What To Do If You Have a Worse Credit Score Than Your Spouse

When most couples talk about money, the topic of credit scores usually isn’t one that gets them fired up.  It’s much more fun to focus on a goal like buying a new home than it is to dwell on your credit score.

But, building your credit is one of the most critical steps to take in your 20s, since your credit score impacts most of the other parts of your financial picture.  The interest rates on your future mortgages and car loans directly depend on your credit score.  And, credit takes time to build, so even if you don’t need to take out a mortgage soon, the time to focus on this is now.

It’s very common to see a husband and wife have very different credit scores.  What steps should the person with the lower score take?

Differing Credit Scores Can Be a Huge Challenge for Couples

There are a lot of decisions couples need to make about how they handle their finances together when they get married.  Typically, these decisions involve deciding whether (and how) to combine financial accounts, how to manage monthly cash flows, and how to save and invest.

Credit scores aren’t one of the topics that tend to come up right away.  Unless you’re in the process of buying a home, they just aren’t a topic that tends to be on the top of people’s minds.

But, this doesn’t mean that it isn’t an important topic for couples.  On the contrary, being in a marriage where one partner has a significantly higher credit score than the other can be a huge source of stress on your relationship.  And, it can complicate the process of taking out a mortgage, since you will need to use both of your credit scores when applying for the house.

It’s important, therefore, to be aware of your partner’s credit score and to get out in front of any areas for improvement before you actually need to use the credit score.

How Do You Fix It?

The good news is that this is a fixable problem.  The bad news is that it can take a good amount of time to improve your credit scores significantly.  Which is why it’s critical to start as soon as possible.
This isn’t an exhaustive list, but if you’re looking to improve your credit score, start with these strategies:

Download your Credit Reports Every Year

Knowing is half the battle.  Use a free service like Credit Karma to pull your credit reports once a year.  And, make sure to look at reports from all three credit bureaus- Equifax, Experian, and Transunion.  It isn’t common, but sometimes there can be erroneous items on one report that aren’t listed on any of the others.  You can also get your credit reports through the website of each of these credit bureaus.

Dispute Errors As Soon As Possible

We’ll touch on this in a bit, but it’s so important that I wanted to call it out right away.  You’d think that the three credit bureaus are infallible, but unfortunately, they are far from it.  I’ve caught three different errors on clients’ credit reports in the past couple months alone.  If you see something that you know is a mistake on your report, use the link on the relevant credit bureau’s website to file a dispute immediately.  These things can take some time, but it is possible to remove factually incorrect information from your reports.  And, as I said, this is unfortunately a more common problem than you’d expect.

Recognize that Making Changes to Your Available Credit Usually Involves Taking a Step Backward Before You Take a Step Forward

This is crucially important.  If you open a new credit card and use it the right way (more on that in a bit), over time your credit score will likely go up.  But, whenever you request new credit, this creates what’s called a “hard check” on your credit that causes your credit score to drop for the time being.

Again, in the long run, this will be outweighed by you using your new credit wisely, but be aware that if you’re planning to take out a loan sometime this year, now isn’t the time to be opening new credit cards.

And as an FYI, “hard checks” typically remain on your credit report for two years.

Have Enough Credit Available…

This one is particularly important for those people fresh out of undergrad or a grad school program.

Double check how much available credit you have on each of your credit cards.  Typically, most people new to the working world have credit limits in the $300-$500 range.  Frankly put, that’s not enough to build a great credit score.  Request a credit increase to give yourself more of a foundation to build your credit history.

…But Don’t Use (Much of) It

One of the primary drivers of your credit score is how much you use the credit you have available.  A good rule of thumb is to always use 30% or less of the total amount of credit you have available on each credit card.

In other words, if you have one credit card with a $10,000 credit limit, never let the balance on that card get higher than $3,000.  And of course, pay off the balance every month.  Speaking of which…

Set Reminders

It’s hard to keep track of your finances when you’re busy.  So, make it easy on yourself!  Set reminders to pay your bills every month.

One of the easiest ways to mess up your credit score is to accidentally miss a payment.  Set calendar reminders to yourself to make sure you don’t forget!

Check Your Reports for Any Overdue Bills (And Either Pay or Dispute Them Right Away)

When you do your annual review of your credit report, pay close attention to any bills (medical bills are common examples) that have accidently or allegedly gone unpaid.

If you have a bill listed as in collection that has gone unpaid, first do some research to make sure the bill is actually yours, and if it is, that it actually wasn’t paid.  John Oliver did a great report on erroneous credit reporting not too long ago that is worth taking the time to watch.

If you have a reason to contest the charge, do so as soon as possible.  If you realize that you just forgot to pay the bill, take care of it ASAP.

Don’t “Shop Around” for Loans and Credit Cards….

Or, at the very least, be careful not to get firm quotes from more than one lender at a time.

As mentioned above, every time a lender does a credit check on you regarding issuing you a credit card or loan, this creates a “hard check” on your credit that hurts your score.  If you go to five different credit card companies requesting a credit card, that’s five “hard checks” that will appear on your credit report, even if you only open one card.

By all means, do your homework and shop around, but only begin the application process once you’ve made a decision.

Beware Retail Credit Cards

I’ll confess- I’ve goofed on this one myself.

Stores generally offer pretty good perks to entice you to open up a store credit card.  But, having retail credit cards directly impacts your credit score, and not in a good way.

Lenders view retail credit cards as a negative indicator, so it’s almost always a best practice to say no to the discounts that the retail stores offer you in order to save money on your mortgage down the road.

Give it Time

In most areas of financial planning, we can usually implement a pretty quick fix.  Whether it’s acting on a need to save more for retirement or to refinance a loan, usually the recommendations I provide to my clients can be acted on quickly and you can see immediate results.

Unfortunately, improving your credit score just doesn’t work that way.

Don’t get me wrong, there are things you can and should do today to improve your credit score.

But, it’s not a quick fix- it might be two years before you see substantial improvement.  Trust the process and give it time, and your score will improve if you manage your credit the right way.

 

The Why, When, and How of Combining Your Finances With Your Spouse

“Now that we’re getting married, how should my partner and I manage our money together?”

It’s one of the most common questions I get from my engaged and newlywed clients. It can be hard enough for us to manage our own money. Adding a second person to the mix makes things all the more complicated.

First and foremost, there’s the challenge of how to manage your money together with your spouse. Which accounts to use, how to monitor your finances together- there are a lot of questions here. Enough that I created a guide to walk you through my methodology for combining accounts.

But before we get into the how of managing your money together with your spouse, we need to take a step back.

Start with Why

Whenever I discuss combining money with your spouse, the very first question I typically ask is- why do you want to combine your accounts together?

Is it a matter of convenience? It’s certainly easier for you to keep track of your family finances if everything is in one place. Or is a philosophical matter? You’re one family, after all, and many people want to manage their finances as such.

Do you and your partner want financial autonomy in your day to day lives? Or, do you view your financial future as being completely intertwined with each other. Or maybe somewhere in between?

There’s no right or wrong answer here. But the approach you should take is largely dictated by your answers to these questions.

One Important Note

Pacesetter Planning provides financial advice, not legal advice. Before you decide to completely integrate your financial accounts with your spouse, it is recommended that you consider speaking with an attorney. If you decide not to completely combine accounts, you can certainly still use my framework for managing money together.

If you do decide to keep your accounts separate, you should add your spouse as a beneficiary to your accounts as soon as possible. This way, if something were to happen to you, your spouse will inherit the assets without legal complications.

That being said, my personal philosophy is that if you’re getting married, you should be “all in”. So, I don’t have a problem if couples want to completely integrate their accounts- as long as they want to for the right reasons, as discussed above.

The Next Question- When Should You Combine Finances

You shouldn’t actually combine your financial accounts with your partner until you’re married. Period.

Couples in our generation operate differently than our parents and grandparents. These days, it seems like the norm is to take big steps, like moving in together, before you are engaged. I know and I get it- I lived with my wife for over a year before we got married.

But just because some societal norms are changing, doesn’t mean that everything should change. Particularly when it comes to legal issues.

You might view yourself as “basically married” to your boyfriend or girlfriend, and there’s absolutely nothing wrong with that. But, you bank won’t view you as married until you’re actually legally married. Nor with the courts, if you were to break up. These situations become much more complicated if you have shared financial assets that you’re trying to split between two non-married people.

There’s nothing wrong whatsoever with jointly managing your finances with your boyfriend or girlfriend if you are living together. In fact, I usually encourage it. My guide on managing your finances with your partner will show you how. But managing your finances together doesn’t mean you have to actually combine your accounts. One more time for good measure: don’t do that until you actually get married.

Hopefully, it just means you’ll have separate accounts for a few more months or years. But in the worst case scenario, it can save you a ton of trouble by waiting.

How Do We Go About Merging our Finances?

You’ve talked about why you want to combine finances with your spouse. You are, in fact, spouses, so it’s an appropriate time to merge your money. Now, how do you do it?

I have a three-tiered framework for how to combine finances with your spouse. You’ll get a step by step walkthrough of this in my free guide. In this guide, you’ll learn how to:

1. Identify your shared financial goals with your spouse, and why these are so critical to keep in mind when you set up your joint financial accounts

2. Inventory each of your current financial accounts, and create an account map that shows you exactly where your money is today and how it’s being used.

3. Choose which accounts to use and Confirm you have enough accounts in line with your goals.

There are a lot of steps to combine your money the correct way, and it’s critical that you take the time to make sure that nothing falls through the cracks. Download my free guide on combining your finances today, and you and your spouse will have a roadmap to make sure you’re set up for success.

When Does It Make Sense for Married Couples to File Taxes Separately?

Nobody likes filing taxes every spring.  It takes a lot of time to receive all of your paperwork, and even more time to calculate and review to figure out whether you’re due money back.  And let’s face it- it’s not exactly exciting stuff.

But when you get married, this process can get even more complicated.  In addition to having double the amount of information to review, you need to decide the best way to file your taxes with your spouse.

Married couples have two options when it comes to filing their taxes- to file jointly with their spouse, or to file separately.  As the name implies, filing jointly with your spouse means that income and deductions for both you and your spouse are reported on one tax return.  When you file separately, each of you files a separate tax return with just your personal information on your own return.

But which option is the right one to choose?

Most Couples Choose to File Jointly

As with most tax-related questions, the answer to this question will vary depending on your personal situation.  But, the better option for most couples is to file jointly. There are several reasons for this:

  • Married couples who file separately hit higher tax rates at lower income levels. So, your effective tax rate between you and your spouse is typically higher for couples who file separately rather than jointly
  • The standard deduction is lower for couples who file separately, and many itemized deductions are reduced or completely eliminated if you file separately rather than jointly.
  • There are more tax breaks and credits available for joint filers, such as the Earned Income Tax Credit

So, this should be a fairly easy decision for most couples.  However, there are a few key situations where it makes sense to file separately from your spouse.  I highly recommend either calculating your taxes due both filing jointly or separately, or seek the assistance of a CPA, if you have doubts as to which would be best for you.

When Would It Make Sense to File Separately?

This is not an exhaustive list, but there are a few key scenarios where it may make sense to file separately from your spouse

You are on an student loan income-driven repayment plan. If your student loans are on an income-driven repayment plan, the amount you pay per month is tied to your annual income.  Whether or not your annual income is just your personal income, or includes your spouses as well, depends on whether you file jointly or separately.

So, if you have a significant loan balance and are on one of these payment plans, if you file separately, you can base your payments on your income alone.  But, as soon as you file your taxes jointly with your spouse, your spouses income will be included the calculation used to determine your loan payments.

You still may be better off filing jointly and paying the extra amount per month toward your student loans, but you should definitely keep these consequences in mind while making your decision.

I talk about this in my free eBook, “13 Steps to Take Before Making Your Next Student Loan Payment”.  Subscribe to my newsletter, and I’ll send you a copy for free!

Either You or Your Spouse Has Significant Medical Expenses

The current tax code allows you to deduct any medical expenses that are over 10% of the income reported on your tax returns.  This income number includes your spouse’s if you file jointly, but doesn’t if you file separately.  So, if you had high medical expenses this year, you may end up paying less taxes by filing separately, depending on the numbers on the rest of your return.

For example, say that your annual salary is $75,000, and your spouse’s annual salary is $125,000.  And, let’s say that you had a medical issue last year that cost you $10,000 total.

If you file jointly, your total income reported on your tax return would be $200,000.  Since your total medical expenses ($10,000) is less than 10% of your income ($200,000), you wouldn’t be able to deduct any of these expenses.

But, if you file separately, your income on your tax return is only $75,000.  Since you spend over 10% of this on medical expenses, you would qualify for this deduction.

You and Your Spouse Have (Very) Different Salaries

If you earn significantly more than your spouse (or vice versa) it may work in your favor to calculate each of your tax burdens separately rather than combining your incomes.  If you also have a lot of investment income, such as capital gains or dividends, this scenario applies even more.

Again, in this case, I’d recommend you calculate your tax burdens both ways- jointly and separately- and compare the total taxes due in order to decide.  But if, for example, you make $250,000 a year and your spouse makes $30,000, I wouldn’t recommend automatically filing jointly.  Take the time to calculate your total tax bill by filing separately as well, and choose which one works out best for you.

Your Spouse Has Tax Debt 

If your spouse hasn’t paid their taxes in the past, the second that you file jointly, this becomes your debt, too.  If you file separately, you won’t be held legally responsible for this debt.  This is still not a good situation for your family, of course, but filing separately can give you some legal protection in the event of an audit.

Generally speaking, if you have concerns about your spouse’s financial situation, maintaining some degree of legal separation with your money might not be a bad idea while helping them to work through it.  This certainly would include filing taxes as well, even if it means you pay a bit more.

Seek Help

Particularly if you think that any of the above scenarios apply to you, I don’t recommend doing this on your own.  Either use a self-guided program like TurboTax, or seek the help of a CPA, to review your specific circumstances and analyze your potential tax burden both if you file jointly or separately.

It’s no fun, and it adds a layer of work, but there’s too much money on the table to not do your due diligence.

If you have further questions or want to talk about any of the above ideas, don’t be afraid to reach out.  I don’t prepare tax returns, but I can help you find someone that I trust to review your situation and get you the answers you need.