Handling debt as a couple: keep it separate or join forces?
One of the biggest and most challenging topics for many couples is how to deal with shared finances. Money is an emotional topic, and it can cause major friction in a relationship if you don't know how to handle it. This is particularly true of debt: who should hold it, how should you share it? If you and your partner are considering taking on new debt together, you'll need to figure out the best way to do so.
Consider applying for new accounts jointly
If you're looking for, say, a home loan or a shared credit card, know how best to apply. You can either apply jointly, or one person can apply with the understanding that you're both going to pay it down. You might find, though, that it works out in your favour to apply together.
It's understandable to think that the person with the highest income should apply for any loans on their own, but that's not always the best option. "They take more than just your borrowing capacity into consideration if you're trying to borrow," says Shane Whiteside, a financial adviser with Sun Life Financial based in Ontario. For example, Whiteside says, say one of you makes $80,000 a year, and the other makes $30,000, but the former has past credit problems while the latter has perfect credit. Together, the combination of one person's high income and the other's good credit may fare better than if one of you applied individually.
Having joint accounts may help both people feel accountable for the debt, too. Taking on debt as a couple should be a team effort, and if only one name is on the account, it can feel like an individual endeavour. This could cause resentment from the person who feels "solely responsible" for the debt. Or it could cause the other person to feel as though they aren't contributing anything to the relationship's finances.
When it comes to credit cards, know how to apply for the card together. An authorized user is not the same as being a co-applicant. The former is simply someone who can use your credit card account, but is not responsible for any debt on it. The latter is someone who truly shares the credit card, with both names on the account and both parties responsible for debt.
However, sometimes it works out best to only have one person apply. If you decide to only put one name on the account, have a plan for each person to contribute to paying it off, and put all spending and statements out on the table -- literally and figuratively -- for the other person to see.
Consider any snags you may hit later
It's easy to take on joint credit when everything between the two of you is rosy. However, if anything goes wrong, the situation can go downhill fast. A breakup, death or financial trouble for either party could leave shared debt to just one person.
If you separate or divorce, shared finances become tricky, especially if only one name is on certain accounts. That person is, technically, solely responsible for the debt on the account, even with a solid separation agreement that states both parties are responsible for it.
"Whoever issued the debt isn't concerned [about the separation agreement]," Whiteside says. "They have that person on the hook so that's who they're concerned about." A separation agreement can state that both parties are responsible for the debt, he says, but it's very difficult to enforce that. Having a true joint account is the best solution to avoid shouldering all the debt if things go south.
If you have joint accounts, you're both still responsible for the debt; divorce does not end joint credit agreements. It'll be up to you and your partner, and possibly your lawyers, to determine how you will continue to pay the bill. You'll have to clear the balance before you can close the account.
If someone with a joint account gets into financial trouble -- e.g., has to file for bankruptcy -- the other person on the account automatically becomes responsible, says Matthew Keenan, a credit counsellor with Credit Counselling Service of Sault Ste. Marie and District.
If you or your partner loses their job or falls ill, you may suddenly find that you now have to take on your partner's half of the payment.
Keep individual credit in good shape
Regardless of how you handle your joint credit, you should also be sure that each of you has individual credit. If you're very young, or simply have never borrowed before, you may not have a lengthy credit history or even a credit score. If you rely on your partner to have solid credit for the both of you, you leave yourself vulnerable if something happens. Having no credit can be as harmful as having bad credit, because you have not proven yourself a trustworthy borrower, so you're an unknown risk.
If you break up or divorce, or if your partner dies, and every account is in their name, you could be left without the capacity to borrow at all, says Whiteside. You'd have to start from scratch, regardless of how old you are. Having good credit determines your ability to get a new credit card, buy a car, find a new place to live or even get a different job.
Be honest and do what's right for your situation
In the end, how you want to handle joint credit comes down to individual preference, Keenan says. "It's a couple-by-couple basis." Consider how you and your partner were raised to handle money, your views on debt and how honest you are willing to be with one another.
This applies not only to your joint accounts, but to any individual ones, too. If you want to open a store credit card in your name, for example, be sure and discuss it with your partner and be transparent with how much you spend on the account.
Likewise, reveal any debt you may have before going into the partnership so your partner knows exactly what they are getting into. If your partner is the one bringing debt into the relationship, be willing to work with them to form a plan to pay it off as a team. Make it a priority to pay down the individual debt before you suggest taking on new, joint debt, and if your partner needs credit counselling, offer to go with them to show support and so you can help them stick to the suggested plan.
"Communication is key, being all on the same page and having it all in the open," says Keenan.See related: Debt, income disparities take toll on marriage, When and how to use joint credit successfully, Money and relationships: 3 options when finances unequal
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