When entering into a romantic relationship, a partner's level of debt is often the last thing on your mind, but it is a crucial consideration when it comes down to avoiding financial heartache in the long run. More often than not, New Zealanders fail to do their homework on their partners before merging their finances, which can result in an accumulation of what is commonly known as relationship debt. Below, illion provides you with some tips to avoid relationship debt.
- Conduct due diligence
- Be aware of credit and legal obligations
- Spend within your means
- Don't avoid the conversation
Before companies merge, both parties often conduct due diligence on each other to confirm that what they know about the company is accurate and to determine the level of financial risk involved. Similarly, before you enter into a long-term relationship where you will be sharing finances, it is imperative you get a clear picture of his or her financial health.
Request to view your partner's credit history - this not only establishes trust and honesty between both parties, but also alerts you to any bankruptcies or defaults listed on his or her credit report that you may be unaware of. It also alerts you to the level of debt appetite your partner has, such as the number of credit applications made in the past five years and the number of credit accounts currently active.
Apart from bankruptcy information, a credit report also contains public record information such as court judgements, court writs, details of any business he/she owns or is a director of.
It may seem somewhat unromantic to gain a copy of your partner's credit report, but the consequences that could be incurred from failing to do so can cost you financially and emotionally if the relationship ends or sours.
These costs include:
- Being liable for your partner's debt
- Having a black mark on your credit report
- Difficulties in accessing credit in the future
- Further arguments down the track regarding relationship debt
A personal credit report is free through illion and will enable you to determine if your partner has a poor credit history and thus make informed decisions.
Getting a joint or supplementary credit card may seem like a great idea at the time, particularly if one side has a poor credit history and is unable to apply for a credit card on his/her own. It may also seem like a quicker way to accumulate points on a rewards card.
However, this is a dangerous step as it can lead to accumulation of joint credit card debt. Having two people listed on an account may give both of you a lower interest rate and a higher credit limit, but it will also makes you responsible for your partner's debt and vice versa, in addition to your own.
In the event of default, the creditor can chase up the outstanding debt from either party - even if it's not yours. This can lead to legal action, which can be both messy and stressful.
So what should you do if this happens to you? Cancel the credit card immediately and settle the existing debt between both of you. If neither party can afford to pay off the debt in full, negotiate a payment plan. Keep your credit cards separate; this will also ensure that your credit history is not affected by your partner's.
One of the biggest reasons why couples fight is over spending habits, particularly if one party constantly spends more than the other - and doesn't tell the other about it. This is extremely significant when you have a joint bank or credit card account as depleted funds have to be accounted for with your partner.
The solution is to budget your spending and ensure that neither of you are accumulating any debt. You can do this by recording all forms of income you receive as a couple and individually; then adding up rent, utilities and other expenses against your combined income. This will make it clear what money you have left over for personal or discretionary items.
Couples will talk about almost anything - except money. Personal finances, including wages and especially debt are a highly sensitive topic. There can be a lot of stigma attached to elevated levels of personal liability, to income levels and to a poor credit history.
However, this needn't be a sensitive topic, particularly if a couple plans to merge their finances in any way. A frank discussion of each other's current financial status is critical, once it becomes clear that mutual bank accounts or credit agreements will be entered into. Beyond assessment of debt commitment, financial openness is vital for mapping what may be possible in the future, including mortgages and other long-term investments.