Anyone can open an account with another person, or 2 or 3 or 10 other people. Joint accounts are common for married couples and for parents and children. Are they a good idea? For sure, but there are some things you need to know if you have a joint account.
Joint and Several Accounts
The most common type of joint account is called joint and several where either account holder can transact on the account. One person alone can withdraw, deposit, authorize payments, transfer and so on. If you have an existing bank account you can make it joint by going to your bank with the other person and authorizing to have their name added. But, if you decide later that you don’t want to have the other person on the account you can’t just remove their name from the account. You would need to open a new account in your own name.
Joint and several essentially means that all owners of the account are responsible together and separately for all the account transactions and any liability associated with the account.
What does this really mean? Every person on a joint account has equal and full access to the account. A joint owner can withdraw all the money and close the account without letting you know. If you have loans, mortgages, or credit cards, the bank can collect money from the account even if the debt is only in one account holders name. I’ll give you some examples below.
Here’s the key – only open a joint account with someone you completely trust with your finances and close that account immediately if the relationship changes.
You can also set up an account so that both or all parties are required to sign. This is less common because it is difficult to manage an account if you always need 2 or more people to sign for everything. You wouldn’t be able to purchase with a debit card or bank online.
Good Reasons to Have a Joint Account
Joint accounts are a great way to manage shared finances and household payments. Typically, couples will have their pay directed into one account and all expenses and payments withdrawn. Both parties can have their own debit cards and full online banking access to manage the account. It can be a very effective way to manage the household budget.
Parents can start their children banking by opening a joint account. When Johnny gets a birthday cheque from grandma it goes into the account but mom still has access to manage the money while Johnny is young. Having an account at a young age and teaching children about banking and saving early is a great idea.
Some Pitfalls with Joint Accounts
Joint accounts work well for most people but it requires communication and monitoring to operate one. If you have a partner who forgets to mention that they bought a new iPad and you’re standing in the grocery store with your debit card purchase rejecting then maybe it’s not the best way for you to bank. If you’re trying out a joint account with your new partner I’d suggest you consider overdraft protection to avoid mishaps.
Alerts are a great feature that can help with joint account management. An alert is an automatic notification by email or text that can be set up to notify you when a large amount is withdrawn from an account or charged to a credit card. You can choose the amount for the alert and change it at any time. For example, if you set up an alert to text for an amount of $200 or greater, you would immediately know if your partner made a purchase of $200 or more.
With parent/children accounts what often happens is these accounts remain open and are used by the child even when they are older. Do you want mom or dad viewing everything going through your bank account? Oppositely, as a parent, do you want to be responsible for your child’s bank account when they are 30?
I recommend that instead of a joint account you have the child open their own account as soon as you think it’s appropriate for them to start learning about money. There is no minimum age to open an account, they just have to be able to sign their name. This also helps young people establish a relationship with their bank. There are bank plans for kids so they can bank for free while they are in school.
Time to Close the Joint Account
While joint accounts are usually a good idea, make sure they are closed when it no longer makes sense to bank jointly. If you need to keep the account open for a short period of time to reorganize payment arrangements then cancel any overdraft protection and redirect your direct deposits. Here are a few examples why.
The Couple Split
Jack and Jill are a married couple with a joint and several bank account they use for all of their payments and expenses. Their pay is direct deposited. Now, they are going through a legal separation. Jack also has a car loan in his own name. Jill decides to open an account in her own name and redirects her pay and all of her payments to the new account. On Jack’s payday, Jill takes all the money out of their joint bank account. Jack’s payments are returned NSF and he is left without any money and his loan payment in arrears. This can eventually be settled through legal channels, but in the interim Jack is out of luck.(and money)
Parent and Child Account
Mary has a 12 year old son, Tom, who has just started a paper route. She feels her son is too young to have his own account so she opens a joint account with herself and Tom. Tom grows up and goes to University and the account is kept open for Tom to use so that Mary can easily transfer money from her own account to help him with his school costs. Tom isn’t very good managing his money. He charges his credit card to the limit. Money that was supposed to be used for tuition ends up going to the credit card company. His automatic payments for his cell phone, car insurance and gym membership are returned NSF. The account ends up overdrawn $200 due to ongoing fees and charges. Since Mary’s name is on the joint account she is also responsible for the overdraft. This means that money can be transferred from her own account to cover the joint account. And, she has no control over the funds that went to pay the credit card instead of paying Tom’s tuition.
You can see in these examples how the issue of ‘liability’ works. Jack’s out of money and in arrears with his payments even though his pay went into the account. Mary ends up covering her son’s debts and service fees and has no control over how he spends the money. The other issue here is that now Mary has a record of NSF’s with the bank. The Sunday family dinner isn’t going to be much fun.
By the way, these are real examples.
Joint Credit Cards
The same rules for joint and several accounts apply for joint and several credit cards. If you apply jointly for a credit card then you are both jointly and separately responsible for the debt. It doesn’t matter who does the spending. As with a bank account, cancel the card if your situation changes.
This is different from getting a supplemental card on an existing credit card account. If you apply for a credit card and add someone later, you are considered as the Primary borrower and are therefore responsible for that card. If you are not sure how your card is set up give the credit card company a call.
So the same rules apply to joint credit cards, close them immediately if the relationship changes. Primary borrowers can have supplemental card holders removed.
Do you have an experience to share?
Comments and questions are welcome!