Sharing lives, and credit

A friend recently posed a question about joint credit accounts: isn't it unfair that the account affects both partners' credit scores? A $10,000 credit card debt on a joint account shows up on both parties' credit records. A very cursory glance would make it appear that the couple was carrying twice the debt they actually were.

In practice, glances aren't that cursory. In situations where the couple's combined debts and income would be considered, like mortgage applications, potential lenders will recognize that they're seeing the joint account listed on each party's report. From the creditors' perspective, listing the debt on both reports makes sense, because it's a potential liability against each: either party can strand the other with the entirety of the debt.

However, if you're in a precarious financial situation, it can be worthwhile to safeguard at least one partner's credit. Once an account is listed jointly, getting it switched to an individual account can be tricky. Creditors can change the account status at the request of either or both parties, but they aren't required to. Legally, they can insist that the debt remain a joint one.

One way around the problem is to open only individual accounts, to which you add the other partner as an authorized user. Lenders are required to report the account's history on the credit reports of authorized users, but only the individual account owner is legally liable for the debts. The account owner can at any time cut off the authorized user.

For married partners, the shared-accounts issue is trickier in community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These states treat all property, and all debt, acquired during a married as joint economic activity. If you're a Louisiana resident who discovers that your wife has a covert, maxed-out Visa card, you can be on the hook too -- if the debt was incurred while you were married. However, no one can be held liable for debts their partner incurred before the marriage. In all states that aren't joint property states, no one is liable for debts solely in their spouse's name.

CNN has a good article on handling credit-mismatch issues in a relationship. Sometimes the problem isn't irresponsibly managed debt, though. It's simply that there's a lot of it. Next post: tips for boosting your credit rating.