Our customers are our priority during the challenging times we’re all experiencing. Please only call us if it's urgent, so we can help our most vulnerable customers. Please bear with us, as our call waiting times are longer than usual. You can find our latest updates here.
1st November 2016
Whether you already have a joint bank account, or are debating opening one, you should be aware of the pros and cons of this kind of account. Opening a joint account involves a lot of trust with the person you’re opening it with since you’re opening yourself up to financial vulnerability, and you will also be financially linked to them on your credit history. So if their credit rating isn’t the best or takes a hit further down the line, you could experience the same effect on your score too.
What exactly is a joint bank account?
A joint bank account is held by two or more individuals whereby each person has equal access to the money in the account. There is no law against who can join together to open a bank account - it may be a married couple, civil partners, or a cohabiting couple, or family members (for example siblings, or a parent and child). It can be a good option for two people who live together and want a convenient way to collaborate and pay their bills. Business partners sometimes choose to open a joint account initially, rather than a business account. Either way, there are a lot of practical benefits to opening this kind of account.
Why open a joint bank account?
A joint bank account is an extra easy way to share and manage money. However, the reasons behind opening a joint account may vary. For example, if a shared house or a co-habiting couple open an account, it can help to organise the money and payment of shared expenses i.e. rent or bills. It also simplifies any discussions or potential arguments about who owes who money, saving you lots of time and avoiding tension within the household. Alternatively, if a couple or group are saving for something important, they can pool all their cash together in one place and watch it grow and accumulate.
For couples, a joint bank account may be opening to unify their assets – traditionally this is what happened when people were married since their assets were legally split down the middle anyway. However, in modern times it’s a less popular option, since many like to keep their money spending habits private to some extent. With a joint account, you must be completely open and honest about your transactions, as everything you spend will be there in black and white on the account statements!
With regards to loans and credit, you may be able to borrow more, since the money going into the account is, in theory, doubled with the two incomes. One major benefit of this for couples is enabling them to get a bigger mortgage and onto the property ladder.
It’s not nice to think about the worst case scenario when it comes to those closest to you, however most joint accounts carry “rights of survivorship” – this protects the shared monies should one person named on the account pass away. The surviving owner will still get access to all of their money hassle free, without needing to pay additional inheritance tax.
Credit score and financial risks of a joint bank account
Despite the clear benefit of making sharing and managing money much easier, there are several very important drawbacks that should be considered prior to agreeing to be part of a joint bank account.
As mentioned previously, setting up a joint account will most likely end up with you being financially linked to the other person on your credit score. This will end up with you being what is known as ‘co-scored’. This means your score will probably be negatively impacted if the other person’s credit score is poor. Think about whether this risk is worth the benefits of easier money management, and consider getting each of your credit scores identified beforehand to avoid any unpleasant surprises later on – but remember, credit scores can always change for bad or worse!
Equally, If the account becomes overdrawn, each holder is liable for the debt. That means If one account holder uses it as collateral for a loan they have applied for, and then defaults, credit card firms can access this to pay back the debt. If a grandparent is saving for a grandchild, the account may need to be accessed if the elder is facing a lawsuit or bankruptcy.
Also, it’s worth doing further research as if you’re not married or in a civil partnership, there may be possible tax issues.
In the event of a breakdown in relationship
Clearly the biggest risk posed is that several people will have control of the money, as there is no one person in charge. This means that should there be a breakdown in a relationship, then things can get very tricky with your joint account.
As every party has an equal right to paying in and out of the account (i.e. card payments, cash withdrawals, cheques), trust issues may arise. Whilst you can do your best to combat any issues regarding unequal expenditure from the account, you never know what another person will do. And they won’t be doing anything wrong in the eyes of the law, since the money is as much theirs as it is yours. If someone maliciously takes money out of the account, legal action would be necessary to reacquire some of the money.
If a couple experience a divorce, just like all other asset division, all the money will be seen as equal and divided accordingly. Similarly, if you have a joint account with (for example) a family member, should one of you undergo divorce proceedings, all of the money in your joint account could be at risk. This joint account could be seen as their assets during divorce proceedings (even if you are just the co-owner).
However, steps can be taken to help reduce the risk of joint accounts:
As such, it’s extremely important to do your research and weigh up the pros and cons before you open a joint bank account with anyone. Joint accounts may be super convenient in many ways, but they may not be such a good idea in the long term if you’re partnering with someone financially unstable. You never can predict what will happen to your relationships with other account holders in the future, so it’s best to be sure about their intentions for opening a joint account with you. There are also many other alternatives to sharing a joint account which are less risky, such as dividing bills between yourselves every month. If your account is indeed set up to just more easily share household expenses, it’s also a good idea to minimise risks by limiting how much money you put into the account – consider only putting in a fixed amount per month just to cover any shared costs.