Can I Help Improve My Partner’s Credit Without Jeopardizing My Own?By Bryan in Credit
Is your spouse or significant other having credit issues? Is their low credit score preventing them from accessing loans and other credit products? While bad credit isn’t the end of the world, it can be a problem if your partner is trying to get approved and save on interest in the process. Their bad credit can also be problematic if you’re applying for a loan together, such as a joint mortgage, where approval would be hard to obtain if one borrower isn’t as strong financially as the other.
Can your spouse’s credit kill your mortgage? Find out here.
That being said, bad credit isn’t permanent. It may take some effort on both your parts, but restoring your partner’s credit will definitely be worth the struggle.
What Caused Your Partner’s Bad Credit?
Before we move on to solutions for your partner’s credit woes, we should discuss what bad credit is and what might have pushed their credit to that point. The good news here is that, even if you’re married, both you and your partner’s credit profiles are separate. So, unless you’ve already applied for a joint credit product (wherein both your credit profiles will be affected by your joint payments), neither of your credit actions will affect each other. Even if your partner continues to have bad credit, yours will not change unless you personally do something to jeopardize it, such as by making a late payment.
Bad Credit (credit score of 620 or less)
If your partner is a Canadian resident and has used a credit product in the past, they have a credit score. From the moment they were first approved, their lender began reporting their progress to one of Canada’s two main credit bureaus, Equifax or TransUnion. The bureau the lender works with would then have built them a credit report, where all their relevant personal and credit-related information over a certain number of years would be kept.
Your partner’s 3-digit credit score rises and falls according to the way they use their credit products. Good payments (on time and in full) make their credit score rise, improving their approval chances and lowering their interest rate for future credit products. Bad payments (late, short, missing), cause their credit to drop and will have the opposite effect when it comes to their approval and interest rates later on.
Once their credit score falls below 620, they’ll officially have bad credit. Most lenders (not all) will perform a credit check whenever your partner applies for new credit. The lender may see their bad credit score and payment history, then decide they’re too risky to approve. If approval is reached, your partner could be given a higher interest rate than they would receive with good credit. That rate may cost them hundreds, maybe thousands of dollars more over their payment term than they’re financially comfortable with, putting them in serious debt and making their credit even worse.
Check out this infographic to see how bad credit can affect your partner’s daily life.
Are There Lenders Who Accept Bad Credit?
Again, getting approved with bad credit is not impossible. However, bad credit certainly lowers approval chances in general, especially from banks and other prime lenders, where strict standards need to be met during the application process. If that’s the case, there are private and alternative lenders that your partner can apply with, who may accept their application and offer them a slightly higher interest rate. If your partner’s credit is very bad (lower than 560), they may need to apply with a bad credit lender. While they are more likely to gain approval there, once again, they may receive an unaffordable interest rate.
What Happens if My Partner Applies More Than Once?
Let your partner know that even if their first application is denied by their bank or another lender, it’s in their best interest to not applying for new credit multiple times in a row. Every time a lender pulls their credit, a hard credit inquiry gets listed in their report and remains there for several months. Hard inquiries cause your partner’s score to drop by a few points. If they’ve been applying left, right, and centre, not only will their score be damaged, but other lenders will see those application denials, assume they are a risky borrower and may deny them as well.
Click here to learn how long information stays on your credit report.
What’s the Difference Between Revolving Credit and a Loan?
Your partner should also understand what kind of credit product they’re dealing with in the first place. There are two types of credit available to Canadian borrowers, known as “revolving” and “installment-based” products.
Revolving Credit Products
This category applies to products like credit cards and lines of credit, anything that involves a revolving credit limit, rather than a set loan amount. Your partner can borrow from that designated limit as they need, then repay those amounts on a monthly basis. In addition, they’ll only have to pay interest on the amounts they’ve borrowed.
Want to know how to manage your revolving debt? Look here for some answers.
They’ll also have the option of making a minimum monthly payment. While it’s not a great idea for your partner to continually make minimum payments, as they’ll be incurring interest on the unpaid balances, doing so should help them avoid penalties. They can withdraw from and repay their credit limit until their product expires, wherein they are free to renew the account or cancel it and move on.
What’s the difference between a line of credit and a credit card? Look here to know.
This category is more commonly associated with products like personal loans, mortgages, car loans, short-term loans, and of course, installment loans. Unlike revolving products, your partner will request a specific loan amount. If they’re approved, that loan will be deposited directly into their bank account.
Whether or not they actually use any of that money, they’ll be given a certain timeframe within which they must repay it through equally divided installments. That payment schedule can be negotiated with their lender so that it’s suitable for their financial needs, but generally takes place over several months to several years, depending on the loan amount. Once all their full balance has been repaid, your partner can apply for another loan or move on to their next endeavour.
How Your Partner Can Improve Their Own Credit
Probably the only good thing about bad credit is that it doesn’t always need to be bad. As a consumer, you have control over your own credit score, which means you can put the work in to improve it on your own.
Want to see some pros and cons of joint bank accounts? Check this out.
Making Responsible Payments
One of, if not the important things for your partner to do is make responsible payments on all their active credit products. Whether the products are revolving or installment-based, it’s essential for them to pay all their bills on time.
Here’s what happens when you or your partner can’t make their payments on time.
This is particularly important when it comes to regular installment-based loans where collateral is involved. When your partner applies for a larger loan, such as a car loan, they may have the option of offering their assets (properties of significant value), in order to secure the loan at a more affordable interest rate. If they default on too many payments, however, their lender has the right to confiscate the asset in question, then sell it to recuperate part of their loss.
For the ins and outs of asset-based financing, watch this.
Paying Down Debt
Paying down their other existing debts is another essential step for your partner to take. Having debt can make a bad financial situation even worse, especially when that debt is spread out through multiple lending sources. With several unpaid balances and payment dates to worry about, it can be tough to keep track of and pay off every expense that comes their way. This leads to forgotten payments, which ultimately results in credit damage.
Take a look at these debt management tips for credit users.
In addition, future lenders will see your partner’s spotty payment history. Once again, this leads to damaged credit from hard inquiries, followed by rejected applications. If remembering payment dates is the issue, ask them to set up automatic payments.
Disputing Credit Reporting Errors
Your partner’s damaged credit might not even be their fault. Information can sometimes be reported incorrectly. Elements in their personal profile (name, social insurance number, address, etc.) might also be incorrect. Or, even worse, the errors could be caused by fraud or identity theft.
Any of these common errors can cause terrible credit damage if they go uncorrected, which can happen if your partner doesn’t request their credit report at least once per year. All Canadian credit users are entitled to one free copy of their report per 12 months. If they do find a mistake, they can send a dispute request to the bureau in question. If the error is legitimate, it will be corrected within a few days.
Reducing Their Credit Utilization
When it comes to revolving products, your partner’s credit utilization ratio will be particularly important. As we said, revolving products come with a set credit limit. The more of that available credit they use, the closer they will get to their limit and the further their credit score will drop. If your partner wishes to avoid this credit damage, they must use up as little of their available credit as possible. That means paying their monthly balances in the fullest amounts they can manage or requesting a credit limit increase.
Read this to know how your credit card can be used to improve your credit score.
More Drastic Measures
Are the solutions above not enough to improve your partner’s credit? Don’t give up, because more drastic measures can be taken. While they aren’t always easy or cheap, they can help your partner fix their credit and apply regular credit products later on:
- Credit counselling – When their credit situation is becoming unmanageable, your partner can seek out a licensed credit counsellor. They can provide your partner with the right information and solutions to resolve their credit and debt related issues.
- Secured credit cards – These cards are for borrowers with bad credit or who can’t get approved for a normal card. Your partner will need to offer a security deposit equal to their desired credit limit. They can then use the secured card to improve their credit. Once they’ve paid back their full balance, they can cancel the card, collect their deposit, and apply for a regular unsecured card.
Want to know what goes into calculating your credit score? Click here.
What Can I Do to Help Improve My Partner’s Credit?
If you want to help your partner improve their credit so that you can apply for a joint mortgage in the future or simply because you want them to have the same financial freedom that you have, the good news is there are a few things you can do to.
Add them to your credit card account – If you use a credit card to pay for all your necessary expenses and then responsibly pay it off at the end of your billing period every single month, your partner’s credit score could seriously benefit from it. Add them as a second user on that credit account and your responsible habits will help improve their credit score over time.
Cosign a small loan for them – Paying off a small loan is a great way for your partner to improve their credit, but if they can’t qualify for one on their own you could cosign for them.
Debt consolidation loans – If your partner’s debt is the root of their credit problems, they may benefit from a debt consolidation loan. However, these loans do often require a borrower to have good credit, by cosigning for them you can help them gain access to the debt relief they need to improve their credit.
Try reading this if your partner’s debt consolidation loan application gets denied.
Choose Loans Canada
If you and your partner have decided that cosigning a loan is the best way to help improve their credit score, we can help. Fill out an application today.