A couple is hurting over a lower credit score after an ex fails pays rent late — now their chance to buy a home may be gone. Here's how to protect your credit score

It can be a challenge to leave a relationship in the past, especially when there’s a child involved. Even more so if ties to that old flame burn your finances in the here and now. That’s the situation Beth from Philadelphia unfortunately found herself in.

Beth called into The Ramsey Show because her husband rents out his New Jersey house to his ex-girlfriend (1). The reason behind this arrangement is that the former couple have a daughter together, and his goal has been to maintain a stable environment for the child. The problem is, the child’s mother is consistently late with her rent payments, which has negatively impacted his credit score. And since Beth and her husband now want to buy their own house together, it’s a problem.

A tough situation

Beth’s husband bought his New Jersey house somewhere between 2016 to 2017. The house is in his name, Beth told show hosts John Delony and Jade Warshaw.

He’s been renting the home to his ex for five years, but he hasn’t been collecting rent payments from his former partner. Rather, he left her to pay for the mortgage herself.

They arranged it this way, as Beth explained, because the breakup wasn’t amicable. Beth’s husband wanted to avoid interacting with his ex as much as possible, but still wanted to be responsible for their shared child. While the mortgage payments are now up to date, the child’s mother has been late on 20 payments in the past five years.

Beth’s husband is “on top of his finances with the exception of this situation," but the late payments have lowered his credit score to the low 700s.

“That’s not as bad as I would expect,” Warshaw said.

To qualify for a conventional mortgage, Beth’s husband would need a minimum credit score of 620, according to Experian (2). But the higher the credit score, the more favourable the terms for a mortgage, including a lower mortgage rate.

Credit scores for Canadians range from 300 (poor) to 900 (excellent). In Canada — similar to our southern neighbours — the higher your credit score is, the better your chance is at getting the best rates and terms when you look to borrow money. At the very least, potential Canadian home buyers will need a minimum score of 680 to qualify for a home loan, as per Scotiabank (3).

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Next steps for Beth’s husband

Warshaw and Delony recommended that Beth’s husband try to sell the house as soon as possible and move on, especially since his ex has married. They suggested giving her six months’ notice to find a new place, which is more than reasonable.

“I wouldn't make a big drama about it,” Warshaw said. “I wouldn’t go talk about the past missed payments. I would just say, ‘Hey, it’s been five years, I think we’ve all moved on.’”

Beth expressed some concern about the impact on her husband’s daughter.

“The last thing he wants to do is throw them out,” she said.

Regardless, Warshaw and Delony insisted that giving six months’ notice to vacate isn’t leaving the ex and the daughter in the lurch. They also suggested that Beth’s husband could offer to sell them the house at a reasonable price. Otherwise, the ex should be given a six-month notice, with the stipulation that if they don’t pay their rent or if they damage the house, then that timeline will be accelerated. In that case, they’ll have to leave in 30 days.

If that threatens his daughter’s financial well-being, Delony suggested Beth’s husband could negotiate a new custody agreement where his daughter lives with them longer than every other weekend. But, they need to sever the financial connections for Beth’s husband’s sake.

The cost of mixing personal and financial choices

It’s not unusual to end up in a situation like Beth’s husband, where your desire to help someone you have a personal relationship with compromises your finances. And that someone doesn’t have to be an ex-partner: It could be a sibling, a grown child or another close relation.

Of course, the problem with helping someone you care about means you might end up with financial problems of your own. Those could include diminished savings and a negative effect on your credit score, making it harder for you to buy a home of your own.

For example, imagine cosigning for a loan to help a sibling out, but they fall behind on payments. That could leave you on the hook for those payments instead.

A scenario like this is why it’s crucial to be careful. What Beth’s husband could’ve done was enter into a formal lease agreement with his ex, including a payment schedule and penalties for late payments. Between now and when Beth’s husband sells the house, Warshaw and Delony suggested that a formal arrangement be put in place that outlines the consequences of not paying on time.

Had there been financial consequences to missed payments, the ex would’ve been more careful, sparing Beth’s husband whatever credit score damage he sustained. Any financial arrangement you have with a close relative should be made in writing so that each party understands their rights and obligations. Also, be careful with whom you choose to help. In this situation, Beth’s husband has a responsibility to help his ex because they share a child.

It’s difficult to say no to a former partner or family member. But, for the sake of the relationship — and your finances — it’s important to be firm and honest when it happens.

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How your credit score is calculated

A strong credit score is crucial when it comes to applying for credit of any sort, as it indicates your financial well-being to lenders and determines what rates and terms you qualify for. The higher your score, the lower the risk that you’ll default on payments, making a lender more likely to extend new credit to you. Your credit rating matters for any type of new credit you apply for: car loans, credit cards, lines of credit, mortgages or personal loans.

Here are the factors that affect your credit score in order of importance:

• Payment history. This is a repayment track record for credit cards, loans and utilities, and missed or late payments can significantly drag down your score. This is where Beth’s husband’s credit rating took a hit, when his child’s mother made multiple late payments.

• Credit utilization. Your debt-to-credit ratio is expressed as a percent, and indicates the amount of debt you carry versus the total credit amount available to you. A low ratio is a sign to lenders that you responsibly manage your debt and don’t rely on credit. A ratio below 30% is good, while 10% or lower is even better.

• Credit history. A long history of consistent and responsible credit use looks good to lenders. Older accounts have the strongest history and show your money management habits over time. Keep them open and active for a stronger history.

• Credit mix. Credit comes in many forms: credit cards, lines of credit and loans. Having different loan types shows lenders diversity in your portfolio, and that you can responsibly manage different types of debt.

Keep these factors in mind as you design a repayment schedule to improve your credit score over time. A healthy credit score is going to help you get the best financial products in the long run.

Article sources

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YouTube: My Husband Rents a House Out to His Ex-Girlfriend (Her Payments Are Always Late) (1); Experian: What Credit Score Do I Need to Buy a House? (2); Scotiabank: What credit score do you need to buy a house in Canada? (3)