On average, about 50% of all US marriages end in divorce, with one of the top causes being money. So whether you're a newlywed, nearly dead, or somewhere in between, it's not too late to strengthen the financial foundation that is vital to a successful marriage. Here is the first in our series of blog posts on financial mistakes made by married couples, entitled "M³ - Marriage Money Mistakes":
Mistake #1: Closing all credit cards so you can open brand-new joint accounts
Marriage introduces a life filled with newness: you get rid of the worn-down, not-sure-if-I-even-want-to-sit-here, bachelor-pad sofa, and get a cool, black leather one. You’ll throw out your mismatched plastic cups and replace them with a set of crystal glasses from Macy’s. And your Star Wars bed sheets just don’t seem to go as well with your sleek bed frame as 1500 thread count Egyptian Cotton sheets. As you get rid of the old and embrace the new, make sure you don’t apply this same rational to credit cards—closing out all individual cards and opening new accounts jointly. Doing so is completely unnecessary and guarantees a nosedive in your credit score.
When you close all your credit accounts, you've lost two major factors FICO uses to determine your credit score: available credit and length of credit history. Instead of wiping the slate clean and opening all new accounts, take a look at what you have and combine. First, determine which card you’d like to use together. You may choose the card with the lowest interest rate, the best rewards program, or the best card design. When you know which card(s) you’d like to use jointly, simply call the toll-free customer service number on the back of the card and ask the creditor to add your spouse as either an authorized user or a joint account holder. And in about 5 minutes, you’ve got a joint card for you both to use without jeopardizing your credit scores.
If you're set on simplifying your credit portfolio and want to close accounts, then make sure the account you want to close is not buoying your credit score. Remember those two important FICO factors you just read about? Well, make sure the card you’d like to close won’t affect those factors. First, each person should obtain a free copy of his/her credit report. Next, with free credit reports in hand, identify your open credit accounts and determine when each credit account was opened, the credit limit, and the available balance. If the account you want to close is your oldest or has a high credit limit, then you should think twice before closing it. Closing your oldest card could shorten your length of credit history enough to lower your credit score. Closing a card that has a high credit limit could drastically increase your credit utilization, causing your score to drop substantially. Of course, if this card carries an annual fee, then you should make a decision whether you’d like to continue paying the annual fee or risk the drop in credit score. If you have good credit habits, then a drop caused by closing accounts could only be temporary.
Cutting the financial fat in your portfolio is not a bad thing, but first make sure it’s not keeping your credit score alive before zapping it away.
