If you are in the throws of a divorce, balancing a checkbook, paying bills, and applying for credit are furthest from your mind. But, if you are going to be on your own you will need a crash course on all three!
Last month we looked at tracking expenses and budgeting and their vital role in personal finance success. This month we’ll take a look at using credit wisely to help you achieve your financial goals post-divorce. Consumer credit has changed dramatically over the past year with the institution of the CARD Act. Aside from that there are many things you should know about using credit wisely.
Your credit determines more than you think. Today many employers are reviewing credit scores, insurance companies are basing rates on them, and if you need to borrow money, your score is important. So how can you get the credit you need post-divorce and keep it in check? Here’s what you need to know.
Don’t close accounts
When divorcing your ex, you most likely want to divorce their debt too. While this is true to a point, be careful about closing too many accounts all at once. Take the below into consideration:
- Determine who is responsible. If you have joint accounts that carry a balance, determine in your divorce settlement who is responsible for payment and monitor the progress.
- Transfer ownership. Ask to have the account transferred to your name alone and make sure payments are being made monthly to keep the account in good standing.
- Keep available credit. Closing accounts may actually lower your score as this decreases your available credit and skews your debt ratio.
Use it or lose it
Obtaining a copy of your credit report post-divorce is important for many reasons, one of which is to uncover all accounts and their current standing.
- Inactive accounts. If you don’t use your accounts, you may lose them. Creditors today are trying to limit their liability by closing inactive accounts. They fear you will use up all that credit and then not be able to pay it back.
- Use your credit. If you have an account that hasn’t been used for a while buy gas or groceries with it and pay the balance in full at month’s end. Do this every six months or so to keep your accounts active. Or, set up a recurring payment such as a cable or phone bill to be paid with this account.
Monitor your accounts closely
Credit card issuers are tightening up with the tough economy; if you aren’t careful you may get taken advantage of.
- Term changes. Creditors have 45 days to give you written notice to the change in terms of your agreement. Keep your eyes peeled for these notices as they often resemble junk mail or spam.
- What to watch. The most common changes in terms are lowered credit limits and higher rates. There’s nothing worse than making a purchase only to find out you no longer have the credit to cover it. Or, to be blind sided with an interest rate hike making your minimum monthly payments unaffordable.
Learn to say “No”
Just as closing your accounts all at once can lower your score, so can opening too many. While you need a few cards to build your credit history don’t go overboard. Generally speaking 2-3 cards is all you need.
- Say no to store cards. Offers of a discount for opening a card can be tempting; after all you are saving money. Store cards typically have significantly higher interest rates and are rarely a good deal.
- No interest on payments for a year. This is an amazing deal if and only if you can pay the balance in full within the “no interest” period. Otherwise, you will get socked with all of the accrued interest.
Maintain low balances
To boost your credit score, use no more than 30 percent of your available credit at any time on individual accounts and overall, even if you pay your balances in full each month.
- Pay down high balances.
- Compare each card’s balance with its credit limit.
- Stop using the cards.
Get a lower rate
If you find your rates climbing, do your homework and get a lower rate. The average credit card rate is around 15 percent; if you’re paying more than that find out why, and get it lowered.
- Ask. Call customer service and request a lower rate. Be sure to remind them of your payment history and length of time as a customer.
- Be persistent. If you are not given the result you were hoping for, keep trying until you get a reasonable rate.
Managing credit post-divorce can be a challenge as you work to keep your score up, balances low, and pay off your debt. Just remember the importance of your credit and the role it plays in your life. Make managing your credit a priority; be proactive not reactive.
The Divorce Coach Says
I’m really glad Suzanne tackled this topic- it is so important. I can’t emphasize enough the importance of having a clear understanding of who is responsible for paying off any debt at the time of divorce. If you’re not responsible, do everything you can to have your name removed from the account as quickly as possible because if your ex doesn’t make the debt repayments, you may still be held responsible. The other reason to get your name removed is that you don’t want to be responsible for any debt your ex incurs after your divorce. If you can’t get your name removed, then you need to be actively monitoring the account.
Resisting all the tempting advertisements is also important. So many of the cards tout benefits that sound appealing but in reality, will you really use them? For example, when I was preparing for my trip someone suggested I get the new Capital One Venture Rewards credit card that has no fees for foreign transactions. Sounds good, right? Well, yes until you consider it has a $60 annual fee whereas none of my current credit cards (I have three) have an annual fee. That means I’d have to incur more than $60 in foreign transaction fees to make the Capital One card worthwhile. Considering I had no other overseas travel planned, that I was only going to use my credit card to pay for hotels and I’d already paid for some of them through Orbitz, it made even less sense. You’ve got to be able to say no.
Suzanne is a certified credit counselor.
Photo Credit: skibler
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