How to Protect your Credit Score in Divorce: Part Two
On Friday, we talked about your credit score and divorce, and what 5 factors credit agencies look at when they generate your credit score. (For a quick recap, or to read the whole post in its entirety, CLICK HERE.) Today, we’re going to talk more about your financial future (which, of course, has a lot to do with your credit score, especially when you’re just getting started after a separation or a divorce). We’re going to talk about how to build up your credit score (if your number is a little below where you would like—or need—it to be), or how to maintain your credit score (if it’s already pretty healthy).
Your credit score is the bedrock on which all your future plans will be based. Whether you plan to keep your current house, or rent or buy a new one after your divorce, you’ll need to demonstrate that your credit score is solid enough that a lender will want to extend credit to you. I don’t mean to exaggerate or make you nervous, but now is a really great time to start thinking about your current financial picture and start taking steps to build it up, if you’re struggling a little. If you’re not struggling, you’ll still want to keep an eye on that credit score (and also keep an eye on any joint accounts that might still be open and carrying a balance) to make sure that nothing that happens before your divorce has an adverse effect on your score and, subsequently, on your ability to start over later on.
So, let’s talk about what you should be doing!
What kinds of things can I do to help boost my credit score, or maintain my already pretty solid credit score?
Well, like I said before, the first thing you should do is get an actual, physical copy of your credit report, so that you really know where you stand. Understanding how the score is calculated (and how much weight each of the factors involved carries) is also important and can help you correct mistakes you didn’t know you were making. There are two other things you can do, too, in order to help build up your credit score, if it’s on the low side, or maintain your current credit score, if it’s already pretty healthy.
1. Make a list of all the accounts that are open.
It’s always amazing to me that so many people really have no idea what credit accounts are open in their name. I’ve heard of people requesting copies of their credit reports, only to find out that a judgment was entered against them years ago (that has been hurting their credit all along) but notice was sent to an old address and never received. I’ve also heard of people who find out that, for example, the Best Buy store account credit card that they opened ten years ago is still active and just hanging out in limbo. It’s important to get copies of this report so that you really know what sources of credit are out there and are associated with your name.
Make a spreadsheet with all of this information so that you can easily access it and see everything at a glance. This type of information is very important when you meet with your attorney and start to discuss how your debts and other liabilities will be divided between you and your soon to be ex. Don’t miss a debt and forget to discuss it! Find out what’s out there, and come up with a comprehensive plan designed to tackle all the debt and open credit lines that might be causing problems with your credit. (Remember, you’ve got to start over soon!)
Speaking of plans…
2. Make a plan to address the secured and unsecured accounts.
You should make a plan to address anything that’s lingering, unsecured counts first, and then secured accounts. After you’ve organized everything into a spreadsheet that includes all the relevant information (like creditor name, contact number, account number, type of account, account status, account balance, minimum monthly payment, and interest rate), you’ll want to start figuring out how you’re going to tackle these things. In a lot of cases, a call to the institution in question (like Best Buy) can help you resolve some of the lingering issues.
What’s the difference between a secured and an unsecured account?
A secured account is one that is attached to an asset (like a mortgage or a car loan). Most kinds of personal property, like boats, RVs, and motorcycles, are also tied to secured loans. Unsecured loans are credit accounts, like credit cards, where no asset is attached to the debt.
What should I do with these accounts?
If you’re working with an attorney, your next step should be to take your spreadsheet directly to your attorney and have a conversation with her about your debt, your divorce, and your best next steps. Your attorney can help you figure out what is financially in your best interests, as well as what kind of steps you should take (or wait to take) to help move your divorce along and ensure that you get the best possible settlement available to you.
If you’re not working with an attorney (and even if you are), it’s a good idea to talk to a financial professional. In general, CPAs are great sources of information, and can help you figure out what your best course of action should be. You may also choose to talk to your tax adviser, who can let you know what tax consequences you might face. In the case of a mortgage, you can always give your mortgage banker a call to help get you more information about your existing home loan, how much equity you have, and what your options are for selling or refinancing your current mortgage.
The consequences of bad decisions, especially with respect to your finances, can be disastrous, so I really can’t encourage you enough to talk to a licensed professional with experience in the particular field in question and divorce. Divorce is a big financial transaction, but, if you’re carefully prepared, there’s no reason that it should be ruinous to you or your future. Keeping the end in mind from the beginning is a great way to ensure that things will progress smoothly.
Now, I’ll provide a bit of general advice and information. Again, let me reiterate that I think it is absolutely best if you move forward with a plan developed for you by an attorney or other professional.
The difference between secured and unsecured accounts
With a secured account, you can always sell the asset. That will pay off the loan, and remove your name from association with the debt. Otherwise, your options are to either (1) refinance the loan so that one of you can “buy out” the interest of the other (just like we discussed on Monday and Wednesday when we talked about can happen to the marital home), or (2) leave it alone and keep things the way they are (with both of you on the loan).
Sometimes, in a divorce, a couple won’t mess with the way the debt is categorized. If both people’s names are on the debt, it is possible that both people’s names will just stay on the debt and either one party or the other (or, sometimes, both) would then be required to continue to make the payments on it. Keep in mind, though, that even if your separation agreement (or final divorce decree, if your divorce is entered by the judge) says that your husband is responsible for the debt, the creditor still considers you to be on the hook. Even though you could take your husband to court and the judge would uphold the separation agreement or final divorce decree obligating him to pay, and therefore enforce your order, but it would be time consuming and annoying (and could also have an adverse impact on your credit score). If you’re considering doing something like this, you should talk to your attorney first to analyze the possible risks and determine whether an alternate action might really be more prudent.
As far as unsecured accounts are concerned, you should be sure to remove yourself (or your husband) as an authorized user on joint accounts. For any joint accounts that are open but don’t carry a balance, try to split the accounts into two separate accounts and remove your husband’s name from yours. Obviously, you want to separate the ability to charge things to either person’s account, but you also want to continue to have an account where you’ve previously established credit history (remember, the factors!). If you close accounts completely, it can have a negative impact on your credit score, so be careful about that. Before you close any account, chat with a mortgage or financial professional who can help give you advice about whether this might hurt you later on down the road.
Freeze any joint accounts that carry balances, so that no future charges can be made. Keep in mind, though, that if you freeze the account, neither of you will be able to continue to make charges on the account. Before you freeze it, if you absolutely must have a credit card in the meantime and don’t have any open in your name alone, open one in your name (unless, of course, you’re trying to buy a house—then either talk to someone about whether this might hurt your ability to qualify for a mortgage, or play it safe and just wait). You can then transfer balances from your joint accounts to your own account, so that you can be sure that the balances are paid timely each month.
Again, if you’re working with an attorney, it’s best to consult with her before you take any big steps. This is generalized advice, designed to help you navigate the financial responsibilities associated with divorce, but it is definitely best to talk to an attorney one on one about your specific circumstances and come up with a way to protect yourself (and your credit score) during your divorce.
These tips can help give you a general idea for how maintain or improve your credit score, all while keeping an eye out for what will benefit you most in the long run. As always in a divorce, it’s best to keep both long term and short term consequences in mind, and work with a team of professionals to help make sure that you’re taking the best action possible under the circumstances. What works for you may not work for someone else, and vice versa, so it’s important to really consider your unique circumstances and come up with a plan that addresses your concerns and protects your rights.
Divorce usually brings with it a period of discomfort, uncertainty, and anxiety. The best thing you can do to counteract some of these feelings it to come up with a comprehensive plan for how to deal with the debts and other liabilities you and your soon to be ex assumed during your marriage. Talk to your husband, if possible, and come up with a plan together.
If you have questions about your debt, how it might be divided, or what qualifies as marital debt, give our office a call at (757) 425-5200, and we can help schedule you an appointment with one of our licensed and experienced Virginia divorce and custody attorneys. Not ready to make an appointment yet? No problem. You can always attend one of our low cost monthly divorce seminars, each of which is taught by one of our attorneys, and you’re very likely to get an answer to your question there. Good luck!