“What’s your credit score?” While that’s not exactly first date conversation, it is a question you’ll want to ask before walking down the aisle with your sweetheart. Credit scores impact every facet of our financial lives, from buying a house to leasing a car. A low credit score (below 650) can even have a negative impact on job prospects if an employer takes a peek at your credit report.
So, what happens if you’ve got stellar credit and the one you love can’t get a loan? How will your finances be affected? Let’s look at some strategies you can employ to protect both of your finances.
Protecting Your Credit in a Community Property State
The good news is that whether you’re single or married, your credit report is yours and yours alone. Your spouse cannot affect your FICO score — unless you’re mingling your finances.
However, California is a community property state. What does this mean? When you become married or enter into a domestic partnership, you become one legal “community.” That means whatever property you acquire while married is “community” property (house, bank accounts, stocks) and any debt you acquire while married is “community” debt.
This refers to everything you bought or received during marriage or a domestic partnership, including debt, that is not a gift or inheritance. That includes all earnings, and everything purchased with those earnings. It does not include property or earnings prior to your marriage.
Any financial obligations incurred during your marriage belong one-half to you, and one-half to your partner — even if the debt was only incurred by one of you or if a credit card is just in your spouse’s name. So, marrying a partner with bad credit in California might also affect you, even if you choose to keep separate checking accounts.
What is considered ‘separate’ property in California?
Even if you can’t technically keep your finances separate once married, or anything that you earn during your marriage that wasn’t a gift or inheritance, you can keep separate property.
Separate property is what you owned before your marriage, including anything you buy with separate property. (Keeping in mind “property” is also money earned before married). Should you become separated, separate property also is anything that you acquire after that date.
Debts also can be separate property, which is important to remember when considering just how much your spouse’s debt may affect you. Going into your marriage, what debt they had before your wedding day is theirs alone. What debt you make together, or if one person makes more of it by taking out a huge loan while you’re married, is 50/50 yours and your partner’s.
Sometimes, separate property gets tricky in a marriage in California. If you’re planning to buy a house as a couple but you owned one on your own before you were married, you’re now entering commingled property territory if you don’t buy the house outright with cash from that separate property sale. Your new mortgage payments will be made under community property law, which makes your new dream house both separate property and community property.
Buying a House When You’re Married to Someone with Bad Credit
Say you’re starting your marriage in California with a clean slate — no separate property of which to speak of, really. You now look to buy a home to call your own. The most important purchase you will ever make.
For most spouses, the purchase of a house is a joint venture, but how does bad credit factor into the equation? It’s no secret that loan applicants with low credit scores get slammed with high interest rates. On a six-figure mortgage, even a slightly higher rate can mean the difference between living comfortably and barely scraping by.
The solution? As unappealing as it may sound in a partnership, it may be financially advantageous for you to apply for a mortgage without the burden of your significant other’s bad credit. This way, you’ll get the best interest rate possible and potentially save many thousands of dollars.
Again, for those of us living in a community property state, we begin to accumulate the debt of our partners 50/50 once we’re married (in addition to their other property). But their debt (and credit score) before marriage is not ours. The credit report of a non-borrowing spouse in a mortgage application only becomes applicable in the case of FHA or VA loans — but a bad credit score doesn’t necessarily mean your mortgage will be denied. When you apply together for a mortgage in California, however, all credit scores will be taken into account.
See also: My Cosigner Filed Bankruptcy. Now What?
Help Your Spouse Get Good Credit
Although we can’t entirely keep our finances or property separate in California once married, perhaps we can help our spouses dig out of debt prior to tying the knot. Here are a few ways you can help:
Build a Budget Together
Creating a budget together will foster a sense of unity and set you both on the path to achieving your financial goals. Once your budget is established, hold each other accountable — and don’t forget to make room for date night!
Pay Down Credit Cards
Living in a major metro area like Los Angeles is expensive and most people don’t have the money to instantly pay off thousands of dollars of debt. So, instead, pay off the debt incrementally, maybe doubling payments for a few months and then tripling them as the debt shrinks. The less credit your spouse is utilizing, the higher his or her credit score will become. As you pay off each card, you’ll see that FICO score slowly but surely rise!
Make Purchases in Cash
We live in a society that is dependent on buying now and paying later. But that’s how your honey got into debt in the first place! Since you’re adhering to a reasonable budget for everything now, you shouldn’t be plunking down $200 on a new pair of running shoes. Only spend the money you have. Living within our means is the surest way to financial freedom.
Filing for Bankruptcy
If your spouse’s debt has become unmanageable, bankruptcy may be a realistic option and a clean slate. In some cases, filing a joint bankruptcy with your spouse can help you save your property even better than if you filed alone.
Contact our bankruptcy experts at Borowitz & Clark to see how we can help you start over.