In case you haven’t heard, the Federal Reserve has changed the rules of the credit card approval game. No longer can issuers consider household income when people apply for credit cards individually; they must instead weigh individual income right along with individual debts. While this move actually makes a great deal of sense, it’s made many stay-at-home parents rightfully concerned about their ability to build credit independently. The fact of the matter, however, is that the ability to apply for a joint credit card account actually means there is no reason to be worried.
Joint accounts are often a cause for confusion among consumers, though, so it’s probably worth looking into exactly what they are, how they work, and what to look out for when considering one. Mishandling such an account can have serious consequences, after all.
What is a joint account?
No, that’s not as stupid of a question as you might at first think. Sure, joint credit card accounts are those shared by more than one person, but in reality there are a few different types of accounts that the term could apply to, each of which confers different rights and obligations on the users.
Co-signer Accounts: These are accounts that involve a primary account manager and a co-signer, who merely provides financial backing, agreeing to cover any unpaid debts and enabling the primary accountholder to garner approval where his credit standing and/or income would not ordinarily merit it. The co-signer doesn’t get access to funds or, in most cases, account information as part of this arrangement, but if the primary accountholder misses a payment, it could be noted in the co-signer’s credit reports.
Authorized User Accounts: An authorized user is basically the opposite of a co-signer in that he can access account funds but likely isn’t liable for most unpaid debts. Lenders may try to collect for specific charges made by the authorized user, but the level of liability certainly isn’t the same as for a full user.
True Joint Accounts: With these joint accounts, both parties’ finances are considered for approval purposes, both parties can use account funds, and both parties are 100% liable for debt, which means if the other person on your account doesn’t pay, you’re liable for the total balance, not just half of it. In addition, no asterisk exists next to a joint account listed on a credit report, noting that any mistakes made might not be yours. Instead, you’ll reap the full benefits of both accountholders acting responsibly or experience the full repercussions of either party being reckless.
What else do you need to know about joint accounts?
Most of us are somewhat familiar with the implications of being a co-signer or authorized user; it was simply important to discuss them in light of the confusion that could arise between them and true joint accounts. Nevertheless, we’ll stick with those truly shared accounts in this section.
- Miscommunication can have painful consequences: You had better set up automatic monthly payments or reach an agreement with your partner about who is responsible for making payments on time each month because if lines get crossed and payments are missed, both you and your partner will see your credit standing suffer.
- Divorce has no jurisdiction: A divorce court cannot alter the terms of a joint credit card account by splitting up amounts owed between the two parties involved, even if it’s an even divide. Both parties are completely liable for all shared debt, which can cause an uncomfortable standoff following a divorce. That’s why it’s recommended that, prior to filing divorce papers, you: a) Pay off joint debts, b) Ask your lender if they’d be willing to take one person’s name off of the account with both accountholders’ consent, or c) Use balance transfer credit cards to divvy up the debt onto two individual credit cards.
- Death is different: Not only is the death of a loved one a traumatic experience, but the way debt from a joint account gets handled may increase your financial liability. Unlike debt from an individual account – which is the purview of one’s estate and will be paid along with other amounts owed in an order determined by an administrator, an outstanding joint account balance will fall on the shoulders of the surviving accountholder.
Ultimately, joint credit is an opportunity. It’s an opportunity to make a couple’s finances easier to manage, to build credit in the absence of independent income, and if you aren’t careful, to damage not only your own finances, but those of a loved one as well. So don’t enter into a joint credit card account unless you are ready to handle the responsibility and have fully considered different unfortunate scenarios like divorce or the death of a loved one.