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4 Keys for Couples to Improve and Protect Your Credit ScoreMaintaining a good credit score could be the difference in being able to purchase a home or not.
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Establishing good credit includes carrying a small amount of debt that you regularly pay.
“ If one spouse has significantly better credit than the other, the spouse with good credit can take steps to boost the other’s credit.”
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Buying a home is a priority for many couples, but bad credit scores often thwart the plans of prospective home buyers. If you have a credit score below 700 with a high debt-to-income ratio (above 30 percent) and you’re applying for a loan worth more than 78 percent of the value of your desired home, your chances of getting a mortgage are only 68 percent, according to an Urban Institute study. This means that your odds of being turned down are nearly one in three.
You can increase the odds in your favor by taking steps to improve both your credit rating and your spouse's rating. Here are four keys for couples to improve and protect your credit score:
Track Your Credit Scores
When you get married, you and your spouse continue to maintain separate credit ratings. This makes it possible to apply for a loan on the strength of the spouse with the better credit rating. However, this limits your ability to pool your financial resources, and it puts one spouse at more risk of liability in case of a divorce. Ideally, it’s preferable for both spouses to have good credit scores.
A first step towards improving both of your credit scores is to track your scores so you know what they are. Your credit card provider may include free credit reporting as part of their services, and you can request a free copy of your credit report every 12 months from a service like AnnualCreditReport.com. An identity theft protection service can also track suspicious activity on your accounts to provide you with an early warning so you can take action to prevent damage to your credit rating.
Lend Each Other Good Credit
If one spouse has significantly better credit than the other, the spouse with good credit can take steps to boost the other’s credit. If you have a credit card in good standing, you can add your spouse as an authorized user, enabling them to inherit your credit history. This can help a spouse without much credit history or with a bad credit history to improve their score.
A similar strategy is using your credit to help your spouse secure a small loan, such as a credit builder loan, which is a loan secured by deposits into a savings account that cannot be drawn from until the full amount of the loan is deposited. By paying back this loan on time, your spouse can build their credit rating.
Minimize Credit Card Spending
One of the most important variables impacting your credit score is your credit utilization rate, which is the percent of your credit limit you have spent. While traditional wisdom aims for a utilization rate below 30 percent, a rate of 10 to 20 percent will boost your credit score, and the best credit scores have an average utilization rate of seven percent, according to finance writer Valerie Ashton. Your utilization rate accounts for nearly one-third of your credit score.
One way to reduce your credit utilization is to limit your monthly credit spending to a set amount on one card per month. As a rule of thumb, you should budget 20 percent of your monthly income towards saving money and repaying debt, so avoid spending more of your credit limit than you would be able to pay back within a month under this budgetary guideline.
Pay Your Bills on Time
Another third of your credit score is determined by how faithfully you pay your bills each month. Paying your bills on time will help improve your credit rating, while paying bills late will damage it.
Typically, about 50 percent of your monthly income should be budgeted towards fixed expenditures such as mortgage or rent, utilities, and insurance. A good way to make sure you pay your bills on time is to schedule automated bill payments.
A bad credit rating can hurt your chances of getting a loan, but you and your spouse can take steps to build each others’ credit scores. By monitoring your credit rating, helping each other build good credit history, minimizing your credit utilization, and paying your bills on time, you and your spouse can improve your credit rating and position yourselves to get a loan when you need it.
Roy Rasmussen, coauthor of Publishing for Publicity, is a freelance writer who helps select clients write quality content to reach business and technology audiences. His clients have included Fortune 500 companies and bestselling authors. His most recent projects include books on cloud computing, small business management, sales, business coaching, social media marketing, and career planning.
You can increase the odds in your favor by taking steps to improve both your credit rating and your spouse's rating. Here are four keys for couples to improve and protect your credit score:
Track Your Credit Scores
When you get married, you and your spouse continue to maintain separate credit ratings. This makes it possible to apply for a loan on the strength of the spouse with the better credit rating. However, this limits your ability to pool your financial resources, and it puts one spouse at more risk of liability in case of a divorce. Ideally, it’s preferable for both spouses to have good credit scores.
A first step towards improving both of your credit scores is to track your scores so you know what they are. Your credit card provider may include free credit reporting as part of their services, and you can request a free copy of your credit report every 12 months from a service like AnnualCreditReport.com. An identity theft protection service can also track suspicious activity on your accounts to provide you with an early warning so you can take action to prevent damage to your credit rating.
Lend Each Other Good Credit
If one spouse has significantly better credit than the other, the spouse with good credit can take steps to boost the other’s credit. If you have a credit card in good standing, you can add your spouse as an authorized user, enabling them to inherit your credit history. This can help a spouse without much credit history or with a bad credit history to improve their score.
A similar strategy is using your credit to help your spouse secure a small loan, such as a credit builder loan, which is a loan secured by deposits into a savings account that cannot be drawn from until the full amount of the loan is deposited. By paying back this loan on time, your spouse can build their credit rating.
Minimize Credit Card Spending
One of the most important variables impacting your credit score is your credit utilization rate, which is the percent of your credit limit you have spent. While traditional wisdom aims for a utilization rate below 30 percent, a rate of 10 to 20 percent will boost your credit score, and the best credit scores have an average utilization rate of seven percent, according to finance writer Valerie Ashton. Your utilization rate accounts for nearly one-third of your credit score.
One way to reduce your credit utilization is to limit your monthly credit spending to a set amount on one card per month. As a rule of thumb, you should budget 20 percent of your monthly income towards saving money and repaying debt, so avoid spending more of your credit limit than you would be able to pay back within a month under this budgetary guideline.
Pay Your Bills on Time
Another third of your credit score is determined by how faithfully you pay your bills each month. Paying your bills on time will help improve your credit rating, while paying bills late will damage it.
Typically, about 50 percent of your monthly income should be budgeted towards fixed expenditures such as mortgage or rent, utilities, and insurance. A good way to make sure you pay your bills on time is to schedule automated bill payments.
A bad credit rating can hurt your chances of getting a loan, but you and your spouse can take steps to build each others’ credit scores. By monitoring your credit rating, helping each other build good credit history, minimizing your credit utilization, and paying your bills on time, you and your spouse can improve your credit rating and position yourselves to get a loan when you need it.
Roy Rasmussen, coauthor of Publishing for Publicity, is a freelance writer who helps select clients write quality content to reach business and technology audiences. His clients have included Fortune 500 companies and bestselling authors. His most recent projects include books on cloud computing, small business management, sales, business coaching, social media marketing, and career planning.
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