Impact of higher rates on couples with merged finances

Financial matters can be complicated to manage when you’re a couple. If you don’t come together to make decisions about how to handle your combined affairs, conflict can arise. With inflation and interest rates increasing, it’s even more important to make swift and positive choices.

And if you’re like many consumers who have been borrowing to meet the shortfall, you also need to deal with higher and more expensive debt. In July 2022, the Federal Reserve hiked interest rates another three-quarters of a percentage point, causing APRs to climb further.

Now is the time to assess your finances with your partner. When you do, you can take steps to weather this storm together. You may even grow closer in the process.

How rising rates affect household budgets

In June 2022, inflation hit a 20-year high of 9.1 percent. The impact is felt on nearly all goods and services, with some common expenditures exceeding the average. The July 2022 U.S. Department of Labor Consumer Price Index found that the cost of meats, poultry, fish and eggs increased by 11.7 percent, fruits and vegetables increased by 8.1 percent, and household cleaning products increased by 11.3 percent. Utility (piped) gas service leaped up by an astounding 38.4 percent.

The pressure such rising costs can cause is intense. Incomes haven’t kept pace with inflation, so there is less money to go around. If you were accustomed to having more than enough to cover your household expenses, you may be experiencing an uncomfortable pinch. But if you were just getting by, the pain can be profound.

“Expenses have increased and most people haven’t adjusted their budget for it,” says Shmuel Shayowitz, president and chief lending officer at Approved Lending, located in River Edge, New Jersey. “There is much more stress. Couples have to openly discuss their bills and expenses. I’ve found that households are typically on autopilot, with people getting into a routine, but they need to change with the new circumstances. This is serious.”

Communicate about money and adjust your actions

Danny Kofke, a content creator for a financial wellness company from Atlanta, Georgia, says he and his wife have been communicating about their household budget, so they can make necessary adjustments.

“Our older daughter is starting college this year and we have to pay tuition and other costs,” says Kofke. “Now my wife and I are discussing the prices of groceries. She comes back from the grocery store having spent $250, and I ask, ‘What did we buy?!’ The bill is a lot higher than it used to be.”

Kofke and his wife, who have had merged finances with all conjoined bank and credit accounts for their entire 22 years of marriage, have taken action.

“We can’t control the economy but we can control our spending,” says Kofke. To make the numbers work, he and his wife have started to whittle down unnecessary items from their budget, including canceling satellite TV. It all adds up, he says, explaining that if they don’t need it, they’re getting rid of it.

How to manage merged finances

Making changes when you’re single can be easier than when you have a partner because you don’t need buy-in. If you want to pare down expenses or forgo a vacation because inflation and interest rates are driving those costs up, and you’re prepared to wait it out, you can.

However, your partner may not have the same level of commitment. To avoid conflict while also getting on the same page, Shayowitz recommends setting up a formal 90-day or quarterly sit-down where you’re simply discussing your goals and aspirations.

“Make it a macro review,” says Shayowitz. “Talk about all the things you want or need to do in your life. It doesn’t have to be a bill-by-bill discussion. When you focus on your goals, you will naturally start to focus on what is getting in the way of achieving them.”

You can make the process of refining a budget effective by identifying what each of you is passionate about. “There are certain specific things you may not want to compromise on, and that’s fine,” says Shayowitz. “Now you have to save or free up that money. Discuss how you will do it.”

If necessary, separate your finances

During times of financial stress, merged accounts can be tough on couples. Each person can see the ebb and flow of money, which can lead to micro-managing. After that, arguments can ensue, with each person pointing fingers at the other for overspending.

For this reason, Shayowitz says setting up separate bank accounts can be best.

“Couples can find them very helpful,” he says. “You can have a joint operating account where the majority of your income goes, then a spillover account for each of you in your own names where there will be no questions or judgments.”

With this system you can pay the household bills from the funds in the operating account, then use the individual accounts for your special interests.

How rising rates affect credit cards and couples

Making budgetary changes can also help you avoid descending into debt. Many are leaning into credit cards more than they have in the past. The 2022 Federal Reserve Bank of New York’s Center for Microeconomic Data report shows a 13 percent year-over-year increase in credit card balances, the largest jump in two decades.

And if your credit cards have variable APRs, expect hikes. As of July 20, 2022, the average interest rate for variable-rate credit cards was 17.25 percent, up from 16.4 percent three months earlier. Therefore if you’re carrying over debt, the financing fees will also be higher.

The Fed’s rate increase is also affecting new credit card accounts, so if you and your partner are in the market for a credit product, be prepared. The better your credit scores are, the more likely you can qualify for cards with lower rates.

Though you’re one-half of a couple, you don’t have to merge your credit cards. You may want an individual account, which is in only one person’s name. Most credit issuers allow you to add authorized users, so your partner can use the account. Kofke and his wife have a single personal credit card between them, with one as the authorized user. With this arrangement, they both have access to the credit line and they can manage it together.

Or you may opt for a jointly-held account. This can make sense when you want the account to be a permanent fixture on your individual credit reports or if you can’t qualify for the account on your own.

Whichever situation you choose, put some thought into the right card for both of you, and know your actions with your account — whether separate or shared — can impact the other person. If you run up a balance causing the payments to escalate, you’ll have less available money for your merged bills. And if your credit scores drop because you start to miss payments, that will affect your combined goals, such as buying a home or car.

Merged finances and debt management in times of rate increases

If you haven’t discussed credit card management, do not delay. One of you may be more apt to charge your way out of inflationary issues, and into expensive debt.

“The instant gratification about spending money will be very short lived but the repayment will have ramifications for years,” says Shayowitz. “Make sure your partner is conscious of the fact that borrowing for something today will impact your futures. Helping them realize that they can do without something they want, so they can avoid debt, can elevate the pressure.”

Remember, this is about refocusing the conversation so it’s about goals. Will putting the extra costs on the credit cards help you achieve or impede them? Focus on that question.

If you’re already in debt and the rates are climbing, there is no time to waste in forming a repayment plan. Reducing expenses is great if there’s room in your budget to cut, but you may want to add more money to the pool of funds by getting a side hustle or a part-time job. Then, when you have the money, apply it to your credit card balances.

“I like the debt snowball method,” says Kofke, referring to the strategy where you pay off your smallest debt first then apply the payments you were using to the next-smallest debt. “You build momentum because you see results fast. When you do it together, it’s empowering. You’re accomplishing a goal, which strengthens your bond. You can celebrate together!”