Figuring out how to better manage your credit score through your divorce sounds like a boring topic and I would tell you that a boring credit score is a good thing and especially during the end of your marriage.
BUT, that’s often not what’s going on in divorce. Frequently, this is when people are looking at their credit scores and freaking out when they start to see the impact of closed accounts and missed payments. It’s also when many of us start to understand the impact of our credit score on things like getting new loans such as for a car or a home and even trying to open up a new credit card.
So how does getting divorced impact your credit score? Why do many people find their score plummeting at this time? What can you do to protect yourself?
Joining me for this Conversation is attorney John Heath from Lexington Law. Heath is an expert in this area and his firm offers a free credit consultation – call 1-844-422-0817.
Listen in below or keep reading ….
What Is A Credit Score?
It sounds a bit like a riddle … what is something that every adult has but nobody applies for, something you don’t pay for but has a huge impact on your life without you even knowing it? That’s your credit score and with most credit card companies providing free access to the scores, more and more people do know what it is.
“It’s a report card regarding your financial life,” said Heath. “It’s going to relate to how you perform on making payments, your obligations and even the types of credit you have.”
You should know that there are different credit score products. FICO is one of them and Heath says it’s the one that most businesses use. If you’re looking at the credit score that your credit company provides, that may be different from the score that another potential lender is using.
The scores from different providers are probably not gong to be drastically different and they will be impacted by the same events. But the breakpoints in scores could make a big difference for example, if your score with one provider is in the excellent category but is in the very good category with a different provider.
Why Does Your Credit Score Matter?
Your credit score affects not only whether you’ll be offered a loan, a credit card or a line of credit but also, the interest rate. Generally, the higher your score, the lower your interest rate. But there’s more.
“A lot of potential employers now look at your credit score to determine whether you’re going to be a responsible employee,” said Heath.
Don’t Be Embarrassed By Your Score
Just as people can feel ashamed about getting divorced, people can feel shame about their credit score even to the point of not wanting to know the actual number. Heath doesn’t see it that way.
“Credit scoring is part of life,” said Heath. “And there’s a phrase I like to use which is life happens. It’s nothing to be embarrassed about.”
The score is good for a point in time and you can work on it to improve it. Using a tool like WalletHub will help you see how small changes made month after month can lead to significant improvements.
Your Spouse’s Score Is Separate From Yours But …
You and your spouse have separate, distinct credit scores but if you hold accounts where both of your names are on the account, then the payment history on that account will affect both people’s scores.
This is one reason why credit scores can take a hit during divorce … you have a car loan together, or a home equity line of credit and each of you think the other is paying the bill but no one is so the payments are late.
Plan Ahead For Household Finances During Divorce
While you’re working through the divorce process, it makes sense to work cooperatively to itemize the household obligations and to agree who will be responsible for making payments.
Needless to say, that cooperation isn’t always there. The worse-case scenario is when access to marital funds by the stay-at-home parent or the lower-earning spouse is denied. While you pursue resolution through the court system, you’re going to have to triage who gets paid and who doesn’t. Heath suggests that expenses related to shelter and utilities come first, then transportation and after that credit card payments.
“Unfortunately, if you can’t cover all of those things, there’s going to be a negative hit to your credit score,” said Heath.
Defaulting on an obligation is going to be more serious than being late with payments so if your access to funds has been cut-off, you may be juggling who gets paid each month so you can avoid going into default.
Credit Card Accounts Are Messy
The ownership on credit card accounts can be complicated and unclear. On some accounts there’s a primary cardholder and an additional cardholder but the responsibility for payments may still rest with both cardholders. There are also situations where one of the spouses has acted as a guarantor on the account.
Unfortunately, Heath says the answer to who is responsible for payments on the accounts is usually in the boring small print of the cardholder agreement. Yup, the document that most of us don’t read. Calling the company and asking the service rep for the answer isn’t likely to help either.
“Your best bet is to request a copy of the agreement, if you don’t have it and read through it yourself,” said Heath.
Closing Credit Cards Is Unavoidable
Unless you and your STBX have your own separate credit card accounts, getting divorced means you are going to have to cancel some credit cards. It is just way too risky to keep joint credit cards. Closing accounts, however will reduce the overall amount of credit available to you and will likely cause your credit score to go down, at least temporarily.
But like Heath says, your credit score is a work in progress. What I’ve noticed when I’ve cancelled a credit card that I’m no longer using, is that another credit card may increase my credit limit after a short period and that helps my score to increase.
Applying for new credit cards means the card issuer will make an inquiry on your account and that can also adversely affect your score. That means if you are applying for a new card you want to be pretty certain you aren’t going to get denied. Heath cautions that before you even apply you should assess whether you truly need another card.
If, for some reason, you and your STBX retain some joint debts after the divorce is final, you’ll want to monitor the accounts to make sure payments are actually being made. Remember, while the court may assign a debt to your STBX, it doesn’t change the agreement with the lender: if the loan was issued to both of you, then you are still liable for payments.
“If you have the means to make the payment you may want to consider doing that and then seek assistance from the court to hold your ex-spouse in contempt for not making the payments,” said Heath.
Actively Monitor Your Credit Score
If trying to figure out what helps your credit score and what harms it has your head spinning, join the club. The best we can do is to make educated guesses because the algorithms that are used are proprietary and not disclosed.
“My advice would be to really look through your credit report and make sure you recognize everything that is on your credit report,” said Heath. “Then make a determination whether you use certain credit accounts or not.”
Decide what you want to use, what you think you’re going to use and what you’d like to use going forward. After that, make sure you’re meeting the terms in the cardholder agreement.
While Heath checks his credit score weekly or even daily, his advises his clients is to check theirs at least monthly to make sure they recognize everything. Regular checking will also help you understand the algorithms better.
Consider Disputing Your Credit Score
If you feel there is something that’s inaccurate about your credit score, then you owe it to yourself to dispute it. The score is being used by any company that you apply to for a loan and may also be used by a potential employer. The score is being driven by what’s on your credit report so start there.
“If there’s a story behind why the payment wasn’t made or the obligation was ordered by the court to be made by your ex-spouse, you have the right to challenge this and you probably should,” said Heath. “It’s not fair that you should be saddled with a deficiency or a negative item or a bad credit score because your spouse refuses to meet their obligations.”
If you’re not comfortable handling the dispute yourself or you want more guidance, consider a consult with an attorney who specializes in credit repair, such as Heath’s firm, Lexington Law. They offer a free credit consultation – call 1-844-422-0817.
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