Why you should be careful of opening a joint account
If you’re thinking about opening a joint account with a significant other in your life, or as part of a shared account between housemates or friends, tread carefully. There’s a lot riding on the responsibility of the account, and your name will be on it. In the case something negative happens, like a bill payment is forgotten or you go into unplanned overdraft, the resulting mark could end up on your credit report.
It’s vital to know the credit history of the person or people you’re opening a joint account with, because that could affect how well they handle money. If they’ve shown they’re irresponsible in the past, it’s more of a risk putting your name on an account next to theirs. A joint account could be useful for your living situation, but you need to carefully consider if it’s the right option for your financial future. Here’s what you should know:
How does a joint account operate?
A joint account is split equally between the account owners (i.e. if there are two of you on the account, you’re both equally responsible for the funds and keeping up with payments). You can both have a card linked to the account, be that a debit or a credit card.
There are two main types of joint account – one where both parties are required to sign for transactions, or the other where either party can sign. The first is less convenient for day-to-day spending because it requires approval – it’s mostly reserved for business accounts or joint savings accounts. The second is much easier because it requires only one person to sign off on purchases or payments. If you trust the other person/people on the account, the latter option shouldn’t be an issue.
In the case of a credit account, there’s still a limit on the maximum bill you can rack up. For example, if you both decide to splurge while out shopping individually, and your limit is $4,000, you won’t be able to spend more than that, just like in a regular account with only one account holder. However, if you’re at the credit limit, both of your credit utilisation ratios may be 100 per cent if it’s your only credit account, and that’s where it can affect your credit report.
What is a credit utilisation ratio?
Your credit utilisation ratio is the amount of available credit you have (i.e. your credit card account limit plus any other cards you have) against the amount you owe across all of your accounts. When you have maxed out your card/s, your ratio is 100 per cent because you’ve ‘used’ all of your available credit. This could show lenders that you’re spending beyond your means because you can’t keep up with repayments to stop yourself hitting your limit – not something they look upon positively, as it indicates you pose more of a risk.
Even if the other person on your joint account does all of the spending, your credit report will be affected too, because you hold equal responsibility for the account. Checking your partner’s credit score or credit report before opening a joint account with them is important because it could affect your financial future as well as theirs. Be open about your desire to check their financial history and explain why – offer your credit report for perusal as well so it’s more of an open-book scenario. When neither of you have credit secrets to hide, there’s less chance the unexpected will occur.
Why use a joint account in the first place?
There are pros and cons of joint accounts, even if we’ve only focused on the latter so far. When you’re living with someone (not necessarily a romantic partner) and you share the expenses of your home, it can be more convenient to pay out of one account that you both pay into rather than organising for one of you to be the ‘apartment accountant’.
A joint account allows you to share the responsibilities of your home bill payments and grocery shopping.
Grocery shopping, bill payments, buying new furniture for the home, throwing parties and paying rent can all be done from a joint account. The same goes for people in long-term relationships, or married couples. If you live together, you’ll be sharing the cost of the home including utilities and maintenance. It makes sense to have a joint account where you can keep track of all your expenditure throughout the month.
A joint account could even be a savings account – you can hold separate transaction accounts where you’re paid into and you shop from, and then a joint savings account. You’ll both be able to see transactions into and out of the account, but most importantly you’ll see how much money you’re accruing (and any interest gained on top of that). Eventually, you may have enough for a home deposit, a new car, or a big family holiday.
Before you open a joint account of any kind, make sure you know the financial past of any other involved parties. They could pose a risk to your financial security. For more information or to get a copy of your own credit report first, contact Credit Simple today.