Rebuilding your credit is like walking up the down escalator.

You can make progress gradually if you keep at it, but once you stop doing anything, you wind up back at the bottom again.

If you haven’t read the first two parts of this series on rebuilding your credit, you can click here to access part 1 and right here to access part 2.

In this article, we are going to explore the fifth and sixth rules of credit:

  • Rule #5: What You Don’t Use, You Lose
  • Rule #6: Be Careful With Joint Credit

There are a couple of common misconceptions around credit and loans that we are going to tackle right now.

Most people believe that when you take out a loan and make your payments on time, your credit score should gradually improve.

But like we went over in the first part of this series, that’s not the whole story.

What most people don’t realize is that when you take out a loan, you are considered to have taken out the entire balance, all at once. Similar to using all the credit available on your credit card.

And as we now know, having a balance over 50% of your limit is considered a negative signal to the credit reporting agencies. This means that when you take out a loan, it’s actively suppressing your credit until you reach the halfway point of paying it down.

But that’s not all.

Most people think that once they pay off their loan completely that it will reflect positively on their credit score.

And that intuitively makes sense, doesn’t it?

You managed to pay off your loan like a responsible borrower, on time without any issues. Why wouldn’t that look good on you?

joint credit

The trouble is credit agencies value activity. They want to see you using your credit consistently over time.

And when a loan is paid off, the activity stops. It no longer adds or subtracts anything to your score each month. Each credit account has to show as current, in order for it to count against your credit score.

This rule applies to more than just loans too.

If you have a credit card that you have at a zero dollar balance that you haven’t used in the last six months, it’s considered an inactive account.

In many ways, a lack of credit history, in this case, an inactive account, is more detrimental to your credit score than missing your payments every once in a while.

When it comes to getting financing like a mortgage, underwriters are people too. They understand that life happens, and you may be late on your payments for a variety of reasons.

It’s harder for them to overlook a lack of activity.

When an underwriter looks at your credit history to assess whether or not they should give you a loan, they only see a hole and have no way to make a judgment with that information.

So they will generally err on the side of caution and decline the request for financing, just in case.

The key point with this rule is to make sure that you use your credit at least once a month to keep each account active. For a credit card, that could be as simple as buying a pack of gum and then paying it off.

If you’re just maintaining your credit, every four to six months is a good rule of thumb.

And don’t rely on loans to boost your score once they are paid off. If the majority of your credit score is generated by loans like car financing, you should consider opening a revolving account like a credit card so you don’t have to start right back at the beginning again.

Rule #6: Be Careful With Joint Credit

There are a few pros to joint credit and some major cons that we need to talk about.

Let’s start with the pros, the main benefit with joint credit addresses one of the issues we just talked about.

If you don’t use your credit very often but your spouse does and you have joint credit together, you essentially piggyback on their credit history and get the benefit of that.

The danger of joint credit is that you are also 100% liable for any debts your spouse or partner incurs.

In the case of separation and divorce, this can really mess up your credit. When a marriage ends in divorce, it doesn’t matter who spent the money.

You are fully responsible to pay back any shared debts and in the case of a dispute, you’re both on the hook whether you like it or not.

Even if you are officially divorced, you can’t take your name off an account until it has been paid down to zero or it’s been ordered by a court.

There is also the danger of the person on your joint account running up a pile of debt that you aren’t aware of. If you have a credit card and you have added your partner as a co-applicant, you are responsible for everything they do with that credit.

So be very careful with joint credit. The only time it really makes sense for a couple to open a joint account is in the scenario where they both already have two separate accounts and want to make sure they keep their credit active.

Do a review of your credit and if you don’t have at least two separate accounts under your name, get started. Death, divorce, and babies aren’t the only things that can screw up your financial life. Having your own personal credit accounts is a common-sense safety net everyone should have.

If you haven’t already, check out Richard Moxley’s book The Nine Rules of Credit to get an even deeper look into the world of credit.

In the last article in this series, we’re going to go through the last three rules and reveal some surprising things you may not have known that can reduce your score drastically.