How loved ones can destroy your finances
Family can be a source of love, support and emotional comfort. But those benefits can be overshadowed when loved ones leave us with maxed-out credit cards, debt and other money-related maladies.
Here’s what you can do to keep family and partners from damaging your finances beyond repair.
Joint account? Avoid overdrafts
Moving in with a significant other isn’t always seamless, and combining your money in the same checking account can complicate things even more. With a joint bank account, you’ll both be on the hook to pay overdraft fees. If you don’t, your bank might close the account, which can make it difficult for you to open checking and savings accounts in the future.
While couples can use a joint account for shared expenses like groceries, using that account’s debit card for a solo night out with friends may not be as wise. Partners should set ground rules on when it’s OK to dip into the shared funds.
Use online and mobile banking to monitor balances in shared accounts, and sign up for text alerts that warn you when the account is approaching overdraft territory.
Sharing a credit card? Protect your score
Sharing a credit card with anyone, even a spouse, can be risky. Depending on the type of account you have, you may be responsible for the bills even if you didn’t make the purchases.
If you’re a co-signer or have a joint account, you’re both liable for paying the bill. Both of your credit scores may be damaged if one of you maxes out the credit line or misses a payment. If your spouse is an authorized user on your credit card, you’re ultimately responsible for the bills, but the card may also show up on your partner’s credit report.
The best course of action is to have separate credit cards in each of your names. Your purchases are private and you each pay your own bill. Many couples, though, want to manage shared expenses. Having a joint credit card for household purchases solves the problem, as long as you agree on its use and payment.
Sibling business partners? Proceed with caution
Getting a small-business loan is tough, and co-owning a business with a sibling with poor credit can make it even tougher. While personal credit scores are just one of the criteria lenders look at, bad credit can hurt your loan approval chances and may increase the cost of financing.
One way to guard against that is for you and your sibling to build up your credit scores before applying for a business loan. Besides paying bills on time, check your personal credit reports for errors that could be hurting your score. Contact the three main bureaus — Experian, Equifax and TransUnion — to have them removed.
More established businesses seeking bank loans should check the three major business credit bureaus: Experian, Equifax and Dun & Bradstreet. You can improve those scores by correcting errors, keeping your information current, making on-time payments and keeping your public records clean.
Helping pay for college? Know your options
Whether you’re co-signing a private student loan for your child or taking out a parent loan to help pay for their college education, the impact on your finances can be significant.
If a student stops making payments on a co-signed loan, the co-signing parent is legally responsible. To avoid a hit to your credit rating, see if your child can refinance the loan. She’ll need good credit and a stable income to qualify on her own. Alternatively, some lenders will release the co-signer if the primary borrower makes on-time payments for a certain period.
Some parents take out a federal direct PLUS loans in their own names to help pay their child’s education costs. These loans can’t be transferred to the child, but if you want to remove yourself from that obligation, your child can refinance the loan through a private lender. Not all student loan refinance lenders offer this option, however, and refinancing erases federal loan perks like access to income-driven repayment.
Loved ones have enormous influence on our lives, including our finances. These tips can help prevent relatively minor headaches from becoming more painful.
Tony Armstrong is a staff writer at NerdWallet, a personal finance website.
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