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Financial planning tips

August 02, 2016

How to protect your credit when you marry into debt

Yours may be a match made in heaven, but what if your new spouse is in debt and you’re not? Here’s how to prevent it from derailing your future happiness.

For better or worse, richer or poorer: When you exchanged those vows with your spouse at the altar, you probably weren't thinking about credit scores, savings accounts or how much debt your new partner might have.

Before you tied the knot, you may have been fortunate enough to be debt-free and on the right path financially. But things are different now. You’ve married into debt. Your beloved's credit card, student loan or car payment is now yours to consider as well. Or is it?

It's a legitimate concern, considering that according to a 2014 Harris/Decima poll, Love, marriage and debt, more than four in 10 Canadian marriages on average begin in debt. The average newlyweds start off their new life owing $21,500, which can be a bitter pill to swallow if they want to start a family or buy a first home. What's more worrisome is the lack of communication: More than one in three people said they didn't discuss their debt with their spouse prior to walking down the aisle.

When newlyweds have different spending habits and credit histories, blending finances can be difficult and, in some cases, even unwise. Marriage is about teamwork, but that may mean taking steps to protect your good credit. By communicating, understanding your options and knowing your risks and liabilities, you and your spouse can put yourselves on the right track to a financially sound happily ever after.

Have the money talk

Casually dropping your credit score into a conversation might not lead to a second date, but it can help determine how financially compatible you are. Money conversations should be something most couples have before getting married, not after, says Mark Seed, a personal finance and investing blogger at My Own Advisor. "It would be a challenge for couples to have a successful long-term marriage if they weren't aligned when it comes to their money goals," he says.

Money issues are commonly considered a leading cause of divorce, so understanding each other's finances before you get married can help avoid major money meltdowns, and provide a benchmark for budget planning and goal-setting. Seed says having a conversation about your money personality doesn't have to be painful, and could be as simple as asking: Are you a saver or spender?

Review each other's credit report and scores

Discuss the details of your credit report and scores before taking on joint financial liabilities. You can ask for a free copy of your credit file from Equifax Canada and TransUnion Canada. Look for the factors that determine credit scores, such as bill payment history (including missed and late payments), high credit card balances and bankruptcy. Make it a point to check, review and correct errors on your own report at least once a year.

Know when you're responsible for your spouse's debt

Many couples assume they're responsible for their spouse's pre-existing debt, consumer or otherwise, once they marry. Fortunately, your spouse’s past credit history has no impact on your credit profile, says Brian Pritchard, an Oshawa-based bankruptcy trustee with BDO Canada Limited, Financial Recovery Services. "In fact, even if the debt is incurred by one of the spouses during the marriage, it doesn't automatically result in the other being responsible unless the other spouse guarantees or co-signs the debt," says Pritchard.

Only when you apply for joint credit, co-sign, or add your spouse as an authorized user of your credit card or line of credit will any information be shared on both of your credit reports. For example, when you want to buy a home together, your spouse’s poor credit history could have a negative impact on your mortgage rates.

There are typically two ways to approach married finances:

  1. Keep your individual accounts open

If you have different spending habits and don't want to have to run every single expense by your spouse, or if your spouse has difficulty with creditors, you may opt to split expenses and keep your finances separate. This will allow you to manage your own debt and maintain your individual credit history. Keeping separate accounts requires excellent communication and high levels of trust, as you must rely on your spouse to monitor his or her own expenses and pay assigned bills on time. An individual account can also be beneficial in the case you separate or divorce, says Pritchard.

  1. Combine your accounts 

Joint accounts may make it easier to pay common household expenses and they offer both you and your spouse full access to funds in case of an emergency. However, sharing credit can be a big adjustment and liability differs greatly, depending on the type of account. For instance, as joint account holders, you'll share ownership of the account and are both liable for repaying the debt. Making your spouse an authorized user of your credit card or line of credit is also an option, but be aware that even though he or she can make use of all the available credit you have, your spouse has no legal responsibility to pay it back.

Consider a marriage contract

There are ways a marriage contract can help protect you against your spouse's incurred debt in case of separation or divorce, says Pritchard. A legal agreement lets you decide how assets, income and debts in the marriage are handled. "If one spouse has significant debts, and the other spouse had significant assets that were brought into the marriage, the creditors of the spouse with the debt would only be entitled to what was set out in the contract," says Pritchard.

If you think a marriage contract is a good idea, look for a lawyer specializing in this area to help you understand what you are and aren't liable for.

What do all these strategies have in common? Frank, clear communication. With finances as with anything about being married, it’s vital to be honest with each other about the things that matter.

Another consideration for newlyweds: Now that there's someone else depending on you and your income, look into protecting yourself with life insurance.

Find more tips and tools for this exciting time of your life in our Building section.

 

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