge.
However, you do have the ability to freeze the account if you detect fraudulent charges or erratic spending that doesn't belong to you.
You can't close the account unless the balance is $0, though. If your account partner has racked up a hefty bill, you'll need to pay the tab before you can shut down the account for good.
Do: Communicate and check on the
"The only way you can protect yourself with a joint account is to make sure you're monitoring it constantly," Moxley says.
It may sound tedious, but it's the best way to safeguard the account. You'll know what your partner is using the card or line of credit for and how often, and if they're making payments.
You also need to keep the communication lines open to make sure neither partner is spending too much -- if your credit utilization ratio gets too high, both credit scores will take a hit.
Pull your credit report, too. The account should come with a "J" pointing to the joint credit. Sometimes, people -- spouses, for example -- use joint credit to help one partner rebuild their credit. If that's the case, you need to make sure the joint credit is showing up on both credit reports.
Don't: Rely on informal agreements to excuse you from lenders
You may write down terms and conditions as an informal agreement for you and your joint credit partner to abide by. However, this informal document won't hold up in court if a creditor decides to chase you down for the outstanding debt.
"The banks don't care what other agreements were set up," Moxley says. "Technically, if you have something in writing you could go after the other person for damages, but the lenders don't care about that side deal. They'll continue to report your file as delinquent if you aren't paying up."
Do: Know as much about your partner as possible
White co-signed on a line of credit for her daughter during her post-secondary studies. But it's because she trusted her daughter and was honest about the potential risk, she says.
"I wasn't hesitant because I know my daughter," White says. "At that point, she was tracking every penny she spent."
She urges those considering a joint account to take an honest look at the person they're co-signing with.
Some factors to consider are repayment history, bankruptcy history, job status and spending habits. If you know your potential partner is always good about repayments or, as in White's case, you have a good handle on how they spend, that person is likely a good candidate. But someone who can't get a credit card otherwise because they've defaulted or are drowning in debt? Probably not such a good idea.
"You have to know the person because it's like you're lending the money to someone," White says. "If you have qualms about it, you shouldn't be doing it."
However, unlike White, Moxley doesn't believe it's worth it to attach your name to your child's account. There are too many variables, he says: your child could get into a bad relationship, fall victim to fraud or get into financial trouble.
Parents are better off putting up $500 for a secured credit card as a loan to their children, instead of signing onto a joint credit card or line or credit, he says.See related: Newcomer credit cards: Choose and use wisely, 5 ways to protect your finances during divorce
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