Lots of people are talking about their credit score now with the Equifax data breach but that’s not the only reason you should be monitoring it. There are ten important things you need to know about divorce and your credit score and that’s what I’m talking about in this latest episode of Conversations About Divorce.
My guest for this Conversation is Samantha Gregory from Rich Single Momma. Samantha shares a wealth of knowledge, much of it learned the hard way with her own experience with divorce and bankruptcy (listen in to around 18 minutes for Samantha sharing about that). Listen in below or keep reading for a synopsis.
What Is A Credit Score And How Do You Get One?
A credit score is based on an algorithm that takes into account things like your borrowing including your credit card debt, mortgage, car loan and student loans, how much of your available credit you’ve used (also known as utilization rate), and any derogatory events such as late payments, missed payments, collections or bankruptcy.
You don’t apply for a credit score and you may not even know that you have one. If you don’t actively search it out, you could easily have no idea what yours is. These days however, many credit card companies are providing cardholders with a way to check their score for free and you can also check it through the free site WalletHub.
Your credit score will go up or down depending on your financial behavior.
“Once you learn what is included in the score, you can manage it or some people would say, manipulate it, for a higher or lower score,” said Gregory. “It’s about how willing you are to be aware of your financial situation.”
If you have good payment history, haven’t had collections, then your score is going to be great.
Who Creates The Credit Scores
There are two main credit scores in the U.S. One is FICO and the other is Vantage. They use different scales so don’t expect your score to be the same on both. And just because they’re different doesn’t mean there’s something wrong except that a significant difference in your rating such as excellent on FICO and average on Vantage would call for more research.
According to Gregory the key question is which score is your lender or potential lender using but know that your lender likely isn’t relying solely on your credit score. They’ll be using other criteria that they’ve developed to help them with the loan decision.
Check Your Score Regularly
I generally check my credit score each month when I’m reviewing my credit card statements. Gregory checks her weekly. If you are planning to take out a loan in the next three to six months then monitoring it regularly will allow you to see how your actions such as paying down a debt, are impacting the score. If you’re not planning on taking out any loans then you don’t need to check it as often.
However, “with the Equifax situation, I recommend people check it on a regular basis to make sure there’s no fraud involved with their credit report, their credit score or with their bank accounts,” said Gregory.
Watch For Trends
Checking your score regularly means you can see how it’s trending and that will help you understand more about your score and how your choices are impacting it. It’ll help you set yourself up for success.
“Knowledge is power,” said Gregory. “The more you know, the more equipped you are and empowered you are to make good decisions.”
The financial settlement you make with the end of your marriage may mean taking on a share of debt that your spouse incurred without your knowledge. It may mean taking on debt to pay your legal fees. Coupled with the negative emotions connected with this can make it hard to even look at your credit score.
“You may find yourself completely wanting to hide your head in the sand but this is not the time to do that,” said Gregory. “This is an area of your life that you can take control of so do the best you can. Give yourself some time, maybe a month or two but after that go in and take control.”
Get A Credit Card In Your Name
If you are thinking of divorce or if your spouse has mentioned it, don’t wait until it’s definitive to take some preliminary precautions. The first thing you should do is open a credit card and a bank account in your sole name. This will give you access to emergency funds if necessary such as paying a retainer for an attorney, or allow you to build up some funds that you could use for a deposit if you have to move out or buy a car for transportation.
“You don’t want to be left in the lurch,” said Gregory. “You don’t want to have no money whatsoever and face homelessness or to have to stay with friends and family.”
Having a rainy day fund and access to emergency funds will give you a sense of control at time when many people feel powerless.
Your Score Could Be Impacted By Your Spouse
In most marriages, one spouse handles the finances with or without oversight from the other spouse. The end of a marriage can be a wake up call both to start taking responsibility financially and in understanding the state of the marital finances. I’ve heard from many people who thought their spouse was handling the finances only to discover that their finances were in shambles, close to ruin.
Your credit score will reflect the actions of any accounts on which you are listed together with your spouse. So if your spouse was handling the bill payments and didn’t, then the late payments, the collections are all reflected in your score. Worse than that, any debts on joint accounts are marital debt for which you are both liable. A company will try to collect from you both even if your divorce decree says it’s your spouse who is responsible for a debt.
Gregory shared that she and her husband had a car and in the divorce she kept the car and her husband said he would continue to make payments on the loan. He didn’t make the payments and then Gregory discovered the loan was in her name. With the lender chasing her, she consulted an attorney who advised her to file for bankruptcy. She didn’t follow his advice at the time, she did make the payments and her credit score was shot. Later, she did file for bankruptcy and Gregory shares more about that in the podcast around minute 18.
Be Careful Closing Accounts
When I’m working with clients either mediating or coaching and we’re preparing the financial statements, I do suggest that they pull their credit report and close out dormant or inactive accounts. That’s because otherwise, at least in Colorado, you have to list all accounts even those with zero balances and then make sure these are addressed in the divorce agreement.
Gregory makes the point however that you have to be careful because closing accounts could adversely affect your credit score which seems counter-intuitive. She suggests you can deactivate accounts, cut up cards but she wouldn’t necessarily close them. It might be worth a conversation with the institution and see what they would recommend.
You Can Have Too Many Credit Cards
So this gets to sound a little like Goldilocks – you do have to be careful about closing accounts but at the same time, having too many credit cards can hurt you especially if you are using them all. Remember that utilization score I mentioned earlier. Having debt on multiple cards will mean less of your credit limit being available, which increases your loan utilization rate.
So which cards should you close? Gregory says your goal should be to keep the cards with the highest credit limits and those you’ve had the longest even if they have a high amount of debt on them. You’re going to want to try to pay down some of that debt.
Close The Joint Credit Accounts
As a general rule, it’s a bad idea to keep any credit accounts in joint names after divorce because you will both stay liable for any debts incurred. This means the accounts are going to be yours, theirs or closed.
You will want to take responsibility for ensuring that your name is removed from any accounts that are being closed or are going to be your STBX’s. Do not leave this up to your STBX because it may not happen. You’ll likely need to call the institution and ask what they need from you.
Similarly, for accounts that are going to be in your sole name, find out from the institution what they need from you to remove your STBX.
For accounts with debit balances, who is going to pay what debt needs to be addressed in your divorce agreement. From a practical viewpoint, if you don’t have assets to pay off your portion of a debt, you may be able to open a new credit card and take advantage of a balance transfer option.
Consider Delaying Transactions
If your credit score is less than stellar than there are transactions that you may wish to consider delaying. Applying for a credit card is one of them especially if you think you may get denied. This is because this will show up as a credit inquiry on your credit score and these can count against you.
Avoid taking out loans that have elevated interest rates because of your credit score. If delaying is not an option and you have to proceed, then one solution is to have a trusted co-signer.
Gregory also warns against falling into the trap of accepting a higher rate loan thinking you’ll be able to refinance in a few months time when your finances have improved. That’s a good concept and your finances may well improve but if the item you purchased has fallen in value, then your loan is going to be underwater and refinancing won’t be an option. The deprecation on new cars is notorious … so be warned.
There’s a lot to think about and it is tempting to ignore it. Gregory says don’t. “Be proactive. If you are thinking of divorce make sure you have your records in order. Make sure you have your accounts in your name and make sure you move forward with as much gumption as possible. You don’t have to be nasty or ruthless but have to take care of you.”
My guest for this Conversation was Samantha Gregory from Rich Single Momma. Visit Samantha’s website and grab a copy of her Budget Sanity Saver Worksheet – it’ll give you a jumpstart on getting a handle on your spending.