How Will Ownership Transfer Affect My Credit?

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Debt is an essential part of credit scoring. Demonstrating your ability to maintain long-term responsibility is the cornerstone of financial health. The average person needs credit to purchase big-ticket items, but what happens when ownership is shared or transferred? Read on to learn how these factors could affect your credit.

Credit Card Balances

Credit utilization accounts for 30 percent of your credit score. The amount owed vs. the total credit limit illustrates your reliance on borrowed funds. The credit elite maintain an individual and cumulative ratio of 25 percent or less. Suppose you have the following credit cards:

  • Card A
    Years active: 9. Balance: $2,500. Limit: $10,000. Ratio: 25%
  • Card B
    Years active: 3. Balance: $450. Limit: $3,500. Ratio: 12.9%
  • Card C
    Years active: 0. Balance: $1,000. Limit: $10,000. Ratio: 10%

You opened Card C three months ago, and it provides zero percent interest for 18 months. To secure better terms, you are tempted to transfer Card A and Card B’s balances and close the accounts.

Card C may offer better terms, but transferring balances and closing accounts will do more harm than good. Closing Card A and Card B will eliminate 9 and 3 years of payment history, respectively. It will also lessen account diversity on your credit reports and increase your utilization ratio to 39.5 percent. With the right strategy, credit card balances won’t damage your score, but a few missteps will accomplish the opposite. Consider all factors before deciding to transfer a balance.

Mortgages

Transferring ownership of a home usually occurs in the following cases:

  • Marriage. Adding a spouse to your home title won’t affect your credit score, but it may raise your property taxes, affecting your liquid savings and emergency fund.
  • Divorce. Division of property is common in divorce decrees. If your spouse retains ownership of the home, you will sign a quitclaim deed which transfers physical ownership to your ex. Unfortunately, it does not remove your name from the original loan documents. Unless your ex refinances under his or her own name, you are still responsible for the outstanding mortgage debt. If your ex fails to pay, your credit will suffer the consequences.
  • Estate planning. Aging parents may consider gifting a home to their adult children during the estate planning process. Deeding the home to family before passing away carries a few risks:
    • Lack of control. Deeding the home to another person, even family, relinquishes your control over the property. Legally, they retain the right to sell it or even evict you from the property.
    • Lender consequences. The terms of your mortgage may prohibit ownership transfer. If the lender finds out, they may recall the loan and demand full payment, a consequence that is likely to devastate your savings and credit score.
    • Higher taxes. Relinquishing a mortgage after age 65 also means losing the ability to claim property tax exemptions, mortgage exemptions and other money-saving tools, resulting in higher taxes. The effects have the power to damage your budget and credit standing in the process.

There are plenty of safe ways to ensure your children’s inheritance. Talk to an estate planning attorney to avoid these mistakes.

Co-signing a loan

Ownership is complicated when co-signing is involved. Vouching for family or a friend on a loan application means using your credit score in lieu of theirs for approval. Although you aren’t the primary borrower, co-signing will affect your credit by:

  • Placing a hard inquiry in your file
  • Appearing as an open account on your credit report
  • Altering your credit utilization ratio and debt-to-income ratio (which is considered when applying for a loan)
  • Transferring responsibility to you if the principal borrower fails to pay

Shared ownership and debt transfer is dangerous without proper planning. Ensure your partners are trustworthy and consult experts before making any permanent decisions. The result will protect your credit along the way.

Posted in Finance
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