How to perform a credit transfusion on your spouse
The one with good credit absorbs the bad-credit person's debt
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Dear Opening Credits,
My husband made very poor choices in his past and has some adverse accounts which won't go off his credit history until mid-2016. His score is 626. We were able to use his VA loan last year to buy our first home (thank goodness!), but will be looking to purchase again around 2016. Because of these adverse accounts (two collections and several where he made many, many late payments), I don't think his score will improve until they are removed. He currently has two credit cards which are maxed out.
First question: will paying these two credit cards off help his score? My situation: I have a good score -- 769 (I have tried to make good credit decisions). We won't be needing my good score for any big purchases anytime soon and in fact, my good score doesn't matter when it comes to our VA loan for our home. Bummer! Basically, I think my score would be OK if it took a minor hit.
And here's my second question: Should I open up a new credit card to get a good balance transfer deal, or would my score take less of a ding if I got a personal loan through my bank?-- Nichole
All those excellent credit choices you've made have indeed translated into a great credit score! Assuming we're talking FICO scores here, which range from 300 to 850, anything in the mid 700s and higher is considered excellent.
I'd like you to keep those numbers high. That's possible, even if you were to assume some (or all) of your husband's debt so that his score will rise.
The collection accounts that are on your husband's reports are being factored into his rating. Though old, they're still poisonous to the score, since payment history is the most important factor in a FICO. A paid debt is better than an unpaid one, however, so have him delete those liabilities. He'll see a scoring improvement with that action alone. As for the late payments, nothing can be done about them but wait until they eventually disappear from his file.
His maxed-out credit cards are the real problems. The second weightiest category of a FICO score calculation is credit utilization. That is the amount one owes in relation to the amount one can contractually borrow. Maintaining balances less than 30 percent of a credit line is good, not having a balance at all is best. Owing 100 percent of his limit means his ratio is way off, causing his scores to plummet.
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So how can you assume his obligations so that his scores rise while insuring that yours don't dive? By doing the math. I'll use simple numbers to demonstrate.
Let's assume your husband has two credit cards with limits of $5,000 each, so he owes $10,000. And let's imagine that you, on the other hand, have two cards with limits of $50,000 each and no debt. So there is $100,000 available to you. If you were to add his balances to your empty cards, your utilization ratio would change, but not dramatically, as you'd owe just 10 percent of what you could borrow. The best credit scores go to those with the lowest ratios, but you would have room to maneuver.
In the event that you do not have such large credit lines to play with right now, you may be able to manipulate the situation a bit. For example, you can ask your current creditors to increase your limits (thus expanding your utilization) or, as you're considering, apply for additional credit cards.
The result of such a strategy: Your husband will be out of debt and his scores will rise. You will own his debt, but your scores should be OK if you keep that ratio in the healthy zone. Be aware, too, that most balance transfers come with fees of around 3 percent of what you take on.
Still, I'm troubled by the underlying issue, which is your husband's way of dealing with his (and your) personal finances. He needs to rein in his spending and treat all accounts responsibly, or you'll wind up bailing him out of credit jail again. The time is now for him to get help immediately, take it seriously, then change his behavior. You shouldn't have to mop up his messes. Refer him to the National Foundation for Credit Counseling or the Association of Independent Credit Counseling Agencies to locate a professional credit counselor who will work with him on budgeting and charging skills.
See related: Adding a spouse as authorized user to boost score
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