DY: Joel, you are The Man on the credit card discussion board. How did you get so smart about this stuff?
JC: Well... first, I don't consider myself an expert on credit cards or consumer credit. My chosen field of expertise is computer programming; but I've always had an interest in law and finance. But a personal financial crisis helped focus some of that interest toward my own personal finances.
My employer sent me to Santa Barbara, Calif. for a few months in 1990 to work on a project. With my wife's assistance, we had managed to max out all of our credit cards (about $10,000 to $12,000), and we were living paycheck to paycheck. The weekend before I left, my wife asked if she could start a new diet program. I told her we could think about it after I got back in a few months.
The next weekend all the bills I had written bounced and our joint checking account had been cleaned out by a sizable check to Jenny Craig. I was left stranded in Santa Barbara without any money for living expenses and no way to cover those bounced checks. That experience started a long search for a way to get a handle on our finances.
That event inspired me to look for ways to isolate the damage done to our finances and protect our assets and my credit from her mistakes.
DY: Sadly, at its core, that's a very common scenario.
JC: You have to understand that dealing with these issues can be a double-edged sword. It can go a long way to protecting your sanity; but it can also appear as a sign of distrust between you and your spouse.
In general only the more responsible spouse really has anything to worry about; but when a relationship is young, it's difficult to know which of you that's going to be. For that reason, everyone should take a defensive position with his or her finances. Familiarize yourself with the debt-collection laws available in your state of residence. It can be especially helpful because if things go seriously wrong with your spouse's finances, you need to know what rights you have to protect yourself and your assets.
DY: What should couples who have wildly different credit scores (and ideas about managing money, for that matter), do to, as you say, isolate the damage as well as work toward improving their credit situation?
JC: First, your credit report is entirely your own, so keep it that way. It may sound harsh, but whenever possible, don't allow your spouse to hold joint liability accounts with you. This may even include your home if you can afford it on just one income. Even if you don't suspect your spouse of bad financial management, it's probably best to keep debts separate so your credit won't become impaired if a problem arises.
Also, don't add each other as "authorized users" to your accounts. That way, one person's mistakes don't show up as the other's mistakes as well.
If you live in a community property state like Texas where I live, everything you own is also your spouse's, even the property solely titled in your name. (There are exceptions to this rule, such as anything given as a gift or inheritance and property obtained before marriage if not commingled.)
If you live in a community property state, your assets are exposed to satisfy a spouse's obligations; but your credit rating is not. That means my spouse's creditors can sue my spouse, but not me. They can seize our assets, but not my income, and just as importantly, they cannot (legally) affect my credit rating no matter how that turns out. The downside to this is that not all creditors and not all collection agencies understand this and sometimes the confrontations can get nasty.
DY: What about mismatched couples -- credit-wise, at least -- who want to show their "togetherness" financially?
JC: It is possible to jointly own property with a spouse that's financially irresponsible -- as long as you can trust them not to borrow against that property without your knowledge. In fact, it can be desirable for estate planning purposes. Joint ownership with rights of survivorship is a very useful means of ensuring that a piece of real estate or a bank account passes automatically to your spouse when you die.
In just about every state, such ownership avoids probate court because your share in the asset terminates when you do.
DY: Let's talk about credit reports. Lately people have gotten a lot smarter about FICO scores and the lot. But there's still some confusion. What are some of the big misconceptions you encounter on the discussion boards?
JC: People seem to think that credit scores know something about your income. They don't. The only times your income gets updated on your report is when you add that information or when your lender does -- and your lender rarely does. Because the information isn't timely, credit scores cannot rely on income when trying to determine creditworthiness. Besides, your income probably isn't a very good measure of whether or not you're a deadbeat.
Most people that know anything about the system at all understand that not all credit bureaus have the same information; but most people don't understand that not all credit scores use the same formula. Each credit bureau offers their own version of a credit score -- of which FICO is just one -- and they also may offer legacy-scoring models to various lenders. To complicate matters further, if you order a 3-in-1 credit report with scores, you'll get scores calculated by whatever scoring model is used by the credit bureau that owns the company that's selling you the 3-in-1 report. That score may differ from the scores you would get if you ordered your reports separately.
Finally, people dwell too much on just a couple of points on a credit score. A couple of points is not usually that important. As long as you have a score that's high enough to get you the best rate or a targeted rate, additional points on your score buy you nothing else -- and that's the entire point of knowing and trying to manage your score.
DY: Another thing people are surprised to learn is how many entities are using the credit scoring system to base all sorts of business decisions -- like insurance premiums or even employment.
JC: Yes. Everyone seems to be checking your credit these days. My state has been debating this issue with insurance for several years now and only recently came up with guidelines on how your credit history can be used in relation to your insurance premiums. Basically, the only item they excluded is obligations involving medical providers, though I'm not sure how they can tell that from your credit report.
This isn't all bad though. My own homeowner's insurance renewal premiums went down almost $300 this year because this is the first year my insurance company has considered my good credit score.
DY: Since individuals don't have access to the credit scoring system every different business employs, I've come to the conclusion that it's really not the score that matters so much as the underlying information that is used to calculate it. People would be better served by confirming the individual entries on their credit report card.
JC: As many people know, credit reports are often full of mistakes or outright lies. What many people don't understand is that creditors aren't obligated to say anything at all on your credit report. This can be a huge negotiating asset or a huge liability, depending on whether or not you're trying to build credit or to rebuild it.
DY: Really, how often do you think people should investigate their credit situation -- order their credit reports/scores? The industry says once a year. The media writing stories about identity theft and the like make you think that we should check it right now because everyone is out to get you. I think the industry scare tactics are a way to drum up business. But I'm a big conspiracy theorist.
JC: Gosh, that's a tough one. If they were free and available online, I'd say twice a month. But once a year should be frequent enough to catch most mistakes before they cost you a lot of money. Of course, if you own your home outright and are independently wealthy, retired, and never plan to owe anyone again, you can probably afford to ignore your credit report altogether. Even if someone tries to steal your identity, they'd have to sue you to really make it your problem.
As for the industry scare tactics, you're probably right -- they're overblown. But you also probably don't want to hear my theory on why the entire industry is based on a fundamentally criminal premise....
DY: Oh, yes I do! But let's take this offline so I can turn it into another column.
All the "Who shot JFK?" stuff aside, a lot of Fool readers are like me -- in credit La La Land. I have a fine credit score (which I plan to reveal publicly very soon) and no immediate plans to switch credit cards, borrow money for a home, or get a new job. What should someone like me be doing credit-wise?
JC: Nothing. Pay your bills on time, pay off your debts as fast as you realistically can, and check your credit report periodically for mistakes.
It's not rocket science. Most people have good credit precisely because they're not doing anything wrong. It's the occasional stupid mistake or misconceptions that usually cost people money.
DY: You see the very best and the very tragic on the Credit Discussion board. Name names. Tell me what you find inspirational on that board.
JC: Oh gosh. Confession time, eh? The board is really big on what we call Happy Dances. Many of the board members are trying to recover from bad habits and deep debt and seeing others celebrate their successes inspires them to continue with their plans.
I've been there, too -- had a lot of debt and worked my way out of it. But what inspires me the most are stories about someone leveraging the system or using the system knowledgeably to their advantage. Because of that, I have to say the most inspirational person to me on the Consumer Credit board has probably been xraymd. Her apparently analytical understanding and creative use of credit has been nothing short of impressive to me.
