Maintaining a good credit score should be a consistent goal in your financial life. Maintaining a good credit score during a divorce can be even more important. Yet, that is also the time that people are most likely to be late on credit payments, or miss them completely, due to various factors.
If ending your marriage is under consideration, here are a few things to remember regarding your credit:
- You are going to need good credit post-divorce. If you plan to rent, the leasing company will likely view your credit report. Banks will also review your credit report when you apply for a mortgage. You’ll need a credit card in your name individually; having a good credit score can make you eligible for a higher credit limit and lower your interest rate. In recent years, insurance companies have started to consider applicants’ credit reports when setting premiums for home and auto insurance.
- Start with pulling your credit report from the three reporting agencies – Experian, Equifax, and Trans Union. We recommend our clients use annualcreditreport.com – the website offered by the Federal Trade Commission that offers each report for free once per year. These credit reports do not contain credit scores, but it’s really the content that matters. Companies may not report to all three agencies, and the agencies do not share information, so it is important to review all three reports.
- What to look for on your credit report?
- Create an inventory of accounts in your name and accounts in joint name. Also note any individual accounts where your spouse is an authorized user.
- Close joint accounts and remove your spouse from any accounts where they may be listed as an authorized user to prevent additional charges that you could be responsible for paying off.
- Using the inventory, access your online account or recent statements to verify your address for ALL accounts and make sure they are correct. Make sure no open accounts show a mailing address other than your current residence. In fact, it’s a good idea to get a post office box when you decide to separate and change your address on all accounts accordingly. When you move, you won’t have to worry about invoices and statements going to the house where your soon-to-be former spouse lives.
- Make sure all accounts that are open with balances are paid on time. One late payment on your credit report can drop your FICO score by seventy points.
- Address anything in collections. During a divorce, medical bills for children and bills from companies that didn’t receive a change of address notification commonly end up in collections. Before you agree to pay a collection, contact the collection agency to ask these important questions: Will they take a partial payment? Often they will settle for less than the full balance, sometimes 50% or less. Also ask if they will delete all negative information from your credit report when paid in full, as they are not required to do this. It may take some negotiating to agree on terms that work for both you and the collection agency. Lastly, make sure you make the agreed upon payment amount in a lump sum, as a payment plan can make the account look more recent than it actually is, damaging your credit further.
- If there is an account or unauthorized charge that is not yours, immediately contact the creditor and close the account or dispute the charge. If the creditor is unable to resolve the issue, you can file a complaint with the FTC and a dispute with the credit bureaus.
- A credit freeze is good idea if you have any concern that your spouse will continue to use joint credit following separation. At a minimum, you should use a credit monitoring service like Credit Karma that alerts you to inquiries during your separation and for one year after divorce.
- Keeping your balance on credit cards, store cards, or lines of credit to less than thirty percent of the available limit can increase your FICO score by 70-100 points. In fact, the lower your balance is compared to your credit limit, the better for your credit score.
- It’s not always a good idea to close accounts. In fact, closing accounts can lower your credit score because the length of time accounts have been open is a factor. If you close the account you’ve had open the longest, this will damage your credit score. You might need to show open accounts and credit history down the road in order to make future purchases.
- A couple of account types are often missed in a credit inventory: store credit cards opened just for large purchases and timeshares. Many couples apply for a Lowe’s card, for example, to get a discount on a $5,000 purchase. The Lowe’s card then gets put in a drawer, never to be used again. Years later, your spouse needs a new washer and dryer and goes to Lowe’s again. The associate pulls up his/her name and applies the washer and dryer to credit that still includes you as joint owner. Although you should not be responsible for fifty percent of that debt or get penalized for any late payments, disputing the charges will take valuable time and energy with the vendor and credit reporting agencies. These accounts will show up on your credit report during separation, so be sure to pay them in full and close the account before any additional charges can occur. Timeshares are also often overlooked, but it is important to know that they can be reported to a credit agency as a mortgage. If you or your spouse forgets to pay the annual maintenance fees during the separation period, you might not qualify for a mortgage or a good interest rate.
- A divorce decree has no authority over contracts with financial institutions. What does that mean? Even if your decree stipulates that your spouse is required to pay all joint credit card debt, an arrangement still has to be made specifically with each credit card company to transfer the debt to an account solely in your spouse’s name. If your spouse keeps the house and the mortgage, your name should be removed from both the deed and the mortgage. Your spouse will have to refinance the mortgage into his/her own name.
- What to look for on your credit report?
Any opinions are those of Jennifer Adams and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notices.