Handling your own finances and building a good enough credit rating to get a loan can be difficult, but did you know that in certain circumstances, it’s not only your credit rating that matters? Many people have been refused a loan because their partner’s credit rating has been bad. It doesn’t matter whether they’re a current partner or a former partner. Anyone you have shared your official finances with could negatively affect your credit rating, making getting finance so much more difficult.
What Is a Credit Rating?
First, it’s important to understand our terms. So what actually is a credit rating? A credit rating is, quite simply, a condensed evaluation of your financial risk. When a lender evaluates your application for a loan, what they’re really doing is making an informed guess as to your likelihood of paying back what you’ve borrowed. To make this decision as well-informed as possible, they need to get a snapshot of your financial history, exactly what a credit report is. Your credit rating determines whether they lend to you or not.
If you have a good credit rating, that tells your lender that you don’t have a history of getting into financial difficulty, which must therefore mean you’re reasonably fiscally responsible. That makes the risk of lending to you relatively low, making you more likely to be successful in your application. A bad credit rating means that you have had financial difficulties in the past. That doesn’t automatically mean you’re bad with money or that you’re untrustworthy, but it does make you more of a risk to lend to. It’s not a guarantee that your application will be rejected, but it does mean you might not be offered the terms of the loan you really want.
A bad credit rating can result in higher interest rates or caps on the amount of money you can borrow.
What Can Affect a Credit Rating?
So what turns your credit rating bad? Anything that you would consider a “financial misstep” can have a damaging effect on your credit rating. The most common way people damage their credit rating is through not paying their bills, not repaying other loans they have taken out, defaulting on their mortgage or rent payments, getting behind in child support, or having financial judgements made against them.
Of course, not every path to a bad credit rating is going to be your fault. Sometimes you simply run into a patch of bad luck, and it can have a crippling effect on your finances – but the reality of it is that it will affect your credit score.
Who Else Can Affect Your Credit Rating?
So we’ve already discussed the things that you can do to damage your credit rating, but many people don’t know that other people can actually damage their credit rating too. For example, anyone with whom you have shared an official credit account has the potential to damage your credit rating. This can mean your partner or spouse, but it can also mean a business partner, a sibling, or a housemate.
Why Does Their Credit Rating Affect Yours?
When you formally share credit responsibility with someone, you become tied to them long after the actual account may have been closed. That period of your financial history will count as joint financial activity, so the nature of that activity will have a degree of bearing on how your financial situation is viewed when you come to apply for a loan or finance, depending on the decisions made.
Does That Mean Your File Contains Their Details Too?
Simply put, no. It’s important to understand the mechanics of how another person can damage your credit rating to ensure it never happens to you. A person sharing your finances for a period of time doesn’t mean they automatically become “a part” of your file.
Rather, when you apply for a loan or finance, a mortgage or any financial check, you will be subject to an in-depth review of your financial history. As that is checked, there will be a note on the section where you shared your finances with the person in question, indicating a “connected” credit file. Depending on the nature of the loan or financing you’re looking for, a lender can check this file as a part of their enquiries. They can then see the information that is flagged, such as outstanding debts.
This doesn’t necessarily directly mean that you will be held responsible for those problems. But what it does mean is that there may be an extra degree of hesitation when deciding to offer you the loan you’ve applied for, something you don’t need.
Do Lenders Always Check That Far?
No, lenders don’t always do such a deep dive into your finances. If you’re applying for a payday loan with no credit check or another short term loan, for example, you will likely not encounter too much of an issue. Even if the lender does check the file of the person responsible attached to yours, the likelihood of refusing your loan if the rest of your financial history is clear is a relatively low one.
If you’re applying for a much larger loan, for example, you’re arranging finance on a new car, you’re trying to get a mortgage, or you want to apply for a business loan, you will be subject to a more in-depth financial examination. This is where you might encounter some problems – you’re applying for a much larger amount of money, so any hint of risk in lending to you will be taken much more seriously.
How Can You Mitigate This Risk?
Now you know that there’s a possibility for you to become negatively affected by someone else’s credit rating, it’s natural to think about ways you can avoid that risk. Fortunately, there are several things you can do now you know the risk in advance.
1. Have a Frank Discussion About Money
It’s important from the outset to determine how responsible someone is with money if you’re getting personally involved with them or you’re getting into a position where there’s going to be joint finances. It may seem like a “cold” thing to do, but it isn’t – the reality is that all of our finances matter, and if you get involved with someone who is not financially responsible, it could cause you considerable hardship in the future. In addition, one of the most common causes of arguments in relationships is money and both partners not agreeing on how to spend it. So determining a person’s approach to finances reasonably early can also help minimise the risk of financially related arguments later on.
2. Know When Your Credit Ratings Intersect
Another key point is to make sure that you know the exact point where your credit rating will become “tied” to another person. In the case of a relationship, this will generally be when you get yourself a joint account or apply for shared credit. It can also be when you apply for a mortgage with someone, whether a partner, sibling or housemate. Any point where you are taking joint financial responsibility for something, even to the point of arranging joint finance on a car, you are opening yourself up to the risk of them affecting you, so always be sure that you understand the risks. If you’re not sure, you can ask the lender, and they will be able to confirm it.
3. Know Your Partner’s Credit Score
Obviously, it’s not something you’re going to ask over dinner on a first date, but before you contemplate getting into a situation where your finances are going to become tied together, make sure you know the other person’s credit history. You should know in advance whether or not that person has any outstanding debt, any judgements against them, or whether money is going to be taken out of your shared account to repay their old loans. Remember that you’re under no obligation to share your finances with anyone, whether it’s a relationship or any other kind of personal/business arrangement. If you’re not comfortable with their credit rating, do not engage in joint financing.
4. Act Fast If the Relationship Breaks Up
It’s always an emotionally charged time whenever a relationship breaks down, whether it’s an intimate relationship or something like a housemate deciding to move out. Even so, you have to make yourself aware of the risks you face and take action to protect yourself financially as much as you possibly can. You need to begin looking even more closely at the activity in any accounts that you share to ensure there are no payments or withdrawals that you haven’t been made aware of. If you have any joint debts that you have taken out together, you should make paying these off a priority to ensure that you no longer have anything tying your finances together and can be a potential risk to you later on.
5. Officially Break Your Financial Ties ASAP
Credit agencies can offer you an official notice of disassociation, which means that officially speaking, you are no longer financially tied with the person you shared that account, loan or transaction with. You should do this for every loan you took out together, every finance agreement, and every applicable financial decision. This will mean that when a lender comes to check your financial history later down the line, they will see that you made the effort to be recognised as officially apart from that individual. This could stand you in better stead with your application.
How Can You Improve a Credit Rating?
A credit rating is never entirely set in stone. It’s a fluid and ever-changing thing affected by every financial transaction and decision you make. Improving a credit score is possible, and is quite easy if you’re able to actually get started.
The key is to start making “good” financial transactions wherever possible. That means paying your bills on time, not dipping into your overdraft, not building up late fees and arrears, and not having debts go to collections. If your debt is overwhelming, you might want to consider applying for some form of debt relief to wipe the entirety or a portion of it off. This will leave you freer to handle your finances better, meaning you can focus on making those “good” financial transactions that can build up the credit score again. So, just because a person has a black mark in their finances, it doesn’t automatically mean that they will prevent you from succeeding in every application you make in the future.
Keeping a Clear Focus Is Essential
If you want to avoid risking your finances, you must always look before you leap into any financial decision you make. Of course, a person’s bad financial history doesn’t mean you should avoid being close to them. But it does mean you should think twice before getting into any joint financial situations with them. Many people think they can improve a partner’s bad credit rating by using their own to “boost” it. But in reality, it’s just as likely that your good credit rating will be dragged down to the level of theirs. So it’s best avoided.
Before you make any financial decisions involving joint credit, joint finance or joint loans, be sure you know the person’s financial history that you’re dealing with. Ignorance is no excuse if you end up getting involved with someone who negatively affects your rating. So do your due diligence and be sure you know exactly what you’re getting into. You’re not obligated to share your finances with anyone.
A person you share finances with can indeed damage your credit score later down the line, but with some common sense and homework, you will be able to manage and avoid that risk.