How to Protect your Credit Score in Divorce: Part One
I’ve said it before (and I’m sure I’ll say it again and again), but divorce is one of the biggest financial transactions of most adult’s lives, if not the absolute biggest financial transaction ever, period. Why? Well, think about it. You’re dividing absolutely everything. In a marriage, there are all sorts of assets (and liabilities, of course, but let’s talk about just the assets right now). All of your assets have to be categorized (as separate, marital, or hybrid—you can get more information on the different types of property classifications by clicking HERE), analyzed, and then divided appropriately. Every single thing—from the dish towels on up to the retirement accounts, investments, and real property, has to be categorized, valued, and eventually divided. Can you think of another kind of event or transaction where so much of what you’ve earned and accumulated is involved? I can’t! Even though there are other major financial transactions in your life (like when you bought your house or paid off your car), it’s rare to have a financial transaction that takes so many different pieces of your financial picture (your portfolio, if you will) into account—and then divides them. It’s pretty major.
As you probably already know, divorce is extra difficult because of all the feelings and emotions that come into play. Because of the way you’re feeling, either you or your husband (or both) may behave in uncharacteristic (and unproductive) ways. I’ve seen all sorts of terribly ugly things happen—like promising to pay certain bills and then not paying them, maxing out credit cards, randomly deciding to make a humongous purchase (like buying a new boat or a motorcycle) without notifying the other party, or even using marital money to go on a shopping spree. Since there’s also normally a breakdown of communication between the two parties, these things tend to escalate and get worse.
Both during your period of separation and after your divorce, your life is going to start changing. It may start out slow, but, by the end of the process, the transformation will be pretty dramatic. You’re going to have to start making big decisions about the life you want to lead in the future, and begin setting things up in your current life so that you can begin the transformation with as little resistance as possible. You’ll need to make sure your finances are in good working order, so that when you set off on your own you won’t face unexpected surprises. A big part of that is making sure your credit score is as solid as possible.
We’ve all seen the stupid commercials encouraging us to check our credit scores for free online (which, of course, is not actually free), but most of the time our credit score really doesn’t matter all that much. Unless you’re buying something big, your credit score really isn’t something that you, if you’re like most people, really have to think about on a day to day basis. Sure, you know that if you’re buying a house, renting an apartment, buying a car, or trying to qualify for a new line of credit, the prospective lender will certainly look at your score and your history before making a final decision. But that’s not something that you do every day, so it’s easy to let thoughts of your credit score fall by the wayside.
When you separate from your husband, you’ll have to start thinking about the money you have available, as well as how much debt you have, and what your future possibilities are. Are you planning on selling your current home? How much are you likely to get out of the sale? Would you like to stay there? If so, will you qualify to refinance the home? Would you prefer to get a fresh start somewhere else, and buy or rent a new home? Will you qualify for the lease or mortgage? Are you leaving the marriage with your own car, or will you need to purchase a new one? Do you have credit accounts in your own name? Are there any joint accounts still open? What steps will you need to take to close them? There are a lot of things to consider when you’re starting out on your own, whether you’re still separated or you’ve already begun the divorce process. Thinking about your credit score is a great place to get started.
In this two part article, we’re going to do some talking about two main things: (1) how your credit score is calculated, and (2) what you can do to boost your credit score (if it’s suffering) or keep it up (if it’s already pretty healthy). Today, we’ll focus on how your credit score is calculated.
So, what should I do to check on my credit score?
Well, obviously, first thing’s first: you need to find out what your credit score is. There are a lot of companies that offer free credit reports online, but some of them aren’t actually free (like, you’ll have to give your credit card number and agree to a thirty day trial of something or other) and others won’t actually give you your numerical score. They may tell you what your report says, but without the number it’s hard to tell where that actually puts you on the spectrum.
There are three major agencies that provide credit score reports: Equifax, Experian, and Transunion. That’s why, when you see your credit score, you see three different numbers. Each of these companies keeps records about your financial history and scores you based on it. Sometimes, the numbers are the same, sometimes they’re different, but usually they’re fairly close to each other. You definitely want to see all three reports.
You can get a copy of your credit score at any of the agency’s websites, and that’s a great place to start. There are also lots of sites that will help you get a copy of your scores. Some of them charge and some don’t, but make sure you read the fine print (and make sure it’s a reputable company) before you provide your credit number. As always, use your common sense when you give away personal information on the internet.
Okay, I got a copy of my credit score! What can I do to improve it?
First and foremost, you need to know what components go into a credit score. There are five factors that those three credit agencies look at when they compute what your credit score is, and its really helpful to know exactly what factors into your final score and how much weight each of those things have in determining your overall score. The five factors are:
1. Your payment history. (35%)
Obviously, if you have debt, you have to consistently make payments on time. If you pay your debt on time, it will have a serious positive impact on your credit score. Making late payments, having judgments entered against you, or having charge offs will have a negative impact on your credit score. It sounds pretty obvious, but it’s true. If you consistently miss payments, particularly if you miss big payments, it will have an impact on your credit score. Any delinquencies that have occurred in the last two years hurt you more than any delinquencies that occurred earlier than that.
2. The outstanding credit balances that reflect on your account (30%)
Your credit balance describes the ratio between how much available credit you have versus how much of an outstanding balance you carry. It’s ideal that you carry a balance as close to 0 as possible, but definitely keeping your outstanding balance below 30% of your available credit limit.
Interestingly enough, credit companies don’t reward you for maintaining a zero balance. Instead, you get the most benefit (in terms of your credit rating, at least) if you pay off the majority of your balance each month, but let a small amount carry over from month to month.
3. Your credit history. (15%)
It also matters how long your existing lines of credit have been open, which makes complete sense. Even if you have an absolutely perfect history, if your lines of credit have only been open six months, its just not a lot of information for potential creditors to go on. It helps to have a long-term, established line of credit that has a balance of less than 30% of your available credit limit, and on which you consistently pay your bill (or, at least, most of it). Borrowers with more experience with have the upper hand here.
4. The type of credit you have on your account. (10%)
Potential creditors will also consider what type of credit is listed under your name. It’s better to have a variety of credit sources (like mortgages, auto loans, and credit cards), rather than a lot of debt from one source, like credit cards only.
5. The number of inquiries that were made. (10%)
You probably already know that your credit score gets “dinged” if too many people request copies of your report at one time, but did you realize that this was a factor that accounts for 10% of your credit score? Each hard inquiry can cost you between two and twenty five points on your credit score, but no more than ten inquiries in a six month period will be counted. So, in other words, if 8 potential creditors made an inquiry into your credit score, you could be dinged each time by two to twenty five points per inquiry. If 11 potential creditors made an inquiry into your credit score, you could be dinged for the first ten—but anything after ten won’t continue to reflect in your credit score.
The relevant inquiries are the ones that have been received within a six month period. After six months, these records disappear.
If you run a credit report on yourself, it does not affect your score.
Why does this matter? Well, it sends a red flag to potential creditors if you’re suddenly requesting credit from all over the place. If you’re trying to buy a house, buy a car, and open a credit card, it looks like you’re struggling for a lifeline, and it may affect whether a lender is really comfortable giving you credit. To the potential lender, it says, “I may be taking on more debt than I can reasonably handle,” or “I’m so desperate, I’ll take as much as I can to get out of this hole.” It’s definitely not good!
Now that you have an idea of what kinds of things make up your credit score, you should have a much better idea of what you have been doing (which you may or may not have known before) that might have an adverse impact on your credit score. It’s helpful to know ahead of time, so that you can keep these things in mind as you move forward, both during your separation and later on, after your divorce is entered, so that you can make sure that you’re in as strong a position as possible to get a solid fresh start.
Stay tuned for Part 2 of this post, which we’ll release first thing Monday morning. In it, we’ll discuss how to improve your current credit score, if it’s a little lower than you’d like it to be, and how to maintain your current credit score, if it’s already pretty solid. Again, you should feel free to talk to an attorney or financial professional if you’re worried and feel you need more guidance in this area. Our attorneys are always available to help; give our office a call at (757) 425-5200 for more information or to schedule a confidential appointment with one of our licensed and experienced Virginia divorce and custody attorneys.