When it comes to maintaining good credit, there are times that having joint accounts, commonly known as co-signing an account, can be very beneficial to all involved parties. However, there are a couple of ways that a joint account can negatively affect your credit when used improperly.
In this article, we want to look at five reasons that a joint account can hurt your credit score, because we want to make sure that you are fully informed before co-signing with anyone.
1) Your Co-signer Refuses to Pay Their End.
In some cases, it is possible for two people to share a joint account with the intention of sharing the debt load for a purchase that they want to make together. Maybe a couple of families want to share the purchase of a boat so that they can all use it on the lake or something like that.
However, in the instance that the other party in your joint account became unable to pay their end of the loan, you are still responsible for the full balance of the loan. If you were to become unable to pay, you would incur a derogatory mark on your credit report.
2) You Co-Sign A Child To A Credit Account.
In many instances, allowing your children to become co-signers on your accounts at an early age can be a great strategy. Without having any of the responsibilities of managing credit, a child can develop a great score this way before they ever become a full-fledged adult.
However, you risk severely hurting your child's financial future if the adult runs into financial problems and becomes burdened with too much debt.
3) It Can Reduce Your Chances for Approval.
Let's assume that you are planning to be married soon. You have managed your finances well and have an excellent credit score of 760. However, your soon to be spouse has had difficulty managing finances and has a low credit score.
While credit reports don't merge when you marry, if you co-apply with someone else for credit and they have a poor score, this can hurt your chances of approval. As a result, it may be best to have all credit run through the person with a superior FICO score.
4) Your Joint Account Holder Could Use Too Much Credit.
Again, let's assume that you are newly married. You decide to set up a joint credit card account with your new spouse. If that spouse goes on a spending spree and uses 60% of the credit available to you both through that card, it could hurt your credit score. This is because the credit bureaus look at credit utility (i.e. how much you are using versus what's available to you) as a factor in determining credit risk.
5) It Can Reduce Your Average Credit History Length.
Now, while this won't "ruin" your credit, per say, it is important to note that adding a new joint account can reduce the average length of history attached to all your credit accounts. This usually won't hurt your score terribly, but it may dock it a few points while you lengthen the history attached to your new credit account.
Wrapping it All Together: Make Good Decisions.
So, are joint accounts good or bad? The answer is that they are neither. However, as you can see from the above, it is highly important that you make wise decisions when (or if) you decide to set up a joint credit account. You will want to make sure that your co-signer is reliable and that you would be able to make all the payments associated in a timely manner.
Also, it is important to shortly point out that have a joint checking account cannot affect your credit by any means, as is often mistakenly stated, because a checking account doesn't deal with your ability to handle credit. As a result, it doesn't affect your score.