Your credit score is a reflection of your financial habits but when you get married, that of your spouse will get linked to yours if you go for a joint credit account or consolidate debt. For a healthy financial partnership and a happy married life, an understanding of how credit score works is vital.
What is a credit score?
A credit score is a numerical representation of a person's creditworthiness, ranging from 300 to 900, where a higher number indicates a better credit profile. Individuals can access their score from credit bureaus.
These bureaus gather and organise information to create consumer credit reports. In India, there are four companies — CRIF High Mark Credit Information Services, Equifax Credit Information Services, TransUnion CIBIL and Experian Credit Information Company of India — offer the service.
Here the factors that can affect credit scores
Joint credit accounts
When a couple opens joint loan or credit accounts such as home loans, they become co-signers. This means that both are equally responsible for repaying the debt.
Satish Mehta, Founder of Athena CredXpert (ACX), a firm specialising in credit counselling, says, “Lenders usually consider the credit scores of both spouses when they apply for a loan together.” If a spouse has a low credit score, it can lead to a higher interest rate on the loan or even reduce the likelihood of approval, he says.
Ensuring both have strong credit histories can enhance approval chances and secure better rates.
According to Parijat Garg, a digital lending consultant, lenders take into account the credit score and profile of each applicant in proportion to their income contribution towards loan repayment. For instance, if your spouse contributes 60 percent of the loan repayment, their credit score will carry more weight. Conversely, if their contribution is 25 percent, the impact of their poor credit score on the loan decision will be relatively lower.
Credit utilisation ratio
Joint credit accounts can also affect credit utilisation ratios, which measure the amount of credit being used compared to the total credit limit. This ratio is calculated by dividing the outstanding balances across all loans and credit cards by the total credit limit.
According to Dev Ashish, Founder of StableInvestor, "A lower credit utilisation ratio indicates responsible credit behaviour and positively affects credit scores." Conversely, a consistently high ratio may suggest reliance on credit and financial stress. If one partner has high credit utilisation, it can be a negative for the partner's score.
Credit inquiries
When couples apply for joint credit, lenders may do inquiries on both partners. This can temporarily lower both credit scores.
Debt consolidation
Marriage often involves merging finances, which can lead to debt consolidation. This can affect credit scores if not managed properly.
Talk about finances
Communicating openly about financial goals and credit habits is essential to manage joint credit. This involves discussing and aligning individual financial objectives such as saving for a home or paying off debt. Partners should also share information about their credit history, including past mistakes or concerns.
“Open communication fosters trust and enables couples to work together to maintain healthy credit habits, avoid financial pitfalls, and achieve their long-term financial goals,” says Garg.
Also read: Top reasons your credit score is not rising despite paying your bills on time
Set boundaries
Setting boundaries and expectations for joint credit accounts involves defining spending limits, payment responsibilities and credit utilisation guidelines. This helps prevent misunderstandings, reduces financial stress and promotes responsible joint credit management, ensuring both partners agree.
Keep debt accounts separate
To safeguard your credit score from being affected by your spouse's poor credit, consider separating your finances.
According to Mehta, maintaining separate credit cards and managing individual loans such as personal, education and car loans can help keep your credit distinct.
Monitor credit reports, scores regularly
Ensure that you regularly review your credit reports and scores together to identify areas of improvement.
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