Building Credit as a Couple

Now that you are a newly-minted couple you are taking steps to build your financial life together.  Building a strong credit history is an important step, as it impacts the interest rate, terms, and conditions of loans that you will apply for in the future, such as a new credit card, a car loan or a mortgage.  Nowadays credit reports are also being considered when you apply for a job or a new apartment, which makes strengthening your credit even more important.  Maybe you both have excellent credit, but it is more likely that one or both of you have credit reports with a few blemishes.  Most conventional mortgages require a credit score of 720 or higher to qualify for the best interest rates and terms.  When applying for a mortgage, lenders will factor the partner with the lower credit scores, making it important for both of you to have the strongest possible credit reports.

Review your credit reports

The first step to building your credit is to know what is in your credit report.  Retrieve your credit reports from the three primary credit reporting bureaus:  Equifax, Experian and Trans Union.  Read your reports and check for mistakes, as they could incorrectly cause you to be denied credit.  If you do find a mistake you can take three actions.  First, call the creditor directly and tell them to remove the mistake from your credit report.  Follow up this call with a letter sent certified mail.  Second, call the credit bureau and request that they investigate the mistake and take the false information off of your report.  Again, follow this up with a certified letter.  Finally, open an account with the credit bureau and create a 100-word personal statement explaining that the negative information on your credit report is false.

Building blocks to strong credit

There are specific ways to build credit.  For consumers who have no credit history, applying for a secured credit card can be one of the best ways to build credit.  This is done through a bank or credit union that offers this type of product.  You will need to make a deposit of $500 or $1,000 in a savings account that will serve as the security on the card.  You will then use it for 12 or more months until it can be converted to a traditional credit card.  What is important with secured cards is how you use them. Always make on-time payments and keep your balance below 25 percent of the limit.  Secured credit cards can sometimes be expensive products so look carefully at monthly and annual fees before you commit to one.

Another way to build credit is through a credit builder loan, again offered through some banks and credit unions.  Similar to a secured credit card, you will place the loan amount (typically $1,000) into a savings account at that institution to secure the loan.  You will then make equal monthly payments for a term of typically 6-12 months, which will be reported to the credit bureaus.  Note that a credit builder loan involves interest payments as well as principal, so be sure to budget for that.  And make all of your payments on time in order to receive the full credit-building power of this type of product.

If one of you has stronger credit than the other you may choose to make your partner an authorized user on an existing credit card account.  While on-time payments and low monthly balances may help the authorized user to build up a credit score over time, this method does not have the same power as either a secured credit card or a credit builder loan.

If you have never borrowed money before you may not have a credit report at all (called a “thin file”), meaning that it will be difficult for you to qualify for a loan.  Some lenders allow applicants with no credit history to apply for credit using non-traditional methods.  This means providing documentation proving that you have made on-time rent, electricity, gas, water and telephone bills, over a period of 12 months.

Maintain your credit over the long run

Regardless of the method used to build credit remember the five behaviors that will make your credit as strong as it can be:

1. Pay all of your debt obligations on time
2. Pay off your credit cards every month, or at least keep your credit card balances below 25 percent of your high balance limit
3. Keep your oldest credit card account open, as it reflects the length of your credit history
4. Only apply for new credit that you absolutely need, and don’t apply for more than one credit card at a time
5. Have a mix of revolving (credit cards) and installment (student loans, car loans, mortgages) over the course of your life

A negative credit history may be a source of embarrassment and shame, but it doesn't have to be.  You can turn this around with a combination of open communication with your significant other, a concerted effort to fix past mistakes or pay down old debt, and a resolution to create and maintain positive habits around your credit use.  A negative credit history may take time to turn around, but once it does, a positive credit report can help you as a couple to achieve your financial goals and dreams.